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FOR IMMEDIATE RELEASE
OLDWICK, N.J. - MAY 19, 2009 12:00 AM (EDT)
A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of A (Excellent) and issuer credit ratings of "a" of Wellmark, Inc (Wellmark) (Des Moines, IA) and its subsidiaries, Wellmark Health Plan of Iowa, Inc. (WHPI) (Des Moines, IA) and Wellmark of South Dakota, Inc. (Sioux Falls, SD).
The negative outlook reflects Wellmark's deteriorated underwriting and investment results, capitalization decline and continuous high exposure to equity holdings. Following a history of successful operating performance, Wellmark has turned to the long-term strategy of margins moderation. In 2007-2008, the company posted underwriting losses, with the 2008 loss having exceeded the budget although still within Wellmark's targeted range. The losses were due to a higher than anticipated trend, which along with the change in pricing strategy, resulted in the medical loss ratio increase to 87.1% in 2008 from 83.4% in 2006. Furthermore, during 2008, Wellmark's investment assets declined 25%, driven by the severe market downturn. The company posted $167 million in realized and $91 million in unrealized losses on its equity and fixed income holdings. Simultaneous deterioration of underwriting and investment results led to a 23.6% drop in capital and surplus in 2008. Wellmark's level of risk-based capitalization (RBC) at year-end 2008 is considered good, but A.M. Best is concerned that further decline is possible, as capital may continue to be pressured by lower underwriting results and possible further investment losses. During 2008, Wellmark's exposure to investment in equities reduced from 65% to 55% of total capital and surplus, excluding investments in subsidiaries; however, the current level of equity exposure is still considered high for a health insurance company and leaves Wellmark susceptible to significant investment risks.
The rating affirmations recognize Wellmark's dominant market position in both Iowa and South Dakota, continuous enrollment growth and good level of capitalization. Wellmark has a high penetration in its respective markets, with leading market shares in Iowa and South Dakota. Despite competition from larger national carriers and smaller provider-owned plans, Wellmark has posted enrollment growth for 15 consecutive years. Although the economic environment in Iowa deteriorated during 2008, the company achieved 3.4% membership gains followed by a 1.3% growth in the first three months of 2009. During 2003-2006, Wellmark's growing revenue, combined with an efficient operating structure and high investment income, led to strong financial gains. As a result, capitalization improved and Wellmark's level of risk-based capital, which declined to 722% during 2008 from over 900% in 2006, remains more than sufficient for the company's risks.
For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit Best's Ratings & Analysis.
The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at Best's Credit Rating Methodology.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers.