OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb+” (Fair) from “bbb-” (Good) of Moda Health Plan, Inc. (Moda Health). The outlook of the FSR has been revised to stable from negative, while the outlook of the Long-Term ICR is negative. Concurrently, AM Best has affirmed the FSR of B+ (Good) and the Long-Term ICR of “bbb-” (Good) of Oregon Dental Service (ODS). The outlook of these Credit Ratings (ratings) is negative. Both companies are domiciled in Portland, OR.
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 (ERM).
The ratings of Moda Health reflect its balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, limited business profile and appropriate ERM. Moda Health’s ratings also reflect its strategic importance to ODS.
ODS’ ratings reflect its adequate risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and overall adequate balance sheet assessment, as well as favorable operating earnings for the past three years. The negative outlooks reflect pressure on the company’s BCAR from top line growth and volatility in capital for ODS and its subsidiary, Moda Health. Financial leverage for ODS remains moderately high limiting financial flexibility. The 2021 reacquisition of the ownership of Moda Partners, Inc., an intermediate holding company, from Delta Dental of California was financed partially by two secured promissory notes totaling $91 million. Leverage at year-end 2022 was approximately 36.6%.
The rating downgrades for Moda Health are a result of its risk-adjusted capitalization, as measured by BCAR. AM Best assessed the company’s 2022 BCAR as very weak. Absolute capital and premium revenue have been volatile over the past five years due to the write off and ultimate receipt of the risk corridor receivable. Risk-adjusted capital declined in 2022 mainly due to unfavorable change in non-admitted assets and unrealized losses on its investment portfolio. AM Best remains concerned that material capital appreciation is uncertain given modest net earnings in 2022 and a small net loss reported through the first quarter of 2023. In addition, Moda Health’s two external surplus notes totaling $60 million mature in 2024. These notes comprise over one-half of Moda Health’s capital and surplus. AM Best notes that any repayment of outstanding amounts for these notes requires regulatory approval. Moda Health receives ratings lift based upon its strategic importance and implicit capital support from ODS.
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