Rating Action
Johannesburg, 26 September 2019 – GCR has affirmed Medshield Medical Scheme’s (“Medshield”) national scale financial strength (formerly claims paying ability) rating of AA-(ZA), and revised the outlook to Stable, from Positive.
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook/Watch |
| Medshield Medical Scheme | Financial strength | National | AA-(ZA) | Stable Outlook |
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Medshield was placed ‘Under Criteria Observation’. GCR finalised the review for Medshield under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Medshield has been revised in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Rating Rationale
The rating balances the scheme’s strong solvency and liquidity, against weakened earnings and a moderate membership base, as well as remedial actions aimed at stemming net healthcare losses and enhancing the sustainability of net results. The revision of the outlook to Stable, from Positive, is premised on ongoing earnings strain that is likely to persist in FY19. This is expected to see a moderation in solvency to a medium term range of 32%-34%, limiting the likelihood of upward rating movement.
Solvency remains a key rating strength, with the statutory solvency margin expected to register around 32% to 34% over the medium term. This continues to compare favourably to other similarly rated peers, and does provide a buffer for ongoing earnings strain, although the combination of member growth and continued losses could see the excess buffer dissipate over the medium term.
Similarly, liquidity is viewed to be strong, with gross claims coverage registering at 5.3 months at FY18. However, the scheme has reflected persistent negative operating cash flows over the review period (a function of the scheme’s negative net healthcare results) which may result in reduced liquidity strength going forward.
Earnings is viewed to have weakened, following two years of net losses (cumulatively equating to R175m), and expected continuation of the trend in FY19 (net loss of R59m budgeted). Much of the earnings pressure stemmed from management’s deliberate strategy to implement competitive pricing to grow membership, with excess reserves providing loss absorption capacity to support such a strategy. Nonetheless, GCR notes that the aged member profile, high concentration towards two options (limiting option cross subsidisation) and somewhat misaligned option benefit and pricing structures (persistent net healthcare losses reported throughout the review period, with the majority of options being loss making) to be additional sources of claims pressure that could result in ongoing earnings strain if not correctly addressed. In this regard, management have implemented corrective pricing in FY19, enhanced claims management protocols and made adjustments to option design aimed at stabilising earnings going forward. This will be a key focal point of the scheme’s forward looking credit profile, as it balances member stability and earnings sustainability.
The membership profile negatively impacts the scheme’s rating due to the high average member age and moderate market position (3.5% share of open scheme principal members at FY18). Membership growth is expected to moderate going forward (following corrective pricing initiatives), limiting medium term improvement in the age profile and market position. Membership diversification reflects a well-balanced member composition between corporates and individuals, and low employer concentration. This is somewhat offset by the high proportion of members sourced from the scheme’s two largest brokers (FY18: 26%), exposing Medshield to a degree of intermediary concentration risk. This situation is unlikely to change over the medium term, as broker utilisation is expected to remain high, although the risk may be somewhat alleviated as the in-house brokerage arm continues to account for a growing share of broker business.
Outlook Statement
The Stable Outlook reflects expectations that the scheme’s credit profile will continue to be underpinned by strong solvency and liquidity (catering for short term earnings weakness) and remedial actions aimed at curbing net healthcare losses.
Rating Triggers
The rating may be upgraded on the back of strengthened earnings, stabilisation in member levels and maintenance of very strong solvency. Conversely, sustained earnings weakness leading to deterioration in solvency and/or liquidity may result in negative rating action.
Analytical Contacts
| Primary analyst | Vinay Nagar | Senior Credit Analyst: Insurance Ratings |
| Johannesburg, ZA | Vinay@GCRratings.com | +27 11 784 1771 |
| Committee chair | Yvonne Mujuru | Sector Head: Insurance Ratings |
| Johannesburg, ZA | YMujuru@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, June 2019 |
| GCR South African Medical Schemes Sector Risk Score, September 2019 |
Ratings History
| Rating class | Review | Rating scale | Rating class | Outlook/Watch | Date |
| Claims paying ability | Initial | National | A+(ZA) | Positive | August 2005 |
| Last | National | AA-(ZA) | Positive | June 2018 |
Risk Score Summary
| Risk scores | Medshield |
| Operating environment | 15.50 |
| Country risk score | 7.50 |
| Sector risk score | 8.00 |
| 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 | 16.00 |
Glossary
| Assets | A resource with economic value that a company owns or controls with the expectation that it will provide future benefit. |
| Beneficiary | Nominated person or institution in the policy document that is entitled to receive the proceeds stated in the policy. |
| 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. |
| Contract | An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract. |
| Coverage | The scope of the protection provided under a contract of insurance. |
| Credit Rating | An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. |
| 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. |
| Exposure | Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued. |
| 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. |
| Rating Horizon | The rating outlook period |
| Rating Outlook | A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered). |
| 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. |
| 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 Solvency Margin | Gives an indication as to whether the minimum regulatory solvency margin is being met, based on the net statutory assets to statutory net premiums ratio. |
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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Medshield Medical Scheme. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Medshield Medical Scheme participated in the rating process via face-to-face 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 Medshield Medical Scheme and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 Dec 2018
- Four years of comparative audited numbers
- Unaudited interim results up to 31 May 2019
- Budgeted financial statements for 2019
- Other related documents.
