Announcements

GCR downgrades Resolution Health’s CPA rating

GCR has downgraded Resolution Health Medical Scheme’s (“Resolution”) domestic claims paying ability rating to BBB-(ZA), from the previous rating of BBB+(ZA) accorded at the last review in the first half of 2012. Further, the rating has been placed on Rating Watch.

The rating downgrade follows a review of the scheme’s management accounts for the ten months to October 2012, with a continued sharp deterioration in underwriting performance evidenced. To this end, Resolution posted a sizeable net deficit of R45m as at October F12, which compared to an R18m budgeted net deficit for the corresponding period. As such, Resolution’s annualised statutory solvency equated to a lower 7.1% as at October F12 (F11: 9.1%). According to management, the weaker operating performance compared to budgeted expectations stems from the relative underpricing of products for the 2012 benefit cycle arising from the significant membership growth in 2011 and the reduction in the persal membership component. Specifically, contribution increases for 2012 were premised on historical data and did not accurately reflect the significant change in the underlying membership risk profile that occurred during F11. As such, Resolution’s full year forecasts for F12 have been revised notably downwards by the scheme’s actuaries, with a net deficit of between R49m and R54m anticipated (original budget F12: R8m surplus). Accordingly, statutory solvency projections have also been revised downwards to between 7% and 7.5% for F12 (initial budget F12: 11.8%).

Positively, cognisance was taken of the increase in Resolution’s cash holdings to R125m as at October F12 (F11: R75m), which is largely attributable to the recent merger with NIMAS (effective 1 August 2012). This supported liquidity measures somewhat, albeit remaining relatively constrained.

Through consultation with various forensic actuaries in the last quarter of 2012, management believe that the options have been accurately costed for the 2013 benefit cycle and remain competitively priced. This, together with the restructuring of benefits in line with the revised contribution rates is expected to see the scheme post a small net surplus in F13. However, based on five year projections, statutory solvency is expected to remain constrained in F13 (at around 7.5%), thereafter increasing steadily to 17% by F17.

Given these developments, the rating will be closely monitored going forward.

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