Johannesburg, 25 September 2019 – GCR Ratings (“GCR”) has affirmed Bankmed’s national scale financial strength (formerly claims paying ability) rating of AA+(ZA), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Bankmed||Financial strength||National||AA+(ZA)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Bankmed was placed ‘Under Criteria Observation’. GCR finalised the review for Bankmed under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Bankmed has been affirmed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Bankmed’s national scale financial strength rating reflects the scheme’s very strong solvency and strong liquidity, which is partially offset by high sectoral concentration and intermediate earnings.
Bankmed has maintained very strong capitalisation over the review period, with the GCR CAR ratio equating to more than 2x at FY18. Capitalisation is expected to remain very strong, given the active management of statutory solvency within the targeted range. In this respect, the statutory solvency margin measured at a stable 39% at FY18, and is expected to be maintained within a range of 35% to 40% going forward (1H F19: 38%). However, some dilution towards the lower end of the target band may take place as the scheme balances affordability with reserve utilisation.
Furthermore, liquidity is viewed to be strong, with stressed investment coverage of gross claims and expenses registering at 5.7 months at FY18, while operational cash coverage equated to 1x. Going forward, the investment allocation is not expected to change materially and liquidity is expected to be supported by the large portfolio of tradeable investments, although could be impacted by weaker than expected operational cash flow generation.
Bankmed reflects an intermediate level of earnings, with small net healthcare deficits posted throughout the review period. Overall net margins have nevertheless been supported by investment income, with the five year average net margin equating to a thin but relatively stable 1%. Given the scheme’s strategic objective to balance stability with reserve utilisation, and in the context of greater affordability pressures, earnings may moderate over the short to medium term, representing a rating sensitivity.
Bankmed’s membership profile is viewed to be strong, underpinned by a favourable average beneficiary age (32 years) and low pensioner ratio (8%), as well as a healthy market share, at around 7% of total closed scheme principal members. Going forward, the membership profile is expected to remain healthy, given high member retention and the scheme’s ability to gradually grow the membership base.
Notwithstanding the above, GCR views the high concentration to the banking and financial services sector as a rating weakness, given the scheme’s exposure to systemic risks inherent in the sector. Furthermore, the scheme’s membership base exhibits further concentration risk in the form of exposure to three employer groups (75% of members).
The Stable Outlook reflects expectations that Bankmed’s solvency and liquidity will be maintained at strong to very strong levels, while the membership profile will remain similar over the outlook horizon.
Upward rating movement is considered unlikely over the short term, given the scheme’s admissibility criteria that limit scope for enhanced sectoral and membership diversification. Downward rating pressure may arise from a deterioration in earnings that results in a weakening in solvency and liquidity relative to expectations.
|Primary analyst||Susan Hawthorne||Senior Insurance Analyst|
|Johannesburg, ZA||susanh@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YvonneM@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, June 2019|
|GCR South Africa Medical Scheme Sector Risk Score, September 2019|
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(ZA)||Stable Outlook||October 2000|
|Last||National||AA+(ZA)||Stable Outlook||May 2018|
Risk Score Summary
|Country risk score||7.50|
|Sector risk score||8.00|
|Management and governance||0.00|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Beneficiary||Nominated person or institution in the policy document that is entitled to receive the proceeds stated in the policy.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|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.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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 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.|
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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Bankmed participated in the rating process via telephone conference, 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 Bankmed and other reliable third parties to accord the credit rating included:
- Audited financial statements to 31 December 2018;
- Four years of comparative audited financial statements to 31 December;
- Full year budgeted financial statements to 31 December 2019;
- Unaudited management accounts to 30 June 2019;
- Other relevant documents