Fitch Affirms Health Insurance Plan of Greater New York at 'BBB-'; Outlook Stable

Fri Apr 19, 2013 12:46pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) Fitch Ratings has affirmed the 'BBB-' Insurer Financial Strength (IFS) rating of Health Insurance Plan of Greater New York (HIP). The Rating Outlook is Stable. Key Rating Drivers The rating reflects the company's strong but concentrated market shares in key states, the comparatively small size of the company's operations and scale benefits, organization-wide capitalization metrics that are strong for the rating category, and profitability metrics that are consistent with Fitch's 'BBB' rating category median guidelines. HIP along with its subsidiary Group Health Inc., (GHI) are key subsidiaries of EmblemHealth Group. HIP's rating reflects Fitch's use of a group rating methodology that considers both HIP's stand-alone and Emblem's consolidated financial results and capitalization metrics. Fitch believes that a group rating methodology is appropriate due to GHI's role in rounding out the Emblem organization's product portfolio, financial support provided that HIP has historically provided to GHI, the companies' rights to elect an equal number of Emblem's board members, and overlapping senior management between the two companies. Emblem's insurance operations are concentrated in New York and Connecticut. Based on statutory basis direct premiums, Fitch estimates the company's market shares in those states at approximately 15%. However, roughly one half of the company's medical membership is derived from a single contract with the city of New York, which, in comparison to 'BBB' category rated peers, Fitch views as adding incremental risk to Emblem's market position. The organization-wide capitalization metrics of the Emblem companies are strongly supportive of HIP's rating. Fitch estimates the year-end 2012 organization-wide NAIC Risk-Based Capital (RBC) ratio at 220-245% (company action level basis) and the organization-wide premium-to-shareholders' equity ratio at 5.4x. Fitch also notes that Emblem has no outstanding debt and believes that the company's near-to-mid-term capital and liquidity needs are comparatively limited. However, Fitch notes that HIP's and GHI's individual capitalization metrics vary widely. HIP's NAIC RBC ratio at year-end 2012 was a strong 376% while GHI's was extremely weak at 47%. The companies' ratios of premium-to-surplus at year-end 2012 had a similar relationship with HIP's being a strong 3.3x and GHI's an extremely weak 30.0x. From 2010 through year-end 2012, GHI had New York Department of Financial Services (DFS) approval to maintain its statutory reserve at 50% of the required level. Between 2010 and year-end 2012, HIP provided GHI with $165 million of capital in the form of surplus notes to help GHI meet this requirement. Fitch estimates GHI's capital needs for 2013 at $140-150 million. This estimate is based on the company's recent premium levels and assumes a 2013 net loss equal to an average of GHI's 2010-2012 net losses and that the DFS extends through year-end 2013,GHI's ability to report statutory reserves at 50% of the required level. Fitch considers Emblem's absolute level of earnings to be comparatively modest reflecting the company's small size and scale. Key profitability metrics such as medical loss ratios and margins of EBITDA to revenues are consistent with 'BBB' rating category median guidelines. Emblem's GAAP basis 2008-2012 average medical loss, EBITDA-based margin, and net return on average capital ratios were 87.7%, 1.6% and 6%, respectively. HIP's rating considers the financial and operational implications of the company's potential conversion to for profit status under a plan previously filed with the DFS by HIP, GHI, and Emblem. Under the plan Emblem, HIP and GHI would convert to for profit status with Emblem becoming a publicly-owned holding company. While Fitch does not view the plan's ultimate approval or disapproval as having an immediate impact on HIP's rating, it could impact the rating over the longer-term. Rating Sensitivities Key rating triggers that could lead to an upgrade of HIP's rating include: --Measured and profitable membership diversification that significantly reduces the percentage of Emblem's total medical membership that is derived from its contract with the city of New York; --Run-rate EBITDA/revenue margins approximating 7%; --Heightened clarity around the ultimate resolution of the Emblem organization's planned conversion to-for profit status; --Maintaining organization-wide NAIC RBC ratio above 200% (company action level basis) and premiums-to-surplus ratios of 7.0x or less; --Improved run rate financial results of the company's commercial segment; --Reduced uncertainty around the means by which GHI will improve its stand-alone statutory capitalization metrics. Key Rating triggers that could lead to a downgrade of HIP's rating include: --Non-renewal of the company's contract with the city of New York; --Run-rate EBITDA/revenue margins of 3% or less; --Run-rate organization-wide NAIC RBC ratios of less than 175% (company action-level basis); --Organization-wide premiums-to-surplus ratios above 9.0x; --Post conversion to for profit status debt-to-EBITDA ratios greater than 4.0x or debt-to-capital ratios greater than 40%; --Heightened uncertainty around the means by which GHI will improve its stand-alone statutory capitalization metrics; --Heightened uncertainty around the Emblem organization's strategies and financial profile tied its conversion to-for profit status. Fitch has affirmed the following rating with a Stable Outlook: Health Insurance Plan of Greater New York --IFS at 'BBB-'. Contact: Primary Analyst Mark Rouck Senior Director +1-312-368-2085 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Doug Pawlowski Senior Director +1-312-368-2054 Committee Chairperson Julie Burke Managing Director +1-312-368-3158 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013); --'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (Jan. 29, 2013). Applicable Criteria and Related Research Insurance Rating Methodology — Amended here Health Insurance and Managed Care (U.S.) here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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