Johannesburg, 31 July 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Sizwe Medical Fund of A+(ZA), with the rating outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Sizwe Medical Fund (”Sizwe”) based on the following key criteria:
The Positive outlook reflects the potential for upward rating movement premised on the maintenance of credit protection measures at strong levels, and the management of expenses to the extent that earnings control is preserved over the short to medium term.
Earnings are viewed to be well managed, with the scheme’s performance aligned to the solvency target. In this regard, the scheme reported robust levels of earnings in the early years of the review period (average net margin of 7% between FY12-FY14), in support of reserve accumulation that targeted improved solvency. After reaching the desired level of solvency, the strategy shifted towards reserve maintenance, with more emphasis being placed on curbing member losses through competitive pricing and aggressive marketing. This saw a notable rise in claims and non-healthcare costs over the past two years, with the claims ratio stabilising at 88% in FY16 (from a review period low of 82% in FY14), and the non-healthcare cost ratio increasing to 12% (FY15: 11%). GCR has factored in a potential moderation in earnings, with the scheme’s ability to contain atypical non-healthcare costs, in light of the reducing membership scale and comparatively low contribution rate increases, representing a key rating consideration.
Sizwe’s solvency measured at a very strong level, underpinned by healthy and consistently positive earnings over the past four years. Accordingly, the statutory solvency margin continued to track upward, registering at a very high 52% at FY16 (FY15: 48%). The scheme’s reserve management strategy focuses on maintaining a statutory solvency margin above 40%, while utilising excess reserves to alleviate affordability pressures on members through very competitive contribution rate increases. Given the limited medium term membership growth prospects, the reserve base is expected to remain resilient to moderating earnings, with the scheme’s statutory solvency margin forecast to register comfortably above 40% (FY17: 46%) over the rating horizon, underpinning a strong medium term credit profile.
The scheme exhibits healthy liquidity, with cash and equivalents forming the core of the investment portfolio (FY16: 61%). Accordingly, liquidity metrics continued to register within a consistent and strong range, with the net cash coverage ratio amounting to a high 4.7 months at FY16 (FY15: 4.5 months). A stable investment strategy is expected to uphold liquidity metrics at sound levels over the medium term.
Sizwe’s membership base is reflective of moderate scale, with the scheme accounting for 2.1% of total open scheme principal members at 3Q F16. The scheme’s members are predominantly derived from corporate clients (at 86%), with high exposure to select sectors of the economy. These sectors are highly sensitive to prevailing economic conditions, giving rise to a degree of volatility in member levels in recent times. This trend is expected to continue over the short term, with a high likelihood of further member losses envisaged for FY17.
Notwithstanding the above, the scheme continues to exhibit a favourable member risk profile, with the average age of beneficiaries closely aligned to the industry average of 33 years. This has facilitated a fairly well contained claims experience over the review period. With the scope for member growth viewed to be limited, a degree of membership ageing is expected, albeit, still anticipated to remain at a favourable level.
Management of expenses to the extent that earnings control is preserved may result in upward rating movement. This would need to be supported by the maintenance of credit protection measures at sound levels. Negative rating pressure may follow a sustained weakening in earnings capacity, solvency and liquidity measures, as well as considerable membership losses.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2015)|
|Claims paying ability: A+(ZA)|
|Last rating (July 2016)|
|Claims paying ability: A+(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated July 2016
Sizwe rating reports, 2015-2016
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.
Sizwe Medical Fund 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 Sizwe Medical Fund with no contestation of the rating.
The information received from Sizwe Medical Fund 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 April 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 Sizwe Medical Fund’s rating of A+(ZA); Outlook Positive.