A.M. Best Downgrades Issuer Credit Rating of Oregon Dental Service

A.M. Best Co. has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+” and affirmed the financial strength rating (FSR) of B++ (Good) of Oregon Dental Service (ODS). A.M. Best also has affirmed the FSR of B+ (Good) and ICR of “bbb-” of ODS Health Plan, Inc. (ODSHP). The outlook on all ratings has been revised to negative from stable. Both companies are domiciled in Portland, OR.

Concurrently, A.M. Best has downgraded the ICR to “bbb” from “bbb+” and affirmed the FSR of B++ (Good) of Dentists Benefits Insurance Company (DBIC) (Portland, OR), the property and casualty subsidiary of ODSHP. The outlook for these ratings is stable. A.M. Best also has affirmed the FSR of B++ (Good) and the ICR of “bbb” of Northwest Dentists Insurance Company (NORDIC) (Bothell, WA), the property and casualty subsidiary of ODS. The outlook for these ratings also is stable.

The downgrading of the ICR of ODS reflects the declined level of capital and surplus, when surplus notes issued by ODS’s subsidiary, ODSHP, are excluded. ODSHP issued $23 million of short-term surplus notes in December 2009 and received a capital contribution from Health Services Group Inc., a subsidiary of ODS, to improve its capital position following significant underwriting losses.

The negative outlook for ODSHP reflects underwriting losses and a reliance on external surplus notes to help strengthen capital. Although the financial results at ODSHP have improved during the first quarter of 2010, the high level of membership concentration and predominance of Administrative Service Only (ASO) and minimum premium business may limit organic capital growth in the near to medium term.

The negative outlook for ODS reflects A.M. Best’s concern that continued underwriting losses, if any, or substantial growth could result in additional capital requirements for ODSHP, which would have to be obtained either internally or externally, and at some point in the future could place pressure on the organization.

The offsetting factors for ODS and ODSHP’s ratings include strong market share, increased business diversification, improved operations and transition to more conservative investment allocation. ODS’ share of the dental insurance market in Oregon is approximately 50%, with the nearest competitor’s share below 25%. ODSHP’s membership almost doubled in 2008 and 2009, mainly attributable to the addition of a large group with 120,000 eligible members, as well as rapid expansion into the Alaska market. ODS and ODSHP have completed a major systems conversion that significantly improved the companies’ operational efficiencies and auto-adjudication rates as well as provided better flexibility for benefits and products design. Additionally, during 2008 and 2009, ODS reversed its long-term investment strategy by reducing the share of equity holdings. A.M. Best notes that the new more conservative allocation better protects the company from stock market fluctuations and supports the liquidity needs for the short-term nature of dental insurance obligations.

The downgrading of the ICR of DBIC is reflective of the recent deterioration in the financial strength of its ultimate parent, as this is a limiting factor for the smaller property and casualty operations. DBIC maintains supportive capitalization, low underwriting leverage, a leadership position in providing professional liability coverage to Oregon dentists, and overall favorable operating performance.

Partially offsetting these positive factors are DBIC’s concentration risks both geographically and by product, and the recent increases in claims frequency and severity. The outlook contemplates the expectation of continued supportive capitalization and favorable operating experience within its market niche.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at http://www.ambest.com/ratings/methodology.