OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of B+ (Good) and the issuer credit rating of “bbb-” of Western Health Advantage (WHA) (Sacramento, CA). The outlook for each rating is stable.
WHA’s rating affirmations reflect the financial and operational support by a contractual agreement with its three sponsors: Mercy/Dignity Health Sacramento, NorthBay Healthcare System, and the University of California, Davis Health System, which guarantee a minimum level of capital at the health plan. In addition, the company is further supported by its low-risk business profile, global capitation by the sponsors for the majority of its commercial lines of business and establishing its medical loss ratio for the core lines of business at approximately 92%. Each of the three sponsors is a financially strong integrated health care delivery system that operates within WHA’s service area.
The company maintains weak capitalization based on its Best’s Capital Adequacy Ratio (BCAR). During the fiscal year ending June 30, 2015, WHA reported a sizable loss as a result of the tax impact of transitioning from a mutual benefit company to a 501 (C) 4 corporation. The new corporate structure will help to reduce the taxes and fees associated with the Affordable Care Act (ACA), which had compressed the company’s margins. As part of the capital support agreement, two of WHA’s sponsors provided additional funding through promissory notes. While California’s tangible net equity requirements are modest, the noteholders were required to make special provisions for repayment of the notes to satisfy the regulators and for the promissory notes to be included in the tangible net equity calculation. Also, as a result of the net losses, the absolute level of capital remains at a historically low level. Furthermore, due to the promissory notes, WHA’s financial leverage increased to over 50%. A.M. Best is concerned that future capital needs by WHA could result in increased borrowings from its sponsors. However, A.M. Best notes that historically there has not been a need for additional capital to WHA.
A.M. Best deviated from its “Rating Members of Insurance Groups” criteria report because rating enhancement was afforded to WHA as the company does not operate under common ownership, greater than 50% with the entity providing lift or maintain board control. WHA is not owned by one entity with a majority, but rather is equally sponsored by three healthcare systems, each of which has equal representation on WHA’s board.
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