Announcements Insurance Medical Scheme Rating Alerts

GCR affirms Medihelp Medical Scheme’s national scale financial strength rating of AA-(ZA); Outlook Stable

Rating action

Johannesburg, 23 September 2021 – GCR Ratings (“GCR”) has affirmed Medihelp Medical Scheme’s (“Medihelp”) national scale financial strength rating of AA-(ZA), with a Stable outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Medihelp Medical Scheme Financial strength National AA-(ZA) Stable Outlook

Rating rationale

Medihelp’s national scale financial strength rating reflects a moderately strong financial profile, counterbalancing an intermediate membership profile. While the scheme’s financial profile was boosted by strong earnings as a result of lower claims in FY20, we believe capitalisation and liquidity metrics will stabilise within a strong range over the medium term. Our view is premised on potential for additional earnings strain from Covid-19 pandemic risks and the possible implementation of corrective pricing, among other measures.

Medihelp reported strong earnings in FY20 in line with the market trend of low claims experience as a result of low non-essential benefit utilisation due to the impact of the Covid-19 pandemic. Resultantly, the claims ratio registering at 79.0% in FY20, compared with the review period average of 92.5%, and the scheme posted a positive net healthcare result of R595m from a net healthcare loss of R76.4m in FY19. The net surplus increased to R700m from R49.2m in FY19, despite relatively subdued investment returns in FY20. We, nevertheless, expect earnings to progressively normalise over the medium term as the claims reprieve from the Covid-19 pandemic diminishes, with the claim’s ratio forecasted to revert to historical levels.

Capitalisation registered an improvement in line with the general market trend, following a large net surplus, which supported a substantial accumulation of reserves. Accordingly, accumulated funds amounted to R2.1bn from R1.4bn in FY19. This supported a rise in the statutory solvency margin to 40.4% from a historical average of 28.6% over the review period. Going forward, we project a gradual reduction in solvency as management is planning low contribution increases, against a possible uptick in benefit utilisation. We, therefore, expect the solvency ratio to remain above 40% over the next 12 to 18 months as membership growth remains suppressed, but glide towards 35% over the medium term as benefit utilisation normalises.

Liquidity strengthened on the back of low claims experience and higher operational cashflows, resulting in a 43.5% increase in invested assets. Consequently, the gross claims coverage ratio increased to 6.6 months from 4.1 months at FY19, while the operational cash coverage firmed slightly to 1.1x from 1.0x at FY19. Liquidity is expected to stabilise at adequate levels over the medium term, reflecting our view of a possible reversion of the claims experience to historical levels.

The scheme’s membership profile remains moderate, reflecting a relatively higher negative growth rate in membership of 4.8% in FY20. As a result, membership scale remained modest, while the average beneficiary age and pensioner ratio continued elevated at 37 years and 14% respectively in FY20. Furthermore, the scheme exhibited a high dependence on brokers, with the largest accounting for 19.4% of principal members in FY20 (FY19: 22%), counterbalancing the granular spread of members across individuals (FY20: 69% of principal members). Material improvements in membership profile over the medium term are expected to be limited although management plans to seek growth in the corporate space over the long term.

Outlook statement

The Stable Outlook reflects expectations of a resilient financial profile within rating sufficient levels, given stresses factored into the rating. Earnings are expected to moderate from FY20 levels but to remain positive as the scheme is, in our view, likely to balance affordability and solvency margins. In this respect, the statutory solvency margin is expected to reduce gradually towards 35% over the medium term. On the other hand, liquidity is likely to moderate from the very high levels at FY20 but register within a strong range. We expect no material changes in the membership profile over the next 12 to 18 months, but with potential for improvement over the long term.

Rating triggers

Upward rating movement could result from sustained improvement in earnings capacity, supporting capitalisation and liquidity at strengthened levels. Downward movement in ratings could result from a weaker-than-expected earnings trend.

Analytical contacts

Primary analyst Victor Matsilele Analyst: Insurance Ratings
Johannesburg, ZA VictorM@GCRratings.com +27 11 784 1771
Secondary analyst Fleur Ngassa Analyst: Insurance Ratings
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@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, August 2021
GCR South Africa Medical Scheme Sector Risk Score, April 2021

Ratings history

Medihelp Medical Scheme

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National A+(ZA) Stable March 2000
Financial strength Last National AA-(ZA) Stable September 2020

Risk score summary

Rating components & factors Risk scores
Operating environment 14.75
Country risk score 7.00
Sector risk score 7.75
Business profile (1.00)
Membership profile (1.00)
Management and governance 0.00
Financial profile 1.50
Earnings 0.25
Capitalisation 0.75
Liquidity 0.50
Comparative profile 0.00
Peer analysis 0.00
Total score 15.25

Glossary

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.
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.
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.
Spread The interest rate that is paid in addition to the reference rate for debt securities.
Statutory Required by or having to do with law or statute.
Trust A third party that acts in the best interest of another party, according to the trust deed, usually the investors. Owner of a securitisation vehicle that acts in the best interest of the Noteholders.

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 2020;
  • Four years of comparative audited financial statements to 31 December;
  • Full year budgeted financial statements to 31 December 2021;
  • Unaudited management accounts to 31 July 2021;
  • Other relevant documents
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