Johannesburg, 22 July 2020 – GCR has affirmed Medshield Medical Scheme’s (“Medshield”) national scale financial strength rating of AA-(ZA), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Medshield Medical Scheme||Financial strength||National||AA-(ZA)||Stable Outlook|
The rating action follows a reduction in the South African country and medical scheme sector risk assessments.
The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on 27th May 2020. Click here to access the link. On 14th July 2020, the South African medical schemes sector risk score was also lowered to 7.75 from 8.00 previously. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Medshield’s rating reflects a strong financial profile, driven by strong capitalisation and liquidity, with statutory solvency levels sustained above the medium-term target range, following significant net surplus registered during the review year after two consecutive net deficits. The membership profile remained credit negative, characterised by high average member age and moderate market share. The Stable Outlook expresses GCR’s view that a sustained improvement in the financial profile, given the current business model, balances efforts to improve the constrained membership base.
Earnings capacity is assessed within an intermediate range, albeit with review year reduction in net healthcare losses, which curtailed a net deficit trend over the previous two years, likely to improve the factor assessment if sustained. The net healthcare margin registered at breakeven level in FY19 (FY18: -6%; five-year average: -5%), while net surplus equated to R119m (FY18: R85m loss; FY17: R90m loss). The improvement in the net healthcare result is largely driven by implementation of prudent underwriting policies, enhanced claims management and optimisation of options design, which drivers are likely to balance earnings sensitivity to a likely reduction in membership growth and economic challenges exacerbated by COVID-19 crisis over the near term.
Capitalisation remained within strong bands, evidenced by a stable statutory solvency ratio of 40% (FY18: 38%), with the review year surplus offsetting deliberate reserve utilisations in previous years. Going forward, the scheme’s capitalisation is expected to be stable reflecting pressures on membership growth and potential moderation of the review year surplus position, considering economic challenges exacerbated by the COVID-19 pandemic. Notwithstanding the above, the statutory solvency ratio could moderate towards the 32-34% range over the medium to long term, given ongoing reserve utilisation to drive affordability and competitiveness.
Liquidity is viewed to be strong, with cash and stressed financial assets coverage of gross claims registering at 5.6 months at FY19 (FY18: 5.3 months) and operational cash coverage of 1.0x, underpinned by a large portfolio of tradable securities. Note is taken of a marginal improvement in liquidity metrics, driven by lower claims experience, mitigating the impact of a reduction in net cash balances. However, given volatility in earnings profile, liquidity management represents a key consideration over the rating horizon.
The membership profile exhibits a relatively high beneficiary average age and high pensioner ratio, while market share was limited at 3% of the open schemes market on the back of a 3% contraction in membership base. However, these weaknesses were partially offset by fair membership diversification across corporate and individual, employer groups and regions, despite persistent exposure to intermediary concentration risks. Going forward, material improvements in the overall membership profile is unlikely given current economic environment, coupled with increasing competitive dynamics in the open market.
The Stable Outlook reflects expectations that the scheme will maintain a strong solvency, providing sufficient buffers to absorb earnings and liquidity pressures, which could result from ongoing economic challenges. Meanwhile, the membership profile will be largely unchanged.
The rating may be upgraded following sustained improvements in earnings, while current capitalisation and liquidity strengths are maintained. Conversely, a weakening in liquidity or surplus erosion below the expected trend may result in negative rating action.
|Primary analyst||Fleur Ngassa||Analyst: Insurance|
|Johannesburg, ZA||Marlainen@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance|
|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, May 2020|
|GCR South African Medical Schemes Sector Risk Score, July 2020|
Medshield Medical Scheme
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(ZA)||Positive||August 2005|
|Financial strength||Last||National||AA-(ZA)||Stable||September 2019|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||7.75|
|Management and governance||0.00|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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||Required by or having to do with law or statute.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
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:
- The audited financial results to 31 December 2019
- Four years of comparative audited numbers
- Unaudited interim results up to 31 May 2020
- Budgeted financial statements for 2020
- Other related documents.