Johannesburg, 30 June 2015, Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Medshield Medical Scheme of AA-(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Medshield Medical Scheme (“Medshield”) based on the following key criteria:
Medshield Medical Scheme’s (“Medshield”) solvency metrics evidence very strong levels, with the statutory solvency margin recording at a review period high of 54% in FY14. As one of the highest margins observed across the industry, this represents a key credit strength, with solvency expected to remain strong in the medium to long term. Net cash coverage amounted to 3.3 months in FY14, and has been well managed throughout the review period. In this regard, liquidity metrics remain strong and measure favourably against the industry average.
Earnings capacity is viewed to be moderately strong. The net result margin amounted to 2.4% in FY14 (FY13: 4.5%), having averaged a strong (albeit consistently declining) 4.8% over the past three years. The trend of maintaining healthy net surpluses is expected to continue, with a net result margin of 2.9% expected in FY15.
The lifting of Medshield’s curatorship, and the accompanying set of corrective measures that have been implemented to address highlighted items, is positively considered, given the strengthening of the governance structure and strengthened operational controls and processes of the fund going forward.
Cognisance is taken of the continued membership losses, along with the high (and rising) average age profile of members. This notwithstanding, the scale and diversification of Medshield’s membership base is viewed to be strong relative to industry peers. Management’s membership strategy for FY15 is focused on member retention as a means of combatting attrition, coupled with active net membership growth. Execution of the retention and growth strategies represents a key rating consideration over the rating horizon, with emphasis placed on the take on of younger members as a means of diluting the current high average age.
Concentration risk is evidenced by the high proportion of members sourced from the scheme’s three largest brokers. Note is also taken of the equity and corporate bond exposures, which amount to a combined 76% of the members’ surplus as at FYE14, giving rise to a moderately high level of market risk exposure.
The rating could positively benefit over the medium term from the attainment of material increases in membership scale, and subsequent sustained scale volumes, facilitating an improved member average age profile and diversification level. This must be coupled with a well managed net healthcare result and the generation of consistent strong net surpluses, accompanied by the maintenance of credit protection measures at sound levels. A persistent deterioration in Medshield’s financial performance against expectations, including a considerable weakening of key liquidity metrics and solvency measures, as well as further significant membership base losses, may result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2005)|
|Claims paying ability: A+(ZA)|
|Last rating (July 2014)|
|Claims paying ability: AA-(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.
Medshield Medical Scheme rating reports 2005-2014.
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.
Medshield 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 Medshield Medical Scheme with no contestation of the rating.
The information received from Medshield 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.