Announcements Medical Scheme Rating Alerts

GCR upgrades GEMS’ national scale financial strength rating to AA-(ZA) from A+(ZA) on sustained financial profile strength; Outlook Positive

Rating action

Johannesburg, 01 September 2020 – GCR Ratings (“GCR”) has upgraded Government Employees Medical Scheme’s (“GEMS”) national scale financial strength rating to AA-(ZA) from A+(ZA), with the outlook accorded as Positive.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Government Employees Medical Scheme Financial strength National AA-(ZA) Positive Outlook

The rating action follows a reduction in the South African country and medical schemes sector risk assessments.

The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on 27th May 2020. Click here to access the link. On 14th July 2020, the South African medical schemes sector risk score was also lowered to 7.75 from 8.00 previously. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating rationale

GEMS’s national scale financial strength rating reflects the scheme’s sustained improvement in earnings and capitalisation, while deriving additional support from a large membership base and sound liquidity reserves. In this respect, the scheme continued to register strong net healthcare results and net surpluses, which accelerated reserves accumulation to attain statutory compliance for the first time in FY19. While also noting stimulated liquidity levels, the positive outlook captures the potential for the financial profile to remain resilient, albeit GCR believes that there is still the need to stabilise developing earnings strengths over the medium term.

Earnings improvement was sustained in FY19, underpinned by a favourable claims experience and a relatively low operating cost structure, which supported strong net healthcare profits cumulating to R9.0bn over the past three years. This, coupled with an exponential growth in investment income (FY19: R971m; FY18: R593m; FY17: R314m), boosted net surplus to R3.6bn in FY19 (FY18: R4.1bn; FY7: R3.3bn). This notwithstanding, the factor assessment remains constrained by volatility in performance, especially in the context of COVID-19 pandemic risks which could notably reduce gross premium contributions and investment income. Therefore, the scheme’s ability to sustain and stabilise earnings at improved levels over the medium term will represent a key rating sensitivity.

Net surplus average of R3.7bn over the past three years accelerated reserve accumulation, which outpaced growth in insurance and market risks. Consequently, GEMS’ statutory solvency materially improved to 31.5% in FY19 (FY18: 24.7%; FY17: 15%), complying for the first time with regulatory requirements. Given accumulated reserves buffers, the scheme’s solvency is likely to tolerate potential moderation due to expected earnings strain from COVID-19 pandemic risks. As a result, the factor assessment could support positive rating action over the medium term, if sustained above minimum requirements.

Liquidity remained within strong bands, driven by strong operating cash flows generated over the past three years. In this respect, cash and stressed financial assets coverage of average monthly claims and operational cash coverage registered at 5 months and 1.1x at FY19 (FY18: 4 months and 1.1x) respectively. However, GCR notes that net cash inflows almost halved over the corresponding period, explained by purchases of equity and fixed income investments to optimise portfolio returns. Looking ahead, similar dynamics could result in liquidity moderation, factoring potential for COVID-19 pandemic risks to reduce expected investment returns from ongoing asset reallocation, among other earning pressures. Consequently, the scheme’s ability to sustain liquidity at improved levels which reflect a resilient liquidity management, will represent a key rating consideration.

GEMS’s membership profile is viewed within a strong range, underpinned by a large membership base and a favourable age profile. Moreover, GEMS benefits from a fairly stable captive membership pool, offsetting high concentration to the public sector. Going forward, the membership profile is expected to remain positive to the rating, noting that material improvements in membership profile over the medium term are unlikely, given accrued economic challenges counterbalancing management efforts to grow membership base.

Outlook statement

The Positive Outlook reflects the strengthening in the scheme’s financial profile, which, if sustained, could support upward rating movement. GCR expects capitalisation and liquidity to be maintained above prudent levels given accumulated buffers, tolerating potential earnings moderation due to the impact of COVID-19 pandemic risks on gross premiums contributions and investment income among other factors.

Rating triggers

While downward rating movement is considered unlikely over the short term, a material deterioration in earnings, negatively impacting solvency and/or liquidity, could lead to negative rating action.

Analytical contacts

Primary analyst Fleur Ngassa Analyst: Insurance Ratings
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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 Africa Medical Scheme Sector Risk Score, July 2020

Ratings history

Government Employees Medical Scheme

Rating class Review Rating scale Rating class Outlook/Watch Date
Financial strength Initial/Last National A+(ZA) Positive December 2019

Risk score summary

Rating components & factors Risk scores
Operating environment 14.75
Country risk score 7.00
Sector risk score 7.75
Business profile 0.50
Membership profile 0.50
Management and governance 0.00
Financial profile 0.50
Earnings 0.00
Capitalisation 0.00
Liquidity 0.50
Comparative profile 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 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.
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.
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 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:

  • Audited financial statements to 31 December 2019;
  • Four years of comparative audited financial statements to 31 December;
  • Full year budgeted financial statements to 31 December 2020;
  • Unaudited management accounts to 30 June 2020;
  • Other relevant documents
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