Johannesburg, 7 July 2016, 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’s solvency position is viewed to be very strong, with the statutory solvency margin recorded at 53% in FY15 (FY14: 54%). As one of the highest margins observed across the industry, this represents a key credit strength. Management has highlighted plans to utilise excess reserves to alleviate affordability pressures faced by members. In this regard, statutory solvency is expected to register in the region of 50% in FY16. Management aims to maintain the statutory solvency margin above 40% in the medium term.
Medshield’s earnings capacity is viewed to be moderately strong. In this regard, the scheme has posted net surpluses over the past five years (totalling R416m), with the net margin equating to 1.7% in FY15 (FY14: 2.4%). The net margin has recorded an overall declining trend, with performance impacted by management’s strategy to contain contribution increases as a means of alleviating member losses. While the strategy has not translated into the intended membership growth, and healthcare losses have exceeded expectations, the large quantum of investment income has thus far been sufficient to offset reserve erosion. Reserve utilisation in FY16 is expected to see a R22m net loss.
The scheme’s sizeable and diverse membership is viewed as a rating positive, although sustained high losses have partially eroded this. Medshield continued to lose members over the review period, with total principal members equating to 75,006 at FYE15 (FY14: 76,459). Positively, the membership losses have occurred at a less pronounced rate compared to earlier years. Going forward, management expects this trend to reverse, with a budgeted increase in the membership base of 3% for FY16. The increase is expected to be derived from pipeline opportunities, potential plans for amalgamation with smaller medical schemes, and member retention initiatives.
Medshield’s liquidity metrics decreased in FY15, with net cash coverage amounting to a notably lower 1.3 months (FY14: 3.3 months). As such, liquidity metrics are viewed as intermediate, measuring below the review period average of 3 months and the industry average of 2 months. Concentration risk is evidenced by the high proportion of members sourced from the scheme’s three largest brokers. Going forward, management plans on engaging more brokers, as a means of potentially minimising this risk.
The rating could benefit from sustained increases in membership scale, facilitating an improved member average age profile, coupled with strengthening 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 2015)|
|Claims paying ability: AA-(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating South African Medical Schemes, updated April 2015.
Medshield Medical Scheme rating reports 2005-2015.
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.
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:
- Audited annual financial statements to 31 December 2015
- 4 years of comparative audited numbers
- Unaudited interim results to 30 April 2016
- Budgeted financial statements for 2016
- 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.
GCR affirms Medshield Medical Scheme’s rating of AA-(ZA); Outlook Stable.