Announcements Medical Scheme Rating Alerts

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

Rating action

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.

Rating rationale

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.

Outlook statement

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.

Rating triggers

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.

Analytical contacts

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

Ratings history

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
Operating environment 14.75
Country risk score 7.00
Sector risk score 7.75
Business Profile (1.25)
Membership profile (1.25)
Management and governance 0.00
Financial profile 1.75
Earnings (0.25)
Capitalisation 1.00
Liquidity 1.00
Comparative profile 0.00
Peer analysis 0.00
Total score 15.25

Glossary

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.
image_pdfPDF View


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.