Announcements Insurance Medical Scheme Rating Alerts

GCR upgrades GEMS’s national scale financial strength rating to AA(ZA), from AA-(ZA), on sustained financial profile strength; Outlook Stable

Rating action

Johannesburg, 27 August 2021 – GCR Ratings (“GCR”) has upgraded Government Employees Medical Scheme’s (“GEMS”) national scale financial strength rating to AA(ZA), from AA-(ZA), with the outlook accorded as Stable.

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

Rating rationale

GEMS’s rating reflects the scheme’s sustained improvement in capitalisation and liquidity supported by good earnings, as well as a strong and stable membership base. The scheme continued to register strong earnings over the review period with an even stronger boost in FY20, which accelerated reserve accumulation. The membership profile remained stable, supported by competitive growth of the membership base, although concentration to the government sector limits the factor’s strength. The Stable Outlook reflects our expectations that capitalisation and liquidity will remain at the current levels, while positive earnings are likely to cater for high uncertainty from the Covid-19 pandemic over the medium term.

Earnings have consistently improved over the prior three years and were boosted by a favourable claims experience in FY20 due to reduced benefit utilisation in the wake of successive Covid -19 pandemic waves. A relatively low operating cost structure also supported strong net healthcare profits of R4.7bn in FY20 (FY19: 2.6bn). In this respect, the net surplus absorbed a 10% reduction in investment income in FY20 to register a growth of 54% to R5.6bn (FY19: R3.6bn). The factor’s assessment remains constrained by volatility in performance; therefore, going forward the scheme’s ability to sustain and stabilise earnings at improved levels over the medium term will represent a key rating consideration.

Capitalisation was strengthened by the accumulation of reserves over the past four years, which outpaced growth in insurance and market risks. Reserves grew by 43% in FY20 to R18.6bn (FY19: R13bn) as result of the lower than usual claims experience in FY20. Consequently, GEMS’ statutory solvency materially improved to 41.1%, from 31.5% in FY19 (FY18: 24.7%; FY17: 15%). Given accumulated reserve buffers the scheme’s solvency is likely to remain stable at levels above 30% supported by the expected positive earnings over the medium term.

Liquidity remained within strong bands, driven by strong operating cash flows generated over the past four years and reduced claims in FY20. In this respect, cash and stressed financial assets coverage of average monthly claims and operational cash coverage registered at 6.5 months and 1.1x (FY19: 5 months and 1.1x at FY19) respectively. The scheme largely maintained its asset allocation though, registering a slight increase in money market assets. Looking ahead, liquidity metrics are expected to remain within the current range.

GEMS’s membership profile remained strong, underpinned by a large membership base and a favourable age profile. The captive membership base is deemed to be stable as reflected by the scheme’s ability to grow its membership in a pandemic year when the market was generally losing membership, somewhat offsetting high concentration concerns. Going forward, the membership profile is expected to remain positive to the rating.

Outlook statement

The Stable Outlook reflects the sustainability of the scheme’s financial profile. GCR expects capitalisation and liquidity to be maintained above prudent levels given accumulated buffers, tolerating potential earnings moderation due to the adverse economic conditions and risks on investment income among other factors.

Rating triggers

Upward rating movement is unlikely over the short term but could result from sustained strength in earnings performance. Conversely, downward rating movement could result from a material deterioration in earnings, negatively impacting solvency and/or liquidity.

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 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, August 2021
GCR South Africa Medical Scheme Sector Risk Score, April 2021

Ratings history

Government Employees Medical Scheme

Rating class Review Rating scale Rating class Outlook/Watch Date
Financial strength Initial National A+(ZA) Positive December 2019
Financial strength Last National AA-(ZA) Positive September 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 0.50
Membership profile 0.50
Management and governance 0.00
Financial profile 1.50
Earnings 0.25
Capitalisation 0.75
Liquidity 0.50
Comparative profile 0.00
Peer analysis 0.00
Total score 16.75

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.

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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 2020;
  • Four years of comparative audited financial statements to 31 December;
  • Full year budgeted financial statements to 31 December 2021;
  • Unaudited management accounts to 30 June 2021;
  • Other relevant documents
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