CONTACTS:
FOR IMMEDIATE RELEASE
OLDWICK, N.J. - JUNE 20, 2012 12:00 AM (EDT)
A.M. Best Co. has affirmed the financial strength rating of B++ (Good) and issuer credit ratings (ICR) of “bbb” of the core subsidiaries of HealthMarkets, Inc. (HealthMarkets) (headquartered in North Richland Hills, TX), which include The MEGA Life and Health Insurance Company (MEGA), The Chesapeake Life Insurance Company (Chesapeake) (both of Oklahoma City, OK) and Mid-West National Life Insurance Company of Tennessee (Mid-West) (North Richland Hills, TX). Concurrently, A.M. Best has affirmed the ICR of “bb” of HealthMarkets. The outlook for all ratings is stable.
The ratings reflect HealthMarkets’ ability to remain profitable as the organization executes its revised business strategy. Given the uncertain impact of the Patient Protection and Affordable Care Act (PPACA) on most of HealthMarkets’ medical insurance business, the organization created Insphere, a distributor of third party life and health insurance products. A.M. Best believes the creation of Insphere, which was launched in 2010, should help HealthMarkets offset some of the premium revenue lost from its gradual exit from the individual medical market. In 2011, Insphere produced $525 million of first year premiums across all of its markets. A.M. Best notes that while Insphere also will be used to complement the sales of Chesapeake’s supplemental insurance products, the profitability of the distributor will be limited in the near term due to its sizeable initial start-up costs.
Additionally, the ICR of HealthMarkets reflects its reduced regulatory and legal issues, including the recent completion of its multi-state re-examination and pay-down of its maturing debt. During the first quarter of 2012, HealthMarkets paid off a $362.5 million term note. Sizeable dividends were upstreamed from the life subsidiaries over the past 18 months, primarily MEGA and Mid-West, to help fund the debt. However, despite the significant pay-down, A.M. Best believes HealthMarkets and its subsidiaries remain adequately capitalized. While the organization’s debt-to-capital ratio improved considerably, A.M. Best notes that its financial leverage at over 40% remains high relative to a company of its size. Furthermore, A.M. Best remains cautious that the interest coverage within the group, at roughly three times, will be maintained due to lower earnings going forward.
Although HealthMarkets remains profitable, A.M. Best remains concerned about the significant decrease in its premium revenue. As the organization transitions from being primarily an individual medical organization to more of a fee-based organization, A.M. Best expects its premium income level and operating earnings within its insurance subsidiaries to decrease in the coming years as it looks to gain scale in its non-medical product lines. Additionally, A.M. Best believes it will take some time for the profitability of Insphere and the success of its new and modified insurance products to offset the organization’s lost premium revenue and investment income.
A.M. Best believes that HealthMarkets and its subsidiaries are well positioned at their current ratings. Factors that could lead to negative rating actions include a decline in net premiums within Chesapeake’s core lines of business, a lack of profitability within the subsidiaries or a material deterioration of risk-adjusted capital. HealthMarkets is a privately owned holding company, whose major shareholders are affiliates of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source.