GCR affirms Discovery Health Medical Scheme’s rating of AA+(ZA); Outlook stable
Global Credit Ratings (GCR) has affirmed the national scale claims paying ability rating assigned to Discovery Health Medical Scheme (DHMS) of AA+(ZA), with the rating outlook accorded as Stable.
DHMS’s membership base is viewed to reflect a material rating strength, stemming from the risk pool’s exceptionally large scale and diversification. DHMS is the largest medical aid scheme in the open industry, covering just over 2.7 million total lives (accounting for a sizeable 55% of total open industry scheme principal members).
“This is supported by the scheme’s sustained high membership retention rates, while intermediary and client concentrations are contained at very low levels,” says Marc Chadwick, Sector Head of Insurance Ratings at GCR.
“The member pool also displays a favourable risk profile, with the average principal and beneficiary member ages remaining stable at 44 years and 34 years respectively.”
The scheme exhibits extremely strong risk profile management. Strong alignment of pricing and benefit design, coupled with a high level of claims predictability, has allowed for an extremely competitive operational profile to be sustained throughout the review period. This is also supported by the entrenched membership base within the scheme’s framework.
Accordingly, GCR expects DHMS to evidence continued operational control over the rating horizon, with capacity to manage the tight market that is likely to persist over the coming 12 months.
DHMS continues to generate sufficient earnings and manage earnings volatility to support its reserve management strategy. In this respect, the claims ratio remained relatively well contained at 87% in 2016 (2015: 86%). This facilitates a positive net healthcare margin of 0.2%, and is also viewed favourably in the context of the open industry scheme 3Q 2016 average net healthcare margin (-2.5%).
Supplemented by a 24% increase in investment inflows, the overall net surplus reported at a healthy R1 billion in 2016. The claims ratio is expected to remain stable at 87% in 2017, with positive net healthcare results projected to be sustained over the rating horizon.
Solvency is well managed, with the statutory solvency margin trending around 26% over the past three years (in line with management’s targets). In this regard, DHMS displays strong reserve generative capacity, with the three year CAGR of accumulated funds amounting to a sound 13%, ending the year on R14.2 billion. Going forward, the statutory solvency margin is expected to be maintained at 26%, with sound reserve generation anticipated to uphold targeted levels of solvency.
DHMS displays sound levels of liquidity, with the investment portfolio weighted towards cash and equivalents (Financial Year Ending 2016: 61%). Of late, DHMS has gradually increased its exposure to equity and bond securities in line with the strengthening in solvency relative to historical levels.
“Nonetheless, liquidity strength is expected to be upheld by the large and highly tradable nature of the investment base (Financial Year Ending 2016: R18.8 billion), and supplemented by strong operational cash inflows,” says Chadwick. “Note is also taken of the aggregated credit strength of the underlying bond portfolio, which supports the strong liquidity profile.”
In consideration of prevailing characteristics in the South African medical schemes arena, the industry rating ceiling remains capped at AA+(ZA). The absence of a revision thereof, an upward adjustment of the scheme’s rating, which constitutes the highest rating an open or closed medical scheme currently can be accorded by GCR, is considered unlikely over the short to medium term.
Conversely, downward rating pressure may arise from a severe weakening in key operating and solvency metrics and/or a marked loss in membership within the 24-month rating horizon.
