|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Profmed||Financial strength||National||AA(ZA)||Stable Outlook|
Profmed’s rating is premised on the scheme’s very strong solvency, which has been maintained over the review period, offsetting sustained deterioration in earnings and liquidity. The scheme membership profile is considered weak given its relatively small and high-risk membership base, albeit with the high level of policy granularity viewed to be credit positive.
Capitalisation remained a key rating strength, despite the slowing down in the members’ surplus over the past three years on the back of strategic reserves utilisation. Consequently, the GCR capital adequacy ratio (“CAR”) was well maintained at around 2.0x over the corresponding period, while solvency remained very strong at 43.5% in FY19 (FY18: 50%). In this respect the scheme’s above average loss absorption capacity is likely to provide flexibility in pricing and claims management, with statutory solvency likely to measure within the target range of 35% to 40% over the medium term.
Earnings remained credit positive despite review year claims elevation. The scheme evidenced consistent accumulation of sound net profits over the past five years, amounting to R178m. In this respect, the earnings assessment tolerates the net loss of R35m registered in FY19, following a spike in claims which widened net healthcare deficits to 5% of net premium income in FY19 (FY18: 2% deficit; FY17: 3% deficit). However, additional earnings pressures are expected from accrued economic challenges due to the COVID-19 pandemic, notably through contribution levels and investment income. As such, there is a potential for a higher than expected erosion of the scheme’s financial profile from sustained claims pressures, which could moderate the earnings assessment over the medium term.
Liquidity moderated from very strong to strong levels over the past five years, adversely impacted by placements into non-cash investments, resulting in aggregate fair value losses of R161m over the corresponding period. In this regard, cash and equivalents reduced by 44% over the past five years to account for 11% of the investment portfolio at FY19 (FY18: 14%). Consequently, the gross cash and stressed financial assets coverage of claims equated to 4.4 months in FY19 (FY18: 5.1 months; FY15: 9.4 months), while the operational cash coverage remained around 1.0x. Liquidity could further moderate due to the scheme’s plans to maintain an asset allocation skewed toward non-cash investments and possible earnings strain over the medium term.
The membership profile remained a main rating weakness, a function of a relatively small membership base representing about 2% of the closed schemes industry memberships. This is compounded by a comparatively high-risk membership base, with a high average beneficiary age of 40 years, and pensioner ratio of 17%. Nevertheless, GCR positively views the scheme’s very high level of diversification across individuals (96% of principal members), as well as sound risk base management through efficient option pricing and benefits design. Furthermore, the scheme maintained a strong membership growth, averaging 4% over the past five years, which indicates potential for the market share to remain resilient to economic pressures on membership growth.
The Stable Outlook reflects expectations that the scheme will maintain a strong financial profile, underpinned by above average accumulated reserves, which are likely to absorb earnings and liquidity pressures expected over the medium term. Meanwhile, the membership profile will remain similar, managed in line with strategic objectives.
The rating remains sensitive to sustained earnings and/or liquidity weaknesses, which may trigger negative rating action, especially if statutory solvency moderates below 40%. Upward rating movement is unlikely over the medium term, but sustained and/or material improvements in the scheme’s membership profile could be positively viewed. This should be supported by current financial profile strength.
|Primary analyst||Fleur Ngassa||Analyst: Insurance Ratings|
|Johannesburg, ZA||MarlaineN@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, May 2020|
|GCR South African Medical Schemes Sector Risk Score, July 2020|
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(ZA)||Stable||July 2014|
|Financial strength||Last||National||AA(ZA)||Stable||September 2020|
Risk score summary
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Pricing||A process of determining the price of a debt security.|
|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.|
|Reserves||A portion of funds allocated for an eventuality.|
|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 RATINGS
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:
- The audited financial results to 31 December 2019;
- Four years of comparative audited statements to 31 December;
- Unaudited interim results up to 30 September 2020;
- Budgeted financial statements for 2020;
- Other related documents.