The Bonitas-Liberty megamerger puzzle
Industry insiders perplexed at medical fund’s willingness to merge with ailing scheme, despite warnings of declining solvency rate
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.