Johannesburg, 2 May 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Transmed Medical Fund of BB+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Transmed Medical Fund (“Transmed”) based on the following key criteria:
Transmed’s earnings capacity is viewed to be limited, with the annual subsidy from Transnet for the SATS risk pool representing the primary determinant of the scheme’s net result in a given year. In this regard, the fluctuating value of the annual subsidy has resulted in the scheme exhibiting a volatile earnings trend throughout the review period, which has been exacerbated by an elevated claims ratio. The scheme’s net healthcare margin rose to 6.7% in FY16 (against a previous four year average of -3.3%; given a higher subsidy of R299.6m), although this is budgeted to reverse to -9.7% in FY17. Positively, note is taken of WMP’s stabilization of the net result in positive territory over the past three years, which is budgeted to be sustained in FY17. Going forward, continued volatility is likely to persist, although comfort is derived from the historical subsidy support provided by Transnet.
Transmed’s solvency margin recovered to 21% in FY16, with a stable solvency margin projected for FY17. At these levels, solvency is viewed to be intermediate. Note is taken of the potential for solvency volatility to persist going forward, however, should the value of the Transnet subsidy continue to fluctuate. The scheme manages its solvency relative to short and medium term targets, with a view to restoring solvency to the minimum regulatory requirement of 25% by FY20. As such, the attainment of solvency metrics in line with annual targets is a key rating consideration over the projection horizon.
The membership base’s ageing profile represents a rating weakness that is expected to persist going forward. In this respect, the scheme’s average age of principal members and beneficiaries equated to 59 years and 51 years respectively in FY16, measuring above industry average. Furthermore, Transmed has experienced a material reduction in members over the review period. In this regard, the scheme’s membership base reduced to 33,554 principal members at FY16 (FY12: 61,092). Year on year membership losses stem largely from natural attrition on the SATS pool, as well as member migration to other participating schemes in the employer base and employee downsizing. Positively, losses in membership have stabilised in recent years. Management’s view on this stability is that the impact of the recognised scheme structure on member outflows has taken its full effect.
Transmed displays a healthy liquidity profile, with the average monthly claims cash coverage ratio registering between 2 to 3 months over the review period. The metric is supported by a decreasing liquidity requirement (a function of year on year reduction in claims) as well as the scheme’s predominantly cash based investment portfolio. Liquidity is expected to remain sound over the medium term underpinned by further reductions in year on year claims, coupled with maintenance of the conservative investment strategy and cash inflows from the Transnet subsidy.
An upward adjustment of the rating is considered unlikely over the short term. Over the medium term, rating uplift remains subject to the scheme managing key credit protections metrics upwards in line with the revised business plan, as well as a demonstrated track record of attained net surpluses. Downward rating pressure may arise from a deterioration in key solvency metrics below levels stipulated in the business plan, as well as protracted large net deficits.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2004)|
|Claims paying ability: AA-(ZA)|
|Last rating (April 2016)|
|Claims paying ability: BB+(ZA)|
|Sector Head: Insurance Ratings|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated July 2016
Transmed Medical Fund rating reports, 2004-2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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 with no contestation of the rating.
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 2016
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Other relevant documents
The rating above was solicited by, or on behalf of, the rated client, 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
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Transmed Medical Fund’s rating of BB+(ZA); Outlook Stable.