Rating action
Johannesburg, 22 July 2020 – GCR Ratings (“GCR”) has affirmed Bankmed’s national scale financial strength rating of AA+(ZA), with a Stable Outlook.
Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook/Watch |
Bankmed | Financial strength | National | AA+(ZA) | Stable Outlook |
The rating action follows a reduction in the South African country and medical schemes sector risk assessments.
The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on 27th May 2020. Click here to access the link. On 14th July 2020, the South African medical schemes sector risk score was also lowered to 7.75 from 8.00 previously. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Rating rationale
Bankmed’s national scale financial strength rating reflects the scheme’s very strong solvency and strong liquidity, albeit restrained by high sectoral concentration and intermediate earnings.
Bankmed’s capitalisation remained a key rating strength, consistently trending within a very strong range, with a statutory solvency of 40% at FY19 (FY18: 39%), well balancing affordability and reserve utilisation. Going forward, the scheme’s capitalisation is expected to be maintained within a very strong range, given its demonstrated ability to manage solvency within the targeted band of 35% to 40%.
Furthermore, liquidity was stable within a strong range, with cash and stressed investments coverage of claims maintained at 6 months at FY19, while operational cash coverage was constant over the last four years at 1x. Liquidity metrics are supported by a sizeable portfolio of tradable investments, which grew by 7% to R3.2bn in FY19. Note is taken of a moderation in liquidity over the review period, driven among other factors by increasing net claims expenses. While the investment allocation structure is expected to remain relatively similar going forward, liquidity could be further impacted by weaker than expected operational cash flow generation over the rating horizon.
Bankmed’s earnings were assessed within intermediate range reflecting thin net healthcare deficits posted throughout the review period. Accordingly, the net healthcare margin registered at -1.0% in FY19 (FY18: -0.5%; FY17: -0.9%), evidencing earnings sensitivity to high claims expenses, albeit deficit levels significantly reduced over the past three years on the back of the scheme’s scale and operational efficiencies. Meanwhile, investment income was volatile, measuring at R142m (FY18: R146m; FY17: R118m), which resulted in a net surplus of R93m (FY18: R126m; FY17: R83m), with the five-year average net margin equating to a thin 1.9%. Given the scheme’s objective to maintain affordability of products, earnings may moderate over the short to medium term, representing a rating sensitivity.
The membership profile is viewed to be moderately low, limited by concentration to the banking services, with very high exposure to three employer groups further compounded by sensitivity to systematic risks inherent to the industry. These rating weaknesses balance the strong risk base, underpinned by a favourable average beneficiary age and low pensioner ratio. Meanwhile, market share was stable at 7% of restricted medical schemes principal members, despite a slight contraction in principal members registered in FY19. Although there is potential to expand and diversify the membership base within the circumscribed industry, material improvements in the membership profile are unlikely over the rating outlook, given limitations to on-boarding new employer groups.
Outlook statement
The Stable Outlook reflects expectations that Bankmed’s solvency and liquidity will be maintained within strong to very strong levels, while the membership profile will remain unchanged over the outlook horizon. We expect earnings to remain under pressures as economic challenges due to the COVID-19 pandemic negatively impact contribution levels and investment income, along with potential increase in the claims experience.
Rating triggers
Upward rating movement is considered unlikely over the medium term, given the scheme’s admissibility criteria that limit scope for enhanced sectoral and membership diversification. However, sustainable improvements and stability in earnings could be positively viewed. Downward rating pressure may arise from a deterioration in earnings that results in a weakening in solvency and liquidity relative to expectations.
Analytical contacts
Primary analyst | Fleur Ngassa | Analyst: Insurance |
Johannesburg, ZA | Marlainen@GCRratings.com | +27 11 784 1771 |
Committee chair | Godfrey Chingono | Deputy Sector Head: Insurance |
Johannesburg, ZA | Godfreyc@GCRratings.com | +27 11 784 1771 |
Related criteria and research
Criteria for the GCR Ratings Framework, May 2019 |
Criteria for Rating Insurance Companies, May 2019 |
GCR Ratings Scales, Symbols & Definitions, May 2019 |
GCR Country Risk Scores, May 2020 |
GCR South Africa Medical Scheme Sector Risk Score, July 2020 |
Ratings history
Bankmed
Risk score summary
Rating components & factors | Risk scores |
Operating environment | 14.75 |
Country risk score | 7.00 |
Sector risk score | 7.75 |
Business profile | (0.25) |
Membership profile | (0.25) |
Management and governance | 0.00 |
Financial profile | 3.25 |
Earnings | 0.25 |
Capitalisation | 2.00 |
Liquidity | 1.00 |
Comparative profile | 0.00 |
Peer analysis | 0.00 |
Total score | 17.75 |
Glossary
Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
Rating Outlook | See GCR Rating Scales, Symbols and Definitions. |
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. |
Systematic Risk | Risk attributed to market factors that cannot be eliminated through diversification. |
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entity and other reliable third parties to accord the credit rating included:
- Audited financial statements to 31 December 2019;
- Four years of comparative audited financial statements to 31 December;
- Full year budgeted financial statements to 31 December 2020;
- Unaudited management accounts to 31 March 2020;
- Other relevant documents