Announcements Medical Scheme Rating Alerts

GCR affirms Bankmed’s national scale financial strength rating of AA+(ZA); Outlook Stable

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

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National AA-(ZA) Stable Outlook October 2000
Financial strength Last National AA+(ZA) Stable Outlook September 2019

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
image_pdfPDF View


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright 2019 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.