Johannesburg, 30 April 2015 — Global Credit 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 “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:
Cognisance is taken of a recent improvement in the scheme’s operating performance on an option-segregated basis, whereby the continued refinement in benefit structures and claims protocols has seen Transnet Working Members and Pensioners (“TWMP”) risk pool register its first net healthcare surplus over the review period. Further, whilst the South African Transport Services (“SATS”) risk pool remains in a loss making position, the net healthcare deficit for F14 is viewed to have been reasonably contained in light of a R21m cut-back in subsidy funding by Transnet in F14.
Although a gradual improvement in the statutory funding ratio has been observed over the review period (to 22% at FYE14), it remains below the minimum regulatory requirement of 25%. For F15, the statutory funding ratio is forecast to recede significantly to 9.6%, as the Transnet funding subsidy for the SATS pool is drastically scaled back in order to unlock excess reserves allocated thereto. In this regard, Transnet’s revised funding strategy for the SATS pool over the medium term relates to reducing the pool’s standalone statutory solvency margin to 25% by FYE15, and subsequently maintaining it at this level, using annually calculated subsidies. This notwithstanding, this proposed undertaking and the accelerated pace of implementation is viewed with concern by GCR, as it inhibits the scheme’s overall financial flexibility, limits its resilience in the event of operational distress and gives rise to increased solvency pressure on a consolidated basis. As such, discipline in replenishing TWMP reserves and achieving associated solvency milestones is viewed as crucial for the scheme’s medium term rating strength.
A key challenge remains the ongoing loss in principal members in recent years amidst anti-selection amongst the younger member demographic. This has seen the scheme’s risk profile deteriorate consistently in recent years, with key profile metrics notably misaligned against industry norms. Thus, stabilising the membership base is considered a key objective in terms of the scheme’s rating profile going forward.
The adoption of a very conservative investment strategy continues to underpin a sound degree of liquidity. Going forward, no material alteration to the highly liquid investment portfolio is envisaged.
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, a stabilisation in membership levels, as well as a demonstrated track record of attained net surpluses. Conversely, downward rating pressure may arise from a deterioration in key solvency metrics below levels stipulated in the business plan, a further protracted loss in principal members, as well as sustained deficits registered for the TWMP pool (thereby undermining the financial stability of the scheme on a consolidated basis).
NATIONAL SCALE RATINGS HISTORY
Initial rating (April 2004)
Claims paying ability: AA-(ZA)
Outlook: Stable
Last rating (April 2014)
Claims paying ability: BB+(ZA)
Outlook: Positive
ANALYTICAL CONTACTS
Primary Analyst
Benjamin Schmidt
Senior Analyst: Insurance Ratings
(011) 784-1771
schmidt@globalratings.net
Committee Chairperson
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
chadwick@globalratings.net
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Medical Schemes, updated April 2014
Transmed Medical Fund 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.
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 ratings are 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(s) included audited annual financial statements for 2014 (plus four years of comparative numbers), detailed full year financial projections for 2015, most recent year to date management accounts to 28 February 2015, as well as other non-public, rating-relevant information.
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
| Assets | The items on the balance sheet of the medical scheme which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’ |
| Balance Sheet | An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date. |
| Benefits | Financial reimbursement and other services provided covered by medical schemes under the terms of an insurance contract. An example would be the benefits listed under a Life or Health Insurance policy or benefits as prescribed by a Workers Compensation law. |
| Bond | A certificate issued by a government or corporation as evidence of a debt. The issuer of the bond promises to pay the bondholder a specified amount of interest for a specified period and to repay the loan on the expiration (maturity) date. |
| Claim | A request for payment of a loss, which may come under the terms of an insurance contract. |
| 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 insurance. |
| 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 insurance 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. For example, common stock market value would be the price of the stock as of a specified date. See also Actual Cash Value. |
| Policy | The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract. |
| Portfolio | All of the medical scheme’s in-force policies and outstanding losses, with respect to described segments of its business. Also, the total securities owned by a medical scheme. |
| Provision | A part (clause, sentence, paragraph, etc.) of an insurance contract that describes or explains a feature, benefit, condition, requirement, etc. of the insurance protection afforded by the contract. |
| Reserve | (1) An amount representing actual or potential liabilities kept by a medical scheme 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. |
| Risk | (1) Uncertainty as to the outcome of an event when two or more possibilities exist. See also Pure Risk and Speculative Risk. (2) A person or thing insured. Contrast with Hazard and Peril. |
| Securities | Evidences of a debt or of ownership, as stocks, bonds, and checks. |
| Solvency | With regard to medical schemes, 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. |
| Surplus | The excess of assets over liabilities. Statutory surplus is a medical scheme’s capital as determined under statutory accounting rules. Surplus determines a medical scheme’s capacity to write business responsibility for only that portion of any risk, which exceeds the company’s established retentions. |
| Term | The period of time for which a policy or bond is issued. |
| Valuation | Estimation of the value of an item, usually by appraisal. |
