Johannesburg, 13 July 2017 — 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. The scheme has recorded a five year average net healthcare margin of 2.3%, supported by well contained non-healthcare costs, and an overall stable claims ratio (averaging 88%). The scheme posted a small net deficit of R2m in FY16, underpinned by an industry wide spike in claims. The scheme is budgeting for a net margin of 1.5% in FY17. This reflects some margin compression relative to the historical average, although a recovery relative to the -0.2% margin posted in FY16 (supported by the comparatively high average contribution rate increase of 13.4%).
The scheme’s solvency metrics have registered at adequate levels over the last three years, with the solvency margin equating to a relatively stable 26% at FY16 (FY15: 27%). Going forward, management expects solvency to reduce below the regulatory minimum of 25%, with solvency pressure stemming from the high contribution rate increase, coupled with partially dampened earnings. In this respect, Hosmed has attained CMS approval to maintain the statutory solvency margin at or above 23.5% over the coming 24 months. GCR has factored this solvency floor into the rating, with solvency management being a key rating consideration going forward.
Liquidity metrics registered at intermediate levels, with net cash coverage measuring at 1.6 months at FY16 (FY15: 0.9 months). Liquidity support is derived from fixed income instruments and unitised investments (totalling R139m in FY16), inclusive of which net cash coverage improves to 3.0 months. Going forward, liquidity metrics are expected to be maintained within an adequate range, supported by healthy operational cash flow generation.
The membership base is viewed to be limited (and exposed to continued member losses), albeit benefitting from a comparatively low age profile. Total members equated to 24,759 as at April FY17 (FY16: 25,528), with the scheme exhibiting member losses throughout the review period (which is likely persist over the short term). Positively, the average beneficiary age equated to an unchanged 31 years in FY16, comparing favourably to the open industry average of 34 years.
The rating could benefit from strengthened statutory solvency, coupled with the attainment of material and targeted increases in its membership base. This should be coupled with the maintenance of adequate liquidity metrics and well managed earnings. Conversely, the rating exhibits sensitivity to solvency dilution going forward, particularly below the agreed-upon floor, and/or ongoing earnings suppression. Further significant membership losses may result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2004)|
|Claims paying ability: A+(ZA)|
|Last rating (July 2016)|
|Claims paying ability: A-(ZA)|
|Sector Head: Insurance Ratings|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated July 2016
Hosmed Medical Scheme rating reports, 2004-2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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 unaudited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Other relevant 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Loss||The happening of the event for which insurance pays.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Hosmed Medical Scheme’s rating of A-(ZA); Outlook Stable.