Best’s News & Research Service - October 31, 2019 09:08 AM (EDT)
- October 31, 2019 09:08 AM (EDT)
Oldwick //BestWire// - AM Best has upgraded the Financial Strength Rating (FSR) to A (Excellent) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “a” from “a-” of Blue Cross Blue Shield of Michigan Mutual Insurance Company (BCBS MI) (Detroit, MI) and Blue Care Network of Michigan (Southfield, MI) (collectively known as BCBS MI). Concurrently, AM Best has upgraded the FSR to A (Excellent) from A- (Excellent) and the Long-Term ICR to “a” from “a-” of the members of Accident Fund Group (AF Group). The outlook of these Credit Ratings (ratings) has been revised to stable from positive. (See below for a detailed listing of the AF Group.)
The ratings of BCBS MI reflect its balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The rating upgrades reflect BCBS MI’s operating performance, which turned positive in 2017 and has continued to strengthen over the past two years and into 2019. The improved underwriting performance was driven primarily by much stronger results in most lines of businesses, particularly the Medicare Supplement (Medigap) segment. Prior to 2017, Medigap was reporting large losses of more than $200 million a year, driven by the inability to implement rate increases on the Medigap business for a five year-period ending in 2017. The rate freeze on the Medigap product was part of the company’s social mission prior to its transition to a non-profit mutual insurer. Consolidated net income was enhanced further by an income tax credit in 2018 and 2019, which was a result of the elimination of the alternative minimum tax as part of the Tax Cuts and Job Act. Furthermore, operating results benefited from a broad-based trend of lower utilization and a lower-than-expected medical cost trend, as well as favorable risk adjustment revenue. While operating results have improved in 2019, earnings are expected to temper but remain favorable in 2020. This expectation is driven by strategic pricing actions being taken in certain products lines as a result of continued lower-than-expected medical trends and the loss of Blue Care Network of Michigan’s Medicare Advantage HMO four-star rating. AM Best acknowledges that the loss of the four-star rating only applied to Blue Care Network of Michigan’s Medicare Advantage HMO product and that BCBS MI has continued to maintain its four-star rating for its Medicare Advantage PPO product. Additionally, AM Best notes that Blue Care Network of Michigan has regained its four-star rating for its Medicare Advantage HMO for 2021.
In addition to a favorable operating performance, BCBS MI continues to maintain strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). A significant portion of BCBS MI’s capital and surplus growth over the past few years has been driven by the refund of tax credits that resulted from the elimination of the alternative minimum tax. The ratings further reflect BCBS MI’s well-established market presence and a leading overall market share in Michigan. During the most recent five-year period, BCBS MI reported enrollment growth, a trend that continued through the first half of 2019. In addition, BCBS MI’s ownership in AF Group and its investment in AmeriHealth Caritas provides diversification.
Offsetting rating factors include BCBS MI’s exposure to higher risk assets and operating leverage, as well as historical earnings volatility. BCBS MI’s exposure to equities and Schedule BA assets is greater compared with peers as is its operating leverage due to borrowing activity used for arbitrage. However, AM Best acknowledges that BCBS MI’s level of operating leverage has declined significantly the past few years. Additionally, BCBS MI historically has reported earnings volatility largely driven by its Medigap and individual product lines, both of which have reported improved operating performance the past few years.
The ratings of AF Group reflect its balance sheet strength, which AM Best categorizes as very strong, as well as its strong operating performance, neutral business profile and appropriate ERM.
The rating actions reflect improvement in AM Best’s assessment of the consolidated group’s operating performance to strong from adequate and reflect the strong five-year pre-tax operating earnings and average combined ratio that outperformed the workers’ compensation industry composite. Furthermore, the ratings acknowledge the group’s utilization of sophisticated predictive analytic modeling tools and medical cost containment practices that have contributed to the group’s outperformance of the workers’ compensation industry composite.
The FSR has been upgraded to A (Excellent) from A- (Excellent) and the Long-Term ICRs to “a” from “a-” with the outlooks revised to stable from positive for the following members of Accident Fund Group:
- Accident Fund Insurance Company of America
- CompWest Insurance Company
- Accident Fund General Insurance Company
- Accident Fund National Insurance Company
- Third Coast Insurance Company
- United Wisconsin Insurance Company
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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