Johannesburg, 30 April 2019 – GCR Ratings has today affirmed the national scale claims paying ability rating assigned to Transmed Medical Fund of BB+(ZA), with the rating outlook accorded as Negative.
SUMMARY RATING RATIONALE
GCR Ratings (“GCR”) has accorded the above credit rating to Transmed Medical Fund (“Transmed”) based on the following key factors:
The Negative outlook reflects the expected deterioration in the scheme’s statutory solvency margin to below rating adequate levels. In this regard, Transmed’s solvency remains constrained, with the statutory solvency margin expected to reduce significantly to 10% at FY19 (FY18: 18%) on the back of highly negative operating forecasts (FY19: net healthcare deficit of R72m). This, combined with a shrinking and deteriorating membership risk pool, has significantly reduced the scheme’s capacity to absorb claims volatility. To this end, even slight deviations in performance relative to projections have an amplified impact on solvency levels. Over the medium term, the credit profile is expected to remain constrained by very weak solvency levels, with a key rating consideration being the ongoing subsidy support from Transnet. The captive nature of the scheme, coupled with fairly limited member scale, makes Transmed’s credit profile intrinsically linked to the annual subsidy received from Transnet, which has a significant impact on the scheme’s financial performance and ultimately the solvency position.
The high earnings volatility is viewed to be a key credit weakness with the scheme recording consecutive deep net healthcare deficits of R49m and R55m in FY18 and FY17 respectively. As the value of the annual subsidy fluctuates from year to year based on the funding needs of the SATS member pool (exclusively housing retired, former employees of the South African Transport Services and their beneficiaries), earnings have followed a volatile trend over the review period. Added to this is the deteriorating risk profile of the member base contributing to an elevated claims trajectory (five year average claims ratio: 96%). A reduction in the annual subsidy in FY19 to R170m from R217m in FY18 is expected to see the claims ratio rise to a high 101% (FY18: 97%), with a budgeted net deficit of R64m. Given that this is likely to see the solvency margin on SATS dip below 25% in FY19, a higher cumulative subsidy is expected in FY20, providing earnings support. Earnings vulnerability to the annual subsidy amount will continue to represent a credit weakness.
Liquidity is viewed to be sound, with the scheme following a very conservative investment strategy. In this regard, cash and equivalents comprised 84% of the investment portfolio, with the net cash coverage ratio registering at a sound 2 months. This notwithstanding, the scheme’s limited cash generative capacity may cause a moderation in liquidity metrics going forward, particularly in instances of operational strain.
Transmed has experienced a material reduction in members over the review period (FY18: 25,115 vs. 44,782 principal members at FY14). Year on year membership losses stem largely from natural attrition on the SATS pool, coupled with member migration to other employer participating schemes and employee downsizing at Transnet. Accordingly, the scheme’s membership age profile deteriorated in FY18, with the average beneficiary age equating to a higher 55 years (FY17: 51 years). In the absence of a stabilising member base, the risk profile of the scheme may continue to deteriorate, exacerbating the impact on already strained earnings.
Downward rating pressure may arise from a sustained deterioration in solvency, and/or a weakening in liquidity. The outlook may revert to stable should the scheme manage key credit protection metrics upwards in line with the revised business plan.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2004)|
|Claims paying ability: AA-(ZA)|
|Last rating (April 2018)|
|Claims paying ability: BB+(ZA)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated May 2018
Transmed rating reports, 2004-2018
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES 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 was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Transmed Medical Fund participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Transmed Medical Fund.
The information received from Transmed Medical Fund and other reliable third parties to accord the credit rating included:
- The unaudited financial statements to 31 December 2018
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2019
- Other relevant documents
The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Beneficiary||Nominated person or institution in the policy document that is entitled to receive the proceeds stated in the policy.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Loss||The happening of the event for which insurance pays.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Rating Horizon||The rating outlook period|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Retention Rate||The net amount of risk the ceding company keeps for its own account as a percentage of GWP.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Statutory Solvency Margin||Gives an indication as to whether the minimum regulatory solvency margin is being met, based on the net statutory assets to statutory net premiums ratio.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade|
For a detailed glossary of terms please click here