Announcements Insurance Medical Scheme Rating Alerts

GCR affirms Hosmed Medical Scheme’s national scale financial strength rating of A-(ZA); Outlook Evolving

Rating action

Johannesburg, 11 September 2020 – GCR Ratings (“GCR”) has affirmed Hosmed Medical Scheme’s (“Hosmed”) national scale financial strength rating of A-(ZA), with the Outlook accorded as Evolving.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

Hosmed Medical Scheme

Financial strength

National

A-(ZA)

Evolving Outlook

The rating action follows a reduction in the South African country and medical schemes sector risk assessments.

The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on 27th May 2020. Click here to access the link. On 14th July 2020, the South African medical schemes sector risk score was also lowered to 7.75 from 8.00 previously. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating rationale

Hosmed’s national scale financial strength rating balances the scheme’s moderate financial profile and limited membership profile. Nevertheless, GCR notes the uncertain credit impact from (1) subdued contributions levels, combined with unfavourable claiming trends, potentially translating into lower earnings and liquidity assessments over the medium term; and (2) potential to merge into a scheme with a better credit profile in the event that an amalgamation with Sizwe Medical Fund (“Sizwe”) is well managed. In this respect, the Evolving Outlook captures uncertainties regarding timing of this transaction, following the regulator’s opposition with an application to put Sizwe under curatorship.

Liquidity remained a key rating strength, despite moderation following the spike in claims and shift of asset allocation towards interest securities. Consequently, cash and stressed financial assets coverage of monthly claims equated to 4.2 months (FY18: 4.7 months), while operational cash coverage remained roughly at 1.0x. Although management does not plan to change the scheme’s asset allocation over the medium term, liquidity metrics could further moderate if claims remain elevated, in a context of mounting earnings risks.

Earnings moderated within intermediate levels, driven by a spike in claims, as well as pressures on premium levels explained by persistent membership losses and a very low average contribution increase of 3% in FY19. As a result, the scheme registered a net healthcare loss of R69m in FY19 (FY18: R49m), in turn limiting net profitability (FY19: R24m loss; FY18: R88m), despite support from sound and stable investment income (FY19: R40m; FY18: R39m). Going forward, management plans to better align the pricing of options with benefits, leveraging off its actuarial resources, which is likely to improve net healthcare performance over the medium term, mitigating investment risks driven by the COVID-19 pandemic. Nevertheless, the factor assessment remains sensitive to membership losses, which could accelerate with the COVID-19 pandemic exacerbating pressures on members’ disposable income. As such, the scheme’s ability to demonstrate earnings resilience over the medium term will represent a key rating consideration.

Capitalisation was maintained at intermediate levels, driven by the loss of membership scale counterbalancing the slow-down in reserve accumulation. As such, statutory solvency registered at a stable 34% in FY19, trending above regulatory requirements. Going forward, the capitalisation assessment is expected within a similar range over the medium term, with developing earnings strains offset by expected pressures on contribution levels.

Membership profile is viewed to be credit negative, explained by persisting losses of membership scale, compounded by high concentration to government sector (83% of principal members) and dependence on brokers (three largest brokers representing 52% of principal members at FY19). The amalgamation with Sizwe could improve the membership base of the merged scheme if risks attaching to the finalisation of the transaction are properly managed, representing a key rating input over the outlook horizon.

Outlook statement

Hosmed’s rating could be lowered, driven notably by earnings deteriorations given high sensitivity to persisting membership losses, which could accelerate due to accrued economic challenges amidst COVID-19 pandemic risks. However, the scheme could also access a higher rating through its amalgamation with Sizwe, if issues raised by the regulator over deficiencies in its management and governance processes, among other issues, are resolved and a compliant amalgamation is facilitated. As such, the Evolving Outlook captures uncertainties regarding the timing of the amalgamation with Sizwe, noting on-going legal and regulatory processes.

Rating triggers

Positive rating action is conditioned upon a reversion of the negative membership trend which could support healthy and stable earnings, while maintaining adequate solvency and strong liquidity. Conversely, downward rating pressure may arise from sustained and/or material weakening in earnings, especially if this results in liquidity and solvency deteriorating beyond expectations.

Analytical contacts

Primary analyst

Fleur Ngassa

Analyst: Insurance Ratings

Johannesburg, ZA

MarlaineN@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@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, May 2020

GCR South Africa Medical Scheme Sector Risk Score, July 2020

Ratings history

Hosmed Medical Scheme

Rating class

Review

Rating scale

Rating class

Outlook/Watch

Date

Claims paying ability

Initial

National

A+(ZA)

Stable

September 2004

Financial strength

Last

National

A-(ZA)

Stable

September 2019

Risk score summary

Rating components & factors

Risk scores

 

Operating environment

14.75

Country risk score

7.00

Sector risk score

7.75

   

Business profile

(3.00)

Membership profile

(3.00)

Management and governance

0.00

 

Financial profile

0.75

Earnings

0.25

Capitalisation

0.00

Liquidity

0.50

   

Comparative profile

0.00

Peer analysis

0.00

   

Total score

12.50

Glossary

Premium

The price of insurance protection for a specified risk for a specified period of time.

Pricing

A process of determining the price of a debt security.

Principal

The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.

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.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Securities

Various instruments used in the capital market to raise funds.

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.

Statutory

Required by or having to do with law or statute.

Transaction

A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.

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 party. 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:

  • Audited financial statements to 31 December 2019;
  • Four years of comparative audited financial statements to 31 December;
  • Full year budgeted financial statements to 31 December 2020;
  • Unaudited management accounts to 30 June 2020;
  • Other relevant documents
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