Johannesburg, 31 July 2018 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Sizwe Medical Fund to AA-(ZA) from A+(ZA) , with the rating outlook accorded as Stable.
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 rating upgrade reflects Sizwe’s very strong solvency position, which provides ample flexibility to execute operational targets. This is supported by consistently strong liquidity metrics, coupled with sound review period reserve accumulation.
Sizwe’s solvency is viewed to be very strong, with the statutory solvency margin registering at a very high 55% at FY17 (FY16: 52%). This has been underpinned by robust review period reserve accumulation, coupled with reduced member scale and consistently competitive contribution increases across the review period. Going forward, very high reserves are expected to be maintained, with the statutory solvency margin likely to trend above 40% over the medium term after factoring in potential margin compression and envisaged member volatility.
Earnings remains robust, with the three year net margin averaging a high 4% (FY17: 5%). Earnings generative capacity has been a function of a fairly well contained claims ratio (three year average: 88%), coupled with sizeable reported investment income. Looking ahead, very competitive contribution rate increases and lack of contribution scale enhancement is expected to result in a notably elevated claims ratio (BGT18: 92.7%) which, in tandem with rising non-healthcare expenditure (BGT18 non-healthcare cost ratio: 13.9%; FY17: 12.2%), is expected to result in moderated earnings. Nonetheless, the scheme’s loss absorption capacity is viewed to be high, capable of withstanding the anticipated medium term earnings pressure, although the management of atypical increases in non-healthcare expenditure supportive of sustainable operating performance represents a key rating consideration over the longer term.
The scheme evidenced consistently strong liquidity, with the net cash coverage ratio strengthening to a review period high 5.3 months at FY17 (FY16: 4.7 months; review period average: 4.6 months). Cash and equivalents constitutes the core of the investment portfolio (FY17: 63%) while additional liquidity relief is derived from tradeable non-cash investments. A stable investment strategy is expected to uphold liquidity metrics at strong levels over the medium term.
Principal members contracted by 5.6% to 47,218 in FY17 (FY16 member losses: 4.4%), albeit noting the scheme accounts for a relatively stable 2.0% of total open scheme principal members at 3Q F17. The high member concentration to select sectors of the economy exposes the scheme to systematic risks inherent in these sectors, giving rise to member volatility which is expected to persist over the rating horizon. Notwithstanding the above, the scheme continues to reflect a favourable age profile, as evidenced by the below industry average age of beneficiaries of 33 years (3Q F17 industry average: 35 years). This has facilitated a fairly well contained claims ratio over the review period. Going forward, expected member churn is likely to see the age profile stabilise at current levels.
The rating could benefit over the medium term from material increases in membership scale, coupled with the management of expenses to the extent that earnings control is preserved. This must be accompanied by the maintenance of very strong solvency and liquidity. Negative rating pressure may follow a sustained weakening in earnings capacity, solvency and liquidity, as well as sustained member losses.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2015)|
|Claims paying ability: A+(ZA)|
|Last rating (July 2017)|
|Claims paying ability: A+(ZA)|
|Primary Analyst||Secondary Analyst|
|Vinay Nagar||Siyuan Lu|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated May 2018
Sizwe rating reports, 2015-2017
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 2017
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2018
- Year to date management accounts to May 2018
- 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
|Audited Financial Statements||Financial statements that bear the report of independent auditors (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|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.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Interest||Money paid for the use of money.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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||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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
For a detailed glossary of terms please click here
GCR upgrades Sizwe Medical Fund’s rating to AA-(ZA); Outlook Stable.