OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has revised the outlooks to stable from negative and affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” of Blue Cross Blue Shield of Michigan Mutual Insurance Company (BCBSMI) (Detroit, MI) and its subsidiary, Blue Care Network of Michigan (Southfield, MI). Concurrently, A.M. Best has revised the outlooks to positive from stable and affirmed the FSR of A- (Excellent) and the Long-Term ICRs of “a-” of Accident Fund Insurance Company of America (Lansing, MI), United Wisconsin Insurance Company (New Berlin, WI), Accident Fund National Insurance Company (Lansing, MI) Accident Fund General Insurance Company (Lansing, MI) and CompWest Insurance Company (Santa Ana, CA), which operate through an intercompany pooling agreement and are collectively referred to as AF Group.
The revised outlooks for BCBSMI reflect the turnaround in operating performance in 2017, driven mainly by the Medicare Supplemental (Medigap) business, which has resulted in the strengthening of risk-adjusted capital at BCBSMI. Effective Jan. 1, 2017, BCBSMI implemented sufficient rates on Medigap products, which were permitted by Michigan for the first time in five years. In addition, BCBSMI retained a larger than expected and healthier Medigap membership pool during the current year, and this has resulted in a significant reduction of underwriting losses compared with prior years. Furthermore, A.M. Best anticipates that the historical legal matters have been effectively contained and accrued, as evidenced by the lack of additional legal expense accrued thus far during 2017. On a consolidated basis, underwriting and net income were much stronger through mid-2017 compared with previous years, even when the impact of the health insurer fee is excluded. A.M. Best expects earnings to improve from historical trends largely due to the rating actions on the Medigap product line.
Partially offsetting Credit Rating (rating) factors for BCBSMI include the competitive health care market and earnings volatility. BCBSMI’s business environment includes a number of health insurers with national scale operations as well as local carriers with competitive cost structure. Additionally, the company has a history of earnings volatility. While A.M. Best acknowledges that part of this was due to the Medigap business, there have been other issues negatively impacting earnings, such as litigation expenses and accruals as well as the individual product line.
Factors that could lead to a positive rating action for BCBSMI include sustained overall profitability, especially in its Medigap business segment, and improvement in its level of risk-adjusted capitalization. Factors that could lead to a negative rating action include substantial operating losses at BCBSMI or a decline in its risk-adjusted capitalization.
The rating affirmations of Blue Care Network of Michigan reflect its continued favorable operating performance through mid-2017, its more-than-adequate risk-adjusted capital and its role as a strategic health maintenance organization as part of BCBSMI.
The ratings of AF Group reflect the consolidated group’s solid risk-adjusted capitalization, improving operating performance driven by profitable underwriting results and demonstrated expertise within the workers’ compensation marketplace. Furthermore, the ratings acknowledge the group’s utilization of sophisticated predictive analytic modeling tools and medical cost containment practices and initiatives. These positive rating factors are somewhat offset by the weakened underwriting results in recent years, which were influenced by the economic recession and resulting impact on claim costs, prior-year adverse reserve development through 2013 and softening market conditions within the workers’ compensation line of business.
The positive rating factors reflect the impact of tighter underwriting controls, combined with favorable frequency and severity trends. Lastly, the group benefits from the capital support from its ultimate parent, BCBSMI.
The negative rating factors reflect the competitive market conditions in recent years, which impacted underwriting and operating performance, as the economic recession caused loss costs to rise and macroeconomic conditions to weaken. In addition, factors that could lead to positive rating action for the members of AF Group include improvement in underwriting and operating results that can be sustained at a level that consistently outperforms other similarly rated peers while maintaining a strong level of risk-adjusted capitalization. Factors that could lead to negative rating action include deterioration in underwriting performance, material loss reserve strengthening actions or rapid premium growth that weakens risk-adjusted capitalization.
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