A.M. Best Upgrades Ratings of Renaissance Life & Health Insurance Company of America [Manufacturing Close – Up]

A.M. Best Co. has upgraded the financial strength rating (FSR) to A- (Excellent) from B++ (Good) and issuer credit rating (ICR) to "a- " from "bbb+" of Renaissance Life & Health Insurance Company of America (RLHICA) (Greenwood, IN).

The outlook for these ratings is stable.

Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the FSR of A- (Excellent) and ICRs of "a-" of Delta Dental Plan of Michigan, Inc. (DDMI) (Okemos, MI) and its affiliates, Delta Dental Plan of Ohio, Inc. (DDOH) (Westerville, OH) and Delta Dental Plan of Indiana, Inc. (DDIN) (Indianapolis, IN).

The upgrading of RLHICA's ratings reflects its positive earnings, improved risk-based capitalization and parental support. RLHICA's underwriting and operating performance has improved significantly over the last two years and was driven by lower utilization, discipline pricing and a higher level of operational efficiencies and synergies. Positive earnings as well as capital contributions from owners led to more than 70 percent growth in its capital and surplus from 2009 to 2011. The level of risk-based capitalization was further enhanced by lower premiums in 2011 and is currently considered very strong for the ratings.

RLHICA is well positioned for its current rating level. The factors that may lead to negative rating actions include significant deterioration of its operating performance, capitalization decline and decreased parental support.

The revised outlook of DDMI and its affiliates reflects their leading market position, strong underwriting and operating results, excellent level of risk-based capitalization and majority ownership of Renaissance Holding Company (RHC). These companies provide coverage to over four million members in the tri-state area. Although DDMI was challenged by sizeable reduction in its enrollment due to restructuring of the auto industry in 2009, the company successfully replenished membership losses through new business growth in 2010 and 2011. Over the last two years, DDMI's financial results significantly improved as a declined utilization level combined with pricing discipline and increased operational efficiency led to solid underwriting gains. The level of risk- adjusted capitalization improved and is considered strong for the ratings. To further expand the geographic reach and to meet the market need for new dental products, DDMI, along with several other Delta Dental plans, created RHC, which offers non-branded dental coverage through its insurance subsidiary, RLHICA, which has been bringing diversification into DDMI's earnings stream.

Somewhat offsetting these positive rating factors are the unfavorable economic conditions in Michigan. A.M. Best is concerned that DDMI's ability to maintain its current enrollment level may be challenged should the high unemployment and limited business growth continue. Additionally, DDMI's asset allocation remains somewhat aggressive for a health insurance company, with 38 percent of invested assets represented by common stock and 32 percent by real estate. However, total investments in common stock has declined significantly over the last five years.

Factors that could lead to positive rating actions for DDMI and its affiliates include maintenance of earnings, market position and capitalization, as well as continued membership growth. Factors that could lead to negative rating actions include sizeable membership losses, significant decline in operating performance and a substantial deterioration in the organization's risk-based capitalization.

A.M. Best deviated from its "Rating Members of Insurance Groups" criteria because full rating enhancement was afforded to DDOH despite the lack of ownership or board control between DDMI and DDOH. However, DDMI and DDOH share integrated infrastructure, common management and a common mission. As such, A.M. Best expects that DDMI would act to support the entity if needed.

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. Key criteria utilized include: "Risk Management and the Rating Process for Insurance Companies"; "Understanding BCAR for Life/Health Insurers"; and "Rating Members of Insurance Groups." Best's Credit Rating Methodology can be found at ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

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