Johannesburg, 29 May 2015, Global Credit Ratings has today affirmed the national scale rating assigned to Resolution Health Medical Scheme of BBB-(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Rating (“GCR”) has accorded the above credit rating to Resolution Health Medical Scheme (“Resolution”) based on the following key criteria:
Resolution has achieved net surpluses for 2 consecutive years. Whilst remaining somewhat volatile, the net result is viewed to fall within a manageable range, supported by a well contained non-healthcare expense ratio. Accordingly, this supported a slight (R2.3m) increase in the scheme’s reserve levels, allowing for a consecutive incremental improvement in the statutory solvency margin. This notwithstanding, the potential for volatility to feed into the solvency margin is noted. Full statutory compliance is expected to be achieved by management by FY18, as per the 5-year business plan submitted to the CMS.
Resolution reflected a much-improved non-healthcare expense ratio in FY14 (15.3%), which is expected to lower further in FY15 (14.5%), and represents an important consideration in the evaluation of the scheme’s earnings capacity. Moreover, non-healthcare costs per average beneficiary per month tracked in line with the estimated industry average for the year. The scheme adopts a highly conservative investment stance, which mitigates balance sheet exposure to asset risk. Key liquidity metrics, while still constrained, have stabilised, and are expected to remain within a similar range over the short term.
Note is taken of the sharp consecutive contractions in principal members evidenced in FY14 and FY13, with further net outflows anticipated for FY15. GCR views the sustained membership losses as a means of providing short term solvency relief to the scheme. This is conditional upon membership reductions remaining within a manageable range that does not compromise diversification and scale efficiencies.
Upward rating action could develop over the medium term from the consistent generation of net surpluses, underpinning materially enhanced reserves and associated key credit protection metrics. Stabilisation of membership volumes may also lend increased steadiness to the scheme’s performance, potentially contributing towards positive rating movement. Negative rating action may follow a deviation in Resolution’s performance relative to expectations. Membership base losses in excess of expectations may also have a negative rating impact. The rating may be adversely affected by a weakening of key liquidity and solvency metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2004)
Claims paying ability: A-(ZA)
Rating outlook: Positive
Last rating (April 2014)
Claims paying ability: BBB-(ZA)
Rating outlook: Stable
Sector Head: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating South African Medical Schemes, updated April 2015.
Resolution Health Medical Scheme rating reports 2004-2014.
RATING LIMITATIONS AND DISCLAIMERS
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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.|
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.
Resolution Health 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 and contested by Resolution Health Medical Scheme and was amended following the provision of further material information by the entity.
The information received from Resolution Health Medical Scheme and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements, full year detailed budgeted financial statements for 2015 and unaudited management accounts to April 2015, detailed information of historical, current and projections of claims as well as an analysis of high cost claims by the scheme’s actuaries. In addition, other non-public statistical information specific to the rated entity was received.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.