Global Credit Ratings (GCR) has today affirmed the national scale claims paying ability rating assigned to Momentum Health of AA(ZA), with the rating outlook accorded as Stable.
Momentum Health’s membership base represents a key rating strength, with the scheme’s large and growing member count facilitating a very competitive market share of 5.9% in Financial Year 2016. The scheme’s ability to consistently grow its membership base (Financial Year 2016: 7%) at a rate well above the industry average has aided in maintaining a favourable risk pool.
“This is viewed to reflect the scheme’s very high level of competitiveness within its range of target market segments, which is expected to sustain very high organic growth going forward,” says Marc Chadwick, Head of Insurance Ratings at GCR.
“In conjunction with a proposed amalgamation with Metropolitan Medical Scheme, which is likely to add an extra 1,800 principal members to the scheme, total principal members are anticipated to rise further to over 150,000 in Financial Year 2017.”
Strong membership growth has encompassed high uptake of attractive risk profiles, enabling the scheme to contain year-on-year ageing, which is viewed to have contributed to a fairly well contained claims experience, supporting the scheme’s strong credit profile.
“The average beneficiary age has remained stable at 33 years throughout the review period, which compares favourably to the open scheme industry average. The age profile is expected to remain relatively unchanged over the rating horizon, facilitating continued strong risk pool management and claims predictability,” adds Chadwick.
GCR views Momentum Health’s solvency to be intermediate, having been fairly well managed relative to expectations (taking into consideration the strong and positive membership growth), albeit representing a source of likely rating sensitivity going forward. Statutory solvency moderated to an intermediate 27% at Financial Year 2016 (Financial Year 2015: 29%), with high member growth, coupled with an atypical deterioration in earnings, causing the margin to fall slightly below expectations (BY16: 28%).
A further reduction to 25% is expected in Financial Year 2017. This notwithstanding, solvency dilution is viewed to be partially offset by the growth in the scale of the membership base, with the effect being compounded by the stabilising impact of new members on the scheme’s total average age.
Momentum’s rating is likely, however, to exhibit sensitivity to solvency dilution going forward, given the scheme’s continued high membership growth targets. Management is targeting a medium term solvency range of 25% to 28%, which GCR has factored into its forward looking assessment, representing a key rating consideration going forward.
The scheme’s earnings is viewed to have been very healthy over the bulk of the review period, adequate at present, although an additional source of potential rating sensitivity going forward. In this regard, the scheme reported a somewhat elevated claims ratio in Financial Year 2016 (88%, versus an average of 84% over the prior four years).
This notwithstanding, GCR views the scheme’s earnings control to be high, with the claims ratio consistently tracking below the industry average. This is viewed to reflect the favourable risk profile of the membership base, and effective claims containment measures utilised by the scheme. Consequently, and taking solvency sensitivity into account, GCR views management’s bottom line control, with respect to achieving net results in line with strategic targets, to be a primary consideration over the rating horizon.
Liquidity is viewed to be adequate, supported by the fairly tradable nature of the investment portfolio. Following the channelling of interest securities into money market instruments, cash and equivalents comprised a higher 40% of the investment portfolio (Financial Year 2015: 25%), with the net cash coverage ratio improving to 2 months at Financial Year 2016 (Financial Year 2015: 1 month). Liquidity is expected to remain adequate, as no material change in the investment strategy is envisaged over the short term.
An upward rating adjustment may emanate from a sustained material increase in membership over the medium term, coupled with a strengthening in key liquidity and solvency metrics. Downward rating pressure primarily pertains to solvency and earnings registering below targets.