GCR affirms Medshield Medical Scheme’s rating of AA-(ZA); Outlook Positive

Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Medshield Medical Scheme of AA-(ZA), with the rating outlook accorded as Positive.

Medshield’s rating has been maintained on AA-(ZA), with the rating placed on Positive outlook. The potential positive rating action is premised on solvency strength being sustained at very high levels over the medium term (with earnings trending in line with strategic targets), while the scheme evidences increased stability in membership levels and liquidity metrics.

“The rating derives significant support from very strong solvency, with the statutory solvency margin equating to a very high 52% at Financial Year 2016,” says Marc Chadwick, Sector Head of Insurance Ratings at GCR.

“In line with the scheme’s strategic growth objectives, a degree of solvency dilution is expected over the medium term, as the scheme deliberately utilises excess reserves, through competitive contribution rate increases, to alleviate affordability pressures on the existing member base, while simultaneously attempting to enhance its market presence. This notwithstanding, solvency is expected to trend within a very strong range, with the statutory solvency margin likely to remain above 40% over the rating horizon.”

Earnings capacity is viewed to be adequate, and aligned to the scheme’s solvency strategy. In this respect, the large reserve base supports a degree of operational loss absorption, while strong investment inflows serve to sustain adequate net margins (Financial Year 2016: 0.6%; three year average: 1.5%). This trend is expected to continue over the rating horizon, given the high buffer available from the current statutory solvency margin relative to the medium term target range, and the sizeable investment portfolio supporting earnings.

Medshield’s fairly large membership base supports a relatively competitive business profile, with the scheme’s market share of total open scheme principal members equating to 3.1% in Financial Year 2016. Note is taken of the potential for high membership growth to be achieved in Financial Year 2017, taking into consideration the strong 3.5% rise in year-to-date principle member volumes. If sustained, this would serve to stem the trend of consistent member outflows previously evidenced over the review period.

The scheme exhibits strengthened liquidity, with a shift in asset allocation contributing to improved liquidity metrics at Financial Year 2016. In this respect, cash and equivalents increased by 134%, and represented a higher 47% of total investments at Financial Year 2016 (Financial Year 2015: 20%), which resulted in the net cash coverage ratio improving to 4 months (Financial Year 2015: 1 month).

Although liquidity metrics may fluctuate over the medium term (a function of a flexible investment strategy underpinned by very high reserves), liquidity is expected to trend within a sound range, supported by the large quantum of tradable assets.

Over the past four years, the scheme has evidenced a notable deterioration in the age profile of the membership base. In this regard, the average age of beneficiaries, as well as the pensioner ratio, registered well above the open scheme industry average. Going forward, the age profile of the scheme is expected to remain elevated, and may represent a source of potential earnings pressure should the targeted growth not materialise.

Further to this, the high proportion of members sourced from the scheme’s two largest brokers (Financial Year 2016: 26%) exposes Medshield to a degree of intermediary concentration risk.

“This situation is unlikely to change over the medium term, as broker utilisation is expected to remain high, although the risk may be somewhat alleviated as the in house brokerage arm continues to account for a growing share of broker business,” concludes Chadwick.

Upward rating movement could arise from sustained very high levels of solvency, coupled with earnings trending in line with strategic targets, and increased stability in membership levels and liquidity metrics.

A persistent deterioration in Medshield’s financial performance against expectations, including a considerable weakening of key liquidity metrics and solvency measures, as well as further significant membership base losses, may result in negative rating action.