|Rated entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Fedhealth Medical Scheme||Financial strength||National||AA-(ZA)||Stable Outlook|
The rating for Fedhealth reflects the scheme’s sound capitalisation and liquidity, supported by healthy earnings. The business profile remained within an intermediate level, despite review year contraction in membership attributable to economic pressures and structural changes in the scheme. Positively, the scheme’s membership profile is gradually improving with considerable success in the recruitment of younger members.
The scheme’s membership decreased by 3.6% in FY20 as a result of economic strain from the Covid 19 pandemic, as well as terminations from former Topmed members and other members who did not prefer the new product range introduced in 2019. Fedhealth’s share of the open industry membership base however remained relatively stable around 3%. The membership profile improved as the scheme managed to recruit younger members with an average age of 39,3 years compared to the average age of terminating members of 46.2 years. This effectively improved the overall beneficiary age of the scheme to 41.1 years in FY20 (FY19: 43.3 years), while the pensioner ratio reduced to 19% (FY19: 29%). GCR expects the membership profile to remain at the current levels as the scheme’s growth is mainly from products aimed at a younger demographic.
Review year earnings strengthened as a result of low claims experienced due to restrictions on movement in the midst of the Covid-19 pandemic, which notably saw the postponement of elective procedures. In this respect, the claims ratio lowered to 84% in FY20 from 93.3% in FY19. Lower claims supported a surplus of R189.1m despite a decline in investment income of 43% in FY20. The scheme has however experienced higher claims in the first half of the current year compared to the same period in FY20, with the claims ratio forecast to close the year at c. 91%.
Capitalisation strengthened on the back of positive earnings posted in FY20, boosting reserve levels. Resultantly, the scheme’s accumulated funds equated to R1.66bn at FY20, representing 13% growth over the previous year balance. As such, reserve accumulation along with contained exposure to aggregate risks saw GCR capital adequacy ratio (“CAR”) and statutory solvency for the scheme sustained at a strong 2.1x and 45% at FY20 (FY19: 2.1x and 43%) respectively. The strengthening in capitalisation may support a higher factor assessment, if earnings risk is well managed. While GCR expects capitalisation to remain strong in the next 12 months, with the statutory solvency ratio expected to remain above 40%, the scheme’s ability to stabilise capitalisation at improved levels represents a key rating consideration over the medium term.
Liquidity improved as a result of the net surplus, with the value of the investment portfolio increasing by c.15% to R1.9bn at FY20. Consequently, gross cash and stressed financial assets coverage of claims equated to a higher 5.5 months (FY19: 4.7 months), while operational cash coverage registered at 1.0x (FY19: 0.9x). Nevertheless, the likelihood of claims elevation over the medium term may result in liquidity metrics reverting to previous levels, given management’s plans to maintain a relatively similar asset allocation post Covid 19. GCR expects the scheme’s liquidity to remain strong, with the gross stressed financial assets coverage of claims expected to be above 4.5x at FY21.
The Stable Outlook reflects expectations that the scheme’s membership profile is not likely to improve, while capitalisation and liquidity will be maintained at strong levels over the next 12 months. Accumulated reserves are viewed to be sufficient to tolerate claims pressure, as well as potential earnings strain from Covid-19 pandemic risks, such as reductions in contributions and investment income.
Upward rating movement is unlikely over the medium term, although material and sustained earnings strength positively impacting on capitalisation, while liquidity is sustained within strong levels could lead to a rating upgrade. On the contrary, downward rating action could follow material deterioration in membership profile and/or sustained reduction in earnings, resulting in solvency and/or liquidity moderation beyond expectations.
|Primary analyst||Victor Matsilele||Analyst: Insurance Ratings|
|Johannesburg, ZA||VictorM@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Marlaine Fleur Ngassa||Analyst: Insurance Ratings|
|Johannesburg, ZA||MarlaineN@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, July 2021|
|GCR South African Medical Schemes Sector Risk Score, April 2021|
|Fedhealth Medical Scheme|
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Claims paying ability||Initial||National||BB(ZA)||Stable||October 2001|
|Financial strength||Last||National||AA-(ZA)||Stable||October 2020|
Risk score summary
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Reserves||A portion of funds allocated for an eventuality.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entity and other reliable third parties to accord the credit rating included: