Johannesburg, 28 May 2021 – 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|
Bankmed’s national scale financial strength rating balances the scheme’s strong financial profile with high sectoral concentration and a healthy but gradually ageing membership profile.
Bankmed reported a very large net surplus of R668m in FY20 as low non-essential benefit utilisation caused atypically low claims frequency, in line with industry experience. We nevertheless expect earnings to progressively normalise over the medium term as the claims impact of COVID-19 subsides. In this regard, the net healthcare margin ranged between -1% and -3.5% between FY16 and FY19, and the net margin measured between 1% and 3%, with both metrics showing high stability. The net margin is expected to remain in the low positive single digits over the outlook horizon, with potential for small fluctuations stemming from investment market performance.
The large net surplus supported a substantial accumulation of reserves, with accumulated funds equating to R2.9bn at FY20 (FY19: R2.2bn). This supported an increase in the statutory solvency margin to 51%, which is well above the historical average of 40%. Going forward, we expect a gradual reduction in solvency given the low contribution increase implemented in FY20 and the expected uptick in benefit utilisation, although this is likely to be above 45% over the next 12 to 18 months as membership growth remains suppressed.
Similarly, liquidity strengthened in FY20 on the back of higher operational cash inflows that supported a 26% increase in invested assets. As a result, the gross claims cash coverage ratio rose to 6.8 months from 4.9 months in FY19. Going forward, a rebalancing of the portfolio towards higher yielding securities is expected to underpin a moderation from these levels, although liquidity metrics are still expected to be strong.
Bankmed conceded some market share over the past two years, with its share of closed scheme principal members reducing to around 6% from closer to 7% previously. This has been partly attributed to the consolidation in the banking industry and was worsened by prevailing economic challenges. Growth constraints have seen the membership age profile increase slightly, although remaining healthy, with an average beneficiary age of 32 years and pensioner ratio of 9% in FY20. The rating captures the scheme’s very high sectoral and employer group concentration, which in our view has contributed towards some strain in new membership growth. However, we note strategic initiatives to enhance membership growth and diversification, which could support improvement in the overall membership profile if successfully implemented.
The Stable Outlook reflects expectations that Bankmed’s earnings will normalise to historical ranges post COVID-19 and the scheme will continue to successfully balance affordability and targeted solvency margins, as has been demonstrated in the past. Liquidity is likely to moderate from the very high levels at FY20 but register within a strong range. We expect the membership profile to be similar over the next 12 to 18 months, but with potential for improvement over the longer term if strategic initiatives are implemented successfully.
The rating could be upgraded if strategic initiatives to grow the membership base are successfully implemented and this leads to an improvement in the overall membership profile. Downward rating action could follow if there is a material and sustained reduction in solvency and liquidity, with the statutory solvency margin reducing to below 40% and the gross claims cash coverage ratio falling below 5 months.
|Primary analyst||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|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, March 2021|
|GCR South Africa Medical Scheme Sector Risk Score, April 2021|
|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||July 2020|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||7.75|
|Management and governance||0.00|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Contribution||The price of insurance protection for a specified risk for a specified period of time.|
|Investment portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Short Term||Current; ordinarily less than one year.|
|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 Solvency Margin||Gives an indication as to whether the minimum regulatory solvency margin is being met, based on the net statutory assets to statutory net premiums ratio.|
|Statutory||Required by or having to do with law or statute.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
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 entity. 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 2020;
- Four years of comparative audited financial statements to 31 December;
- Full year budgeted financial statements to 31 December 2021;
- Unaudited management accounts to 31 March 2021;
- Other relevant documents