Johannesburg, 27 September 2019 – GCR Ratings (“GCR”) has affirmed Hosmed Medical Scheme’s (“Hosmed”) national scale financial strength (formerly claims paying ability) rating of A-(ZA), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Hosmed Medical Scheme||Financial strength||National||A-(ZA)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Hosmed was placed ‘Under Criteria Observation’. GCR finalised the review for Hosmed under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Hosmed has been revised in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Hosmed’s national scale financial strength rating reflects the scheme’s adequate solvency and strong liquidity. Offsetting these is the limited membership base on the back of persistent membership losses over the review period, representing potential earnings risk, as well as high sectoral concentration.
Consistent reserve accumulation has largely facilitated the sustained improvement in statutory solvency over the past two years. In this regard, the statutory solvency margin registered at 34% at FY18. Cognisance is, however, taken of the relatively low scale of reserves, and stagnating premiums, which moderate the solvency assessment. Furthermore, liquidity is viewed to be strong, with stressed financial assets coverage of average monthly claims registering at 4.6 months at FY18, while operational cash coverage equated to 1x.
The five-year net healthcare margin measured at 1.3% at FY18, albeit note is taken of potential earnings moderation in view of the comparatively lower average annual contribution increase (FY19: 2%). Hosmed continued to shed members, with the scheme registering a negative five-year compound annual principal member growth rate (“CAGR”) of 5%. While earnings have been fairly resilient over the review period, consistent reduction in membership reflects limited diversification and scale benefits, representing a key earnings risk. This, coupled with the very contained average annual contribution increase implemented in FY19, could potentially have a lagging effect on the scheme’s earnings, thus moderating the amelioration in earnings.
GCR views the high concentration to the government sector as a rating weakness, given the scheme’s exposure to systematic risks inherent in the sector. Furthermore, there is a degree of intermediary concentration given the high proportion of members sourced from the scheme’s largest broker (FY18: 26%).
The Stable Outlook reflects expectations that Hosmed will maintain strong liquidity and adequate solvency, while the membership base will remain limited over the outlook horizon.
Positive rating action is conditioned upon a reversion of the negative membership loss trend with a view that a stable expansion of the membership base will contribute towards ongoing earnings stability. This should be coupled with the maintenance of adequate solvency and strong liquidity. Conversely, downward rating pressure may arise from a marked weakening in liquidity and solvency levels, as well as further significant membership base losses.
|Primary analyst||Vinay Nagar||Senior Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Siyuan Lu||Associate Analyst|
|Johannesburg, ZA||SiyuanL@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YMujuru@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, June 2019|
|GCR South African Medical Schemes Sector Risk Score, September 2019|
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(ZA)||Stable||September 2004|
RISK SCORE SUMMARY
|Risk scores||Hosmed Medical Scheme|
|Country risk score||7.50|
|Sector risk score||8.00|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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 Solvency Margin||Gives an indication as to whether the minimum regulatory solvency margin is being met, based on the net statutory assets to statutory net premiums ratio.|
|Statutory||Required by or having to do with law or statute.|
|Systematic Risk||Risk attributed to market factors that cannot be eliminated through diversification.|
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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Hosmed Medical Scheme. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Hosmed Medical Scheme participated in the rating process via face-to-face 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 Hosmed Medical Scheme and other reliable third parties to accord the credit ratings included:
- The audited financial results up to 31 December 2018
- Four years of comparative audited numbers
- Unaudited interim results up to 31 July 2019
- Budgeted financial statements for 2019
- Other related documents