The Boni­tas-Lib­erty megamerger puz­zle

In­dus­try in­sid­ers per­plexed at med­i­cal fund’s will­ing­ness to merge with ail­ing scheme, de­spite warn­ings of de­clin­ing sol­vency rate

CityPress - - Sport - GER­RIT VAN ROOYEN and IN­VES­TIGA­TIVE TEAM busi­ness@city­ Op­er­at­ing re­sult (R’ Mil­lions)

The ra­tio­nale be­hind the pro­posed merger of Boni­tas Med­i­cal Fund and the Lib­erty Med­i­cal Scheme – the largest in his­tory – has left some par­ties in the med­i­cal aid in­dus­try puz­zled. In ad­di­tion, the merger could dam­age Boni­tas’ credit rat­ing. Nev­er­the­less, Boni­tas mem­bers have voted “over­whelm­ingly” in favour of a merger with Lib­erty.

A se­nior of­fi­cial of a ma­jor med­i­cal fund told City Press sta­ble­mate Rap­port that he did not un­der­stand why Boni­tas would agree to merge with Lib­erty’s ail­ing scheme.

An­other in­dus­try player said the pro­posed merger raised eye­brows. “It does not make sense. Boni­tas will be­come a larger fund, but at what cost?”

Boni­tas and Lib­erty are the sec­ond- and ninth-largest open med­i­cal schemes in South Africa, re­spec­tively. The lat­ter has long sought a merger.

The Mail & Guardian re­ported in 2010 on a law­suit al­leg­ing that the then head of Lib­erty Health Hold­ings, Peter Botha, of­fered R1.8 mil­lion to the for­mer chair­man of Lib­erty’s scheme, Larry Jac­ques, if he suc­ceeded in merg­ing Lib­erty with Spec­tramed.

Botha de­nied this, say­ing he was ne­go­ti­at­ing Jac­ques’ sev­er­ance pack­age if the Lib­erty scheme dis­ap­peared and his po­si­tion be­came re­dun­dant. The merger did not take place. Sources told the Mail & Guardian that it was a small bat­tle in a war of life in­sur­ance com­pa­nies to take on Dis­cov­ery.

In 2013, Lib­erty again tried to merge with Spec­tramed. Af­ter their mem­bers’ ap­proval and that of the Com­pe­ti­tion Com­mis­sion, it was can­celled at the last minute “due to cir­cum­stances be­yond the con­trol of the scheme”, says Lib­erty scheme’s 2014 an­nual re­port. The lat­est merger is planned for Au­gust. Lib­erty’s last re­ported sol­vency rate (2014) in the Coun­cil for Med­i­cal Schemes’ re­port was 17.2% – even lower than the pre­vi­ous year, which had also de­clined.

Ac­cord­ing to the scheme’s ex­po­si­tion doc­u­ment on how a com­pos­ite scheme would look on De­cem­ber 31 2015, Lib­erty’s pro­jected sol­vency rate was 11.1% for 2016. Boni­tas’ ex­pected sol­vency rate was a more sta­ble 25.4%.

Ac­cord­ing to 2016 pro­jec­tions, the com­bined funds’ sol­vency rate will be 23.1%, which will put Boni­tas un­der the statu­tory min­i­mum rate. The re­serve fund will have to be sup­ple­mented by con­tri­bu­tions from the 766 440 mem­bers of the new fund.

Marc Chad­wick, head of in­sur­ers’ credit rat­ings at Global Credit Rat­ings, said the merger could af­fect Boni­tas’ good credit rat­ing. “But it is un­clear at present what the im­pact will be, be­cause we have not yet started our re­view process of Boni­tas’ rat­ing,” he said.

Dr Elsabé Con­radie, spokesper­son for the Coun­cil for Med­i­cal Schemes, ex­plains that the sol­vency rate of a scheme is a cal­cu­la­tion of the scheme’s re­serve funds as a per­cent­age of its pre­mium in­come, as pre­scribed by law, adding that re­serves are nec­es­sary to en­sure that the schemes are fi­nan­cially sound and can hon­our claims.

“Once a scheme’s rate is lower than the min­i­mum, the scheme is re­quested to sub­mit a busi­ness plan to the coun­cil to in­di­cate how it will build up its re­serves,” said Con­radie.

Boni­tas’ last credit rat­ing (on July 1 2015) by Global was AA – very good, and two notches above Lib­erty’s last credit rat­ing of A.

Global said Boni­tas’ rat­ing was sup­ported by its “large and di­ver­si­fied mem­ber­ship”, but warned that its sol­vency rate and earn­ing ca­pac­ity were in a de­clin­ing trend.

Lib­erty’s last down­grade was mo­ti­vated by the large deficit recorded by its med­i­cal scheme in the 2014/15 fi­nan­cial year and its de­clin­ing sol­vency rate, which came un­der pres­sure be­cause of weaker eco­nomic con­di­tions, an in­crease in high-cost claims, and a fail­ure to at­tract new and health­ier mem­bers, said a scheme spokesper­son.

The ex­po­si­tion doc­u­ment also shows that Lib­erty mem­bers have a higher av­er­age age and a greater preva­lence of chronic con­di­tions, in­creas­ing their risk for claims. And at­tract­ing new mem­bers, es­pe­cially in the cur­rent eco­nomic cli­mate, is dif­fi­cult.

Bobby Ra­ma­sia, CEO of Boni­tas, de­nied that the merger was a bailout for Lib­erty. “This merger will pro­mote our size and im­prove our abil­ity to ne­go­ti­ate bet­ter ben­e­fits and ser­vices for our mem­bers with health­care providers.”

Boni­tas said that its mem­bers voted elec­tron­i­cally for the merger on April 20 and that the “re­sponses were over­whelm­ingly in favour of a merger”.

Lib­erty said its vot­ing process had been com­pleted, but the re­sults had not yet been an­nounced.

Boni­tas and Lib­erty’s op­tions will re­main the same this year; any changes to ben­e­fits or op­tions will take place in 2017. If the merger is suc­cess­ful, it will con­tinue un­der Boni­tas’ name.

The re­sults of the vot­ing process must still be for­warded to the coun­cil, which will then ap­prove the merger if it is in the in­ter­ests of both schemes’ mem­bers, said Con­radie.

The merger will then have to be ap­proved by the com­pe­ti­tion au­thor­i­ties.

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