Johannesburg, 30 Jun 2015 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Liberty Medical Scheme to A(ZA); with the outlook accorded as Stable. Global Credit Ratings has simultaneously withdrawn the rating.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Liberty Medical Scheme (“LMS”) based on the following key criteria:
The rating downgrade reflects the deterioration in LMS’s credit profile, primarily as a result of weakened FY14 financial results that were materially outside of GCR’s ratings expectations, with a further large net deficit reported and corresponding losses in members’ surplus. Recurring adverse claims experiences have contributed to sizeable net deficits in four of the past five years, with a large R113m net deficit reported in FY14 (FY13: R18m deficit) versus a budgeted deficit of R17m. Over the review period, LMS has reported a cumulative R255m net deficit, which has served to place increasing pressure on reserves and solvency levels of late. Management attribute this to the maintenance of affordable contribution increases despite the worsening member risk profile. While LMS continues to exhibit a relatively large risk pool, the lack of sustainable growth over the review period has led to an aged membership profile, trending above industry norms.
The scheme’s solvency metrics have trended downwards consecutively over the past three years owing to the financial losses incurred. Statutory solvency fell well short of the minimum regulatory requirement in FY14, at 17%, and is projected to decline further over the next two years (BY15: 13.8%; BY16: 10%).
Management has devised a 5-year business plan aimed at materially improving financial performance, and in turn returning the scheme to statutory solvency compliance by FY19. This is largely premised on the refocused growth strategy, which is expected to be facilitated by the enhanced commitment by the Liberty Group to LMS. In this regard, the Liberty Group remains contracted as the scheme’s primary distribution partner. As such, the successful retention of key portfolios and meaningful year-on-year growth of desirable, healthy risk profiles within the scheme’s business mix represents material execution risk. The attainment of short term financial targets is viewed by GCR as critical.
LMS reflected an improved non-healthcare expense ratio in FY14 (14.5% vs. 15.5% previously), which is expected to lower further in FY15 to 12.9% on the back of administration fee cost saving initiatives and thus should aid in mitigating the quantum of net losses over the short term.
The low-risk investment stance adopted by the scheme is favourably considered. However, claims pressure of late has seen corresponding aggregate liquidity metrics weaken notably in FY14, trending below open medical scheme industry norms. The sizeable bond portfolio does, however, add a degree of liquidity relief.
The rating withdrawal was at the request of the client. Therefore, GCR will no longer provide ratings or analytical coverage for LMS.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2004)
Claims paying ability: A(ZA)
Last rating (April 2014)
Claims paying ability: A+(ZA)
Sector Head: Insurance Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating South African Medical Schemes, updated April 2015
LMS rating reports (2004-2014)
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.
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
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.
Liberty Medical Scheme 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/s has been disclosed to Liberty Medical Scheme with no contestation of the rating.
The information received from Liberty Medical Scheme and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements (plus four years of comparative numbers), financial forecast for 2015, unaudited year-to-date management accounts to May 2015, and other related documents.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.