Johannesburg, 30 June 2015, Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Hosmed Medical Scheme of A-(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Hosmed Medical Scheme (“Hosmed”) based on the following key criteria:
Hosmed’s earnings capacity is viewed to be moderately strong, underpinned by the attainment of consecutive net surpluses throughout the review period. This has been supported by well contained non healthcare costs and fairly stable investment yields, which have partially offset the elevation in the claims ratio in recent years.
The scheme’s liquidity metrics have measured at moderately strong levels, with net cash coverage evidencing relative stability around 3 months over the past 3 years. Going forward, a change in the investment strategy may result in a reduction in liquidity metrics as cash is reallocated to balanced funds. This notwithstanding, liquidity is expected to remain adequate, supported by healthy operational cash flow generation.
The statutory solvency margin has evidenced a sustained improvement over the review period, underpinned by the combination of consistent reserve accumulation, and reductions in the quantum of membership levels. In FY14, the statutory funding ratio equated to 25.8%, meeting the timeline to attain the minimum regulatory requirement of 25% as per the solvency plan presented to the Council for Medical Schemes (“CMS”).
The placement of Hosmed under curatorship is positively considered, as it is anticipated to strengthen the governance and transparency of the scheme’s affairs going forward. This view is supported by the planned reconstitution of the Board of Trustees (“BoT”), the establishment of recommended board committees, and the implementation of strengthened operational controls and processes.
The membership base has evidenced a negative compound annual growth rate (“CAGR”) of 6.8% over the review period, resulting in a 3 year increase in the average principal membership age over the corresponding period. Positively, the membership loss rate has decelerated over the past two years, with short term membership growth strategies centering on retention initiatives. Accordingly, membership growth of 1.3% is budgeted for FY15.
The rating could benefit from the maintenance of the statutory solvency ratio above the regulatory minimum level, coupled with the attainment of material and targeted increases in membership scale, facilitating an improved member average age profile and diversification level. This should be coupled with the maintenance of adequate liquidity metrics, increased consistency in healthcare performance, and the successful implementation of corporate governance structures and controls. A marked weakening in the scheme’s financial position, resulting in a significant deterioration in key liquidity and solvency levels, as well as further significant membership base losses, may result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2004)|
|Claims paying ability: A+(ZA)|
|Last rating (June 2014)|
|Claims paying ability: A-(ZA)|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Catherine Zimba|
|Sector Head: Insurance Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating South African Medical Schemes, updated April 2015.
Hosmed Medical Scheme rating reports 2004-2014.
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Accumulated funds||An amount representing the accumulation of historical and current net surpluses and deficits, held for the benefit of members and their dependants|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Benefits||Financial reimbursement and other services provided covered by medical schemes under the terms of a medical scheme plan.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Claim||A request for payment of a loss, which may come under the terms of a medical scheme plan.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by a medical scheme to agents and brokers.|
|Coverage||The scope of the protection provided under a contract of a medical scheme plan.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of a medical scheme to convert its assets into cash to pay claims if necessary.|
|Loss||The happening of the event for which a medical scheme pays.|
|Market Value||The price for which something would sell, especially the value of certain types of assets, such as stocks and bonds. It is based on what they would sell for under current market conditions.|
|Members’ surplus||Accumulated funds plus revaluation reserves.|
|Portfolio||The total securities owned by a medical scheme.|
|Provision||A technical reserve of a medical scheme established to provide for the future liability for claims which have occurred but which have not yet been settled.|
|Risk||(1) Uncertainty as to the outcome of an event when two or more possibilities exist. (2) A person or thing covered by a medical scheme.|
|Securities||Evidences of a debt or of ownership, as stocks, bonds, and checks.|
|Solvency||Reserves (accumulated funds or members’ surplus) expressed as a percentage of contributions (gross or net).|
|Statutory||Required by or having to do with law or statute.|
|Term||The period of time for which a policy or bond is issued.|
|Valuation||Estimation of the value of an item, usually by appraisal.|
For a more detailed glossary of terms utilised, please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Hosmed Medical Scheme participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Hosmed Medical Scheme with no contestation of the rating.
The information received from Hosmed Medical Scheme and other reliable third parties to accord the credit rating included:
- The 2014 audited annual financial statements
- 4 years of comparative audited numbers
- Unaudited interim results as per 30 April 2015
- Budgeted financial statements for 2015
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.