Johannesburg, 2 September 2016 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Bonitas Medical Fund to A+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Bonitas Medical Fund (“Bonitas”) based on the following key criteria:
The rating downgrade follows the reduction in Bonitas’ earnings capacity and solvency.
Earnings generation has been impeded by an elevated and rising claims ratio (FY15: 94.1%), culminating in a sizeable R205m net deficit in FY15. GCR expects Bonitas to continue to be exposed to earnings pressure, owing to high benefit utilisation (taking cognisance of continued earnings constrictions for the year to date).
Bonitas plans to merge with LMS Medical Fund (“LMS”) prior to the end of FY16. The merged entity, while benefiting from increased membership scale, is expected to reflect a similarly strained claims experience (noting the LMS pool’s historically unfavourable claims patterns).
Nonetheless, the stable outlook is premised on management’s expectations for intended remedial actions to have a material turnaround impact on claims metrics over the coming 12 to 18 months. Notably, the claims ratio for the year to date has remained elevated, and as such the execution risk associated with the targeted lowering in the claims ratio is viewed to be high.
Solvency reduced to a moderate level at FYE15, and sustained earnings pressure, coupled with the on-take of LMS, is expected to result in lower solvency margins over the rating horizon. The statutory solvency margin equated to 26.1% at FYE15 (measuring well below the scheme’s internal floor of 30%), having evidenced a downward trend over the past five years. The merged entity’s statutory solvency margin is budgeted to equate to 24.7% at FYE16, and 21.8% at FYE17, compounding the decreasing solvency trend evidenced by Bonitas on a stand-alone basis.
Management expects solvency recovery to begin in FY18, with the amalgamated scheme budgeted to achieve full statutory compliance by FYE20. In line with the execution risk associated with the earnings turnaround, however, GCR expects solvency recovery to represent a primary challenge for the scheme.
Bonitas’ large and diversified membership base continues to represent a key rating strength. Total principal members equated to 295,488, and the scheme reflected 654,387 total beneficiaries in FY15. The merger is expected to see the principal membership base increase to 348,364. Note is taken, however, of the execution risk associated with the on-take of the LMS members, given the elevated average age of this risk pool. Bonitas’ non-healthcare cost ratio remains very well-contained and highly competitive. Management expects the increased scale of the membership base to result in scale efficiencies and improved pricing with key suppliers.
Bonitas’ liquidity is viewed to be intermediate, with key liquidity metrics measuring fairly in line with industry averages. Liquidity is supported by bond holdings with short term maturities, inclusive of which net cash coverage amounts to 3 months (albeit note is taken of the decreasing liquidity trend over the review period). Going forward, liquidity metrics are viewed to be exposed to claims pressure and operational losses, although the large total investment portfolio (FYE15: R3.7bn) provides the scheme with substantial resources if needed.
A strengthening in the rating is dependent upon a material and sustained improvement in earnings, solvency and liquidity. Downward rating pressure is likely to result from the absence of a material turnaround in earnings and solvency in line with expectations.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2000)|
|Claims paying ability: A(ZA)|
|Last rating (July 2015)|
|Claims paying ability: AA-(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating South African Medical Schemes, updated July 2016
Bonitas rating reports, 2000-2015
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.
Bonitas 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 Bonitas with no contestation of the rating.
The information received from Bonitas and other reliable third parties to accord the credit rating included:
- Audited financial results to 31 December 2015
- Four years of comparative numbers
- Unaudited interim results to 31 July 2016
- Budgeted financial statements for 2016
- Forecasts and other information with regard to the merger with LMS
- Other related 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
|Accumulated funds||An amount representing the accumulation of historical and current net surpluses and deficits, held for the benefit of members and their dependants|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Benefits||Financial reimbursement and other services provided covered by medical schemes under the terms of a medical scheme plan.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Claim||A request for payment of a loss, which may come under the terms of a medical scheme plan.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by a medical scheme to agents and brokers.|
|Coverage||The scope of the protection provided under a contract of a medical scheme plan.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of a medical scheme to convert its assets into cash to pay claims if necessary.|
|Loss||The happening of the event for which a medical scheme pays.|
|Market Value||The price for which something would sell, especially the value of certain types of assets, such as stocks and bonds. It is based on what they would sell for under current market conditions.|
|Members’ surplus||Accumulated funds plus revaluation reserves.|
|Portfolio||The total securities owned by a medical scheme.|
|Provision||A technical reserve of a medical scheme established to provide for the future liability for claims which have occurred but which have not yet been settled.|
|Risk||(1) Uncertainty as to the outcome of an event when two or more possibilities exist. (2) A person or thing covered by a medical scheme.|
|Securities||Evidences of a debt or of ownership, as stocks, bonds, and checks.|
|Solvency||Reserves (accumulated funds or members’ surplus) expressed as a percentage of contributions (gross or net).|
|Statutory||Required by or having to do with law or statute.|
|Term||The period of time for which a policy or bond is issued.|
|Valuation||Estimation of the value of an item, usually by appraisal.|
For a more detailed glossary of terms utilised, please click here
GCR downgrades Bonitas Medical Fund’s rating to A+(ZA); Outlook Stable