Johannesburg, 27 June 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Medshield Medical Scheme of AA-(ZA), with the rating outlook accorded as Positive.
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’s rating has been maintained on AA-(ZA), with the rating placed on Positive outlook. The potential positive rating action is premised on solvency strength being sustained at very high levels over the medium term (with earnings trending in line with strategic targets), while the scheme evidences increased stability in membership levels and liquidity metrics.
The rating derives significant support from very strong solvency, with the statutory solvency margin equating to a very high 52% at FY16. In line with the scheme’s strategic growth objectives, a degree of solvency dilution is expected over the medium term, as the scheme deliberately utilises excess reserves (through competitive contribution rate increases) to alleviate affordability pressures on the existing member base, while simultaneously attempting to enhance its market presence. This notwithstanding, solvency is expected to trend within a very strong range, with the statutory solvency margin likely to remain above 40% over the rating horizon.
Earnings capacity is viewed to be adequate, and aligned to the scheme’s solvency strategy. In this respect, the large reserve base supports a degree of operational loss absorption, while strong investment inflows serve to sustain adequate net margins (FY16: 0.6%; three year average: 1.5%). This trend is expected to continue over the rating horizon, given the high buffer available from the current statutory solvency margin relative to the medium term target range, and the sizeable investment portfolio supporting earnings.
Medshield’s fairly large membership base supports a relatively competitive business profile, with the scheme’s market share of total open scheme principal members equating to 3.1% in FY16. Note is taken of the potential for high membership growth to be achieved in FY17, taking into consideration the strong 3.5% rise in year-to-date principle member volumes. If sustained, this would serve to stem the trend of consistent member outflows previously evidenced over the review period.
The scheme exhibits strengthened liquidity, with a shift in asset allocation contributing to improved liquidity metrics at FY16. In this respect, cash and equivalents increased by 134%, and represented a higher 47% of total investments at FY16 (FY15: 20%), which resulted in the net cash coverage ratio improving to 4 months (FY15: 1 month). Although liquidity metrics may fluctuate over the medium term (a function of a flexible investment strategy underpinned by very high reserves), liquidity is expected to trend within a sound range, supported by the large quantum of tradable assets.
Over the past four years, the scheme has evidenced a notable deterioration in the age profile of the membership base. In this regard, the average age of beneficiaries, as well as the pensioner ratio, registered well above the open scheme industry average. Going forward, the age profile of the scheme is expected to remain elevated, and may represent a source of potential earnings pressure should the targeted growth not materialise.
Further to this, the high proportion of members sourced from the scheme’s two largest brokers (FY16: 26%) exposes 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.
Upward rating movement could arise from sustained very high levels of solvency, coupled with earnings trending in line with strategic targets, and increased stability in membership levels and liquidity metrics. 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 (June 2016)|
|Claims paying ability: AA-(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated July 2016
Medshield rating reports, 2005-2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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 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 with no contestation of the rating.
The information received from Medshield and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Year to date management accounts to March 2017
- Other relevant 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE 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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|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).|
|Renewal||The re-establishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.|
|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||Required by or having to do with law or statute.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Medshield Medical Scheme’s rating of AA-(ZA); Outlook Positive.