Announcements Insurance Medical Scheme Rating Alerts

GCR affirms Bonitas Medical Fund’s national scale financial strength rating of AA-(ZA); Rating Watch Positive

Rating action

Johannesburg, 12 August 2021 — GCR Ratings (“GCR”) has affirmed Bonitas Medical Fund’s (“Bonitas”) national scale financial strength rating of AA-(ZA), with a Rating Watch Positive

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

Bonitas Medical Fund

Financial strength

National

AA-(ZA)

Rating Watch Positive

Rating rationale

The rating reflects the scheme’s strong membership profile and moderate financial profile. The Rating Watch Positive reflects the possibility of rating movement from an impending corporate transaction that is expected to be neutral to credit positive. Furthermore, a boost in earnings due to lower claims in FY20, supported improved solvency levels, which if sustained could result in upward rating movement.

Bonitas’ membership profile remained strong, with a market share consistently trending at around 14% of open schemes principal members. The scheme experienced a 1.7% loss in membership in FY20, as a result of the economic impact from the Covid-19 pandemic but this compared better to peers in the industry. Furthermore, the assessment balances reasonable diversification across employer groups, intermediaries and regions with the relatively risky base evidenced by the average beneficiary age of 35 years and pensioner ratio of 10.2% in FY20. Going forward, Bonitas is expected to retain a similar membership profile supported by a high retention ratio and marketing initiatives to defend market share.

Earnings were stronger in FY20 as lower benefit utilisation resulted in low claims frequency, in line with industry experience. The claims ratio registered at 83% compared to a four prior year average of 91%, supporting a positive net healthcare result of R1,4bn (FY19: -R250m). Similarly, the scheme experienced a net surplus growth of more than 1.2x to R1,7bn (FY19: R136m) despite a 22% moderation in Investment income to R292m (FY19: R372m). Over the rating horizon, the scheme is expected to register a positive net healthcare result and net surplus, but with potential for moderation from the very high levels registered in FY20 as benefit utilisation picks up.

Capitalisation was within intermediate levels, though stronger than in FY19 with statutory solvency at 32.7% (FY19: 25%) boosted by high earnings in FY20. GCR believes that capitalisation is susceptible to possible earnings reduction, although we expect the solvency margin to remain above the statutory minimum levels in the 25% – 30% range in the medium term.

Liquidity is also assessed to be intermediate, with coverage of claims by stressed investment assets at 4.5 months (FY19: 3 months), while operational cash coverage was at 1.1x (FY19: 0.9x). The improvement in FY20 was supported by lower claims and operational cash requirements, coupled with improved cash generation as a result of lower receivables, which reduced by 15% to account for 10% of total reserves at FY20 (FY19: 18%). Going forward the scheme is expected to maintain the coverage of claims by stressed investment assets above 3.5x supported by the strategic reallocation of the investment portfolio toward more liquid interest securities.

Outlook statement

The Rating Watch Positive reflects our expectations that capitalisation and liquidity will be sustained at improved levels with the solvency margin expected to remain above 25% and the gross claims coverage expected to remain above 3.5 months. Furthermore, there is potential for the pending corporate transaction to improve the overall credit profile.

Rating triggers

Positive rating movement could result from sustained strengthened solvency and liquidity. Furthermore, the rating could be upgraded if the pending corporate transaction is successfully concluded and results in a sufficient improvement in the financial and/or business profile. Negative rating movement is not expected unless there is an unforeseen adverse impact from the transaction or capital deterioration below expectations.

Analytical contacts

Primary analyst

Victor Matsilele

Analyst: Insurance Ratings

Johannesburg, ZA

VictorM@GCRratings.com

+27 11 784 1771

     

Secondary analyst

Fleur Ngassa

Analyst: Insurance Ratings

Johannesburg, ZA

MarlaineN@GCRratings.com

+27 11 784 1771

     

Committee chair

Susan Hawthorne

Senior Analyst: Insurance ratings

Johannesburg, ZA

SusanH@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, August 2021

GCR South African Medical Schemes Sector Risk Scores, April 2021

Rating history

Rating class

Review

Rating Scale

Rating

Outlook / Watch

Date

Financial strength

Initial/last

National

AA-(ZA)

Stable Outlook

August 2020

Risk Score Summary

Rating Components & Factors

Risk scores

 

Operating environment

14.75

Country risk score

7.00

Sector risk score

7.75

   

Business profile

1.75

Membership profile

1.75

Management and governance

0.00

 

Financial profile

(0.75)

Earnings

0.25

Capitalisation

(1.00)

Liquidity

0.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

15.75

Glossary

Principal

The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.

Rating Horizon

The rating outlook period

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Receivables

Any outstanding debts, current or not, due to be paid to a company in cash.

Recovery

The action or process of regaining possession or control of something lost. To recoup losses.

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.

Reserves

A portion of funds allocated for an eventuality.

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.

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.

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:

  • The audited financial results to 31 December 2020
  • Four years of comparative audited financial statements to 31 December
  • Unaudited interim results up to 30 June 2021
  • Budgeted financial statements to 31 December 2021
  • Other related documents.



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