|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Cellmed Health Medical Fund||Financial strength||National||BB+(ZW)||Stable Outlook|
The rating accorded to Cellmed reflects its strong financial profile, supported by sound liquidity and capitalisation as well as strengthened earnings potential. These advantages are however restrained by limited membership profile and diversification, characterised by a comparatively small membership base, coupled with exposure to a single employer group.
Liquidity is considered a key rating strength, with stressed investment assets coverage of claims equating to 11 months at FY20, while operational cash coverage closed at 1.2x. Liquidity strength has been maintained over the past three years, supported by conservative asset allocation and internal cash generation. Going forward, liquidity is expected to be maintained within the same range given that 80% of the investment portfolio is invested in foreign currency assets, thereby cushioning the scheme from potential effects of hyperinflation.
Capitalisation was assessed as sound, with strong net surplus underpinning reserve accumulation and increased statutory solvency buffers. In this respect, the statutory solvency closed higher at 348% at FY20, far exceeding the regulatory requirement of 25%. GCR believes that risk adjusted and statutory solvency are likely to be maintained within a strengthened range over the rating horizon, although these metrics may be diluted by the recent weakening in earnings.
Despite exhibiting some level of volatility emanating mostly from claims experience, earnings are assessed within an intermediate range, supported by a favourable operating cost structure. In this respect, the net claims ratio equated to 85% in 1H FY21 (FY20: 55%; three-year average: 65%), while the net healthcare margin registered a moderation to -15% (FY20: 18%; three-year average: 15%). Similarly, the net result as a proportion of net premium income registered at -1% (FY20: 27%) compared to a prior three-year average: 33%. Management’s ability to stabilise earnings within an intermediate range will therefore represent a key consideration over the rating outlook.
Cellmed’ membership profile is considered a rating negative, exhibiting limited membership size. In this respect, the scheme accounted for 3% of total medical schemes principal members over the past three years. Furthermore, the membership base reflects a level of concentration to the largest corporate employer group and broker, accounting for 23% and 28% of total contributions respectively. The assessment is however balanced by a favourable risk profile, evidenced by an average beneficiary age and pensioner ratio of 29 years and 2% in FY20, respectively. Going forward, Cellmed is likely to retain its current market share, supported by high risk retention, and management’s initiatives to attract smaller entities with younger age profiles.
The Stable Outlook reflects expectations that Cellmed’s capitalisation and liquidity will be maintained within strong levels, given the currently high surpluses, which are expected to absorb an expected increase in the claims experience. The membership profile assessment is expected to be unchanged over the outlook horizon, with continued growth initiatives likely to partly dilute high membership concentration.
A sustainable growth in membership base that results in improved diversification, while maintaining financial profile strength can be positively viewed. Conversely, a material reduction in earnings negatively impacting capitalisation and/or liquidity may warrant a negative rating movement.
|Primary analyst||Linda Matavire||Analyst: Insurance Ratings|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, July 2021|
|GCR Zimbabwean Medical Scheme Sector Risk Score, July 2021|
|Rating class||Review||Rating Scale||Rating||Outlook / Watch||Date|
|Financial strength||Initial / Last||National||BB+(ZW)||Stable||July 2021|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||0.00|
|Sector risk score||1.75|
|Management and governance||0.00|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|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.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|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 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 2020
- Four years of comparative audited numbers
- Unaudited interim results up to 30 June 2021
- Budgeted financial statements for 2021
- Other related documents