AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating (FSR) of B+ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb-" (Good) of Oregon Dental Services (ODS). Concurrently, AM Best has removed from under review with negative implications and affirmed the FSR of B+ (Good) and the Long-Term ICR of "bbb-" (Good) of Moda Health Plan, Inc. (Moda Health). Both companies are domiciled in Portland, OR. The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings of ODS and Moda Health were removed from under review with negative implications and affirmed following AM Best's analysis of the repurchase of the minority stake of Moda Partners, Inc., from Delta Dental of California. Additionally, ODS re-filed the company's 2021 annual statutory financial statements, which included intercompany ownership changes of subsidiaries as well as a change in the valuation of affiliated subsidiaries and an acquisition of the majority of its specialty drug company, Ardon Health Holdings, LLC.
The ratings of ODS reflect its balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The rating affirmations of ODS' ratings reflect stabilization in risk-adjusted capital, which had been negatively impacted by the repurchase of Moda Partners, Inc. Over the past few years, ODS' volatility of capital has been impacted by material organizational structural changes through divestures and acquisitions, and most significantly, the federal government's settlement of the Affordable Care Act risk-corridor payment. ODS was placed under review with negative implications after the repurchase of the minority ownership of Moda Partners, Inc. from Delta Dental of California, funded through a combination of cash and issuance of debt, which reduced risk-adjusted capital and quality of capital. Subsequently, favorable net earnings for 2021 and the increased carrying value of ODS' subsidiaries has partially offset the pressure on risk-adjusted capital from the repurchase of Moda Partners. Risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), is reflective of the fluctuation of statutory capital over the years, although more recently, BCAR has shown strengthening. However, the organization's financial flexibility may be limited as it does not have material excess capital to deploy to support its subsidiaries, and at year-end 2021, adjusted financial leverage was high at 46.6% and interest coverage was low at approximately three times. ODS' primary dental business remains profitable. Results of the medical business written by Moda Health is the main driver of volatility in consolidated operating performance. ODS' business is geographically limited to Oregon and Alaska; they hold a leading market share in its dental business. ODS' ERM program is developed and includes annual stress testing and reporting. The assigned negative outlooks reflect volatility in ODS' risk-adjusted capital and high financial leverage.
The ratings of Moda Health reflect its balance sheet strength, which AM Best assesses as adequate, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management.
The rating affirmations of Moda Health reflect the stabilization of the risk-adjusted capital of its ultimate parent, ODS. Moda Health receives ratings enhancement from ODS, and that enhancement had been pressured by the repurchase of Moda Partners. Additionally, dividends to its parent has hindered capital growth at Moda Health. Lastly, Moda Health's two external surplus notes has impacted its BCAR negatively. Premium revenue has been trending downward while underwriting has fluctuated over the past five years. Moda Health holds a relatively modest market share in its core Oregon medical business. Moda Health coordinates its ERM program with its parent organization. The assigned negative outlooks reflect the low level of risk-adjusted capital.
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 Guide to Best's Credit Ratings. For information on the proper use of Best's Credit Ratings, Best's Performance Assessments, Best's Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best's Ratings & Assessments.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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