Fitch Affirms Health Insurance Plan of Greater New York at ‘BBB-‘; Outlook Stable

Proquest LLC

Fitch Ratings has affirmed the 'BBB-' Insurer Financial Strength (IFS) rating of Health Insurance Plan of Greater New York (HIP). The Rating Outlook is Stable.

Key Rating Drivers

Today's rating action follows a periodic review of HIP's rating and recent financial performance. The rating reflects the company's strong market shares in New York and Connecticut, organization-wide capitalization metrics that are better than Fitch's median 'BBB' rating category guidelines, and profitability metrics that are consistent with Fitch's 'BBB' rating category median guidelines.

The ratings also reflect the effect of the company's concentrated operations in the greater New York area and membership concentration in key contracts, comparatively small size and scale benefits, and uncertainty regarding the capitalization of HIP's subsidiary Group Health Inc. (GHI).

HIP and GHI are key subsidiaries of EmblemHealth Inc. (Emblem). HIP's rating reflects Fitch's use of a group rating methodology that considers both HIP's stand-alone and Emblem's consolidated financial results and capitalization metrics. Fitch believes that applying a group rating methodology is appropriate due to GHI's role in rounding out the Emblem organization's product portfolio, financial support that HIP has historically provided to GHI and the companies' rights to elect an equal number of Emblem's board members.

Based on statutory basis direct premiums, Fitch estimates Emblem's market shares in its key states of New York and Connecticut at approximately 15 percent. However, roughly one half of the company's medical membership is derived from a single contract with the city of New York, which, in comparison to 'BBB' category rated peers, Fitch views as adding meaningful incremental risk to Emblem's market position.

Fitch considers Emblem's absolute level of earnings to be comparatively modest reflecting the company's status as a not-for- profit organization and small size and scale. Key profitability metrics such as medical benefit ratios and EBITDA margins to revenues are consistent with Fitch's 'BBB' rating category median guidelines.

Emblem's underwriting results through the first nine months of 2013 improved to $162 million compared to $110 million in the prior year-period reflecting much improved commercial segment earnings partially offset by lower Medicare segment earnings. Net results through Sept. 30, were flat compared to the prior-year period due to significant expenses related to the company's integration of the company's AdvantageCare Physicians group.

Fitch calculates the Emblem's GAAP basis medical benefit ratio, EBITDA-based revenue margin, and net return on average capital (NROAC) at 86.5 percent, 2.8 percent, and 7.2 percent respectively. These metrics averaged 87.7 percent, 1.6 percent and 6 percent, respectively from 2008-2012.

The organization-wide capitalization metrics of the Emblem companies supportive of HIP's rating. Fitch estimates the year-end 2012 organization-wide NAIC Risk-Based Capital (RBC) ratio at 247 percent (company action level basis) and the organization-wide annualized premium-to-shareholders' equity ratio at Sept. 30 2013 at 5.3x. Fitch also notes that Emblem has no outstanding debt and believes that the company's near-to-mid-term capital and liquidity needs are comparatively limited.

However, Fitch notes that HIP's and GHI's individual capitalization metrics vary widely. HIP's NAIC RBC ratio at year- end 2012 was a strong 376 percent while GHI's was extremely weak at 47 percent. The companies' ratios of annualized premium-to-surplus at Sept. 30, had a similar relationship with HIP's being a strong 3.3x and GHI's an extremely weak 21.5x.

From 2010 through year-end 2012, GHI had New York Financial Services Department (FSD) approval to maintain its statutory reserve at 50 percent of the required level. Between 2010 and year-end 2012, HIP provided GHI with $165 million of capital in the form of surplus notes to help GHI meet this requirement. Fitch's expectation is that GHI will continue to require capital support from HIP, which Fitch believes could be provided in the form of asset or additional surplus notes purchases or reinsurance transactions.

Fitch notes that HIP, GHI and Emblem filed a plan in 2007 under which they would convert to for-profit status. The plan has not been approved and remains outstanding, and Fitch does not view its ultimate approval or disapproval as having an immediate impact on HIP's rating.

Rating Sensitivities

Key rating triggers that could lead to an upgrade of HIP's rating include:

--Run-rate EBITDA/revenue margins in excess of 5 percent;

--Continued improvement and reduced year-to-year volatility in the underwriting profitability of the company's commercial segment;

--Maintaining organization-wide NAIC RBC ratio above 200 percent (company action level basis) and premiums-to-surplus ratios of 7.0x or less;

--Reduced uncertainty around the means by which GHI will improve its stand-alone statutory capitalization metrics;

--Measured and profitable membership diversification that significantly reduces the percentage of Emblem's total medical membership that is derived from its contract with the city of New York. Fitch believes that this enhanced diversification would be necessary for the company's rating to move into the 'A' rating category. However, failure to achieve this trigger does not preclude upgrades within the 'BBB' rating category.

Key Rating triggers that could lead to a downgrade of HIP's rating include:

--Non-renewal of the company's contract with the city of New York. Given long-ties between Emblem and the city of New York Fitch believes that the likelihood of this contract not being renewed is less than that of a typical large group employer contract. However, Fitch also believes that the contract represents a much larger portion Emblem's membership than that represented by a typical large group employer contract. As a result, the rating implications would likely be significant.

--Run-rate EBITDA/revenue margins of 3 percent or less;

--Run-rate organization-wide NAIC RBC ratios of less than 175 percent (company action-level basis);

--Organization-wide premiums-to-surplus ratios above 9.0x;

--Heightened uncertainty around the means by which GHI will improve its stand-alone statutory capitalization metrics.

Additional information is available at 'fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Jan. 11,);

--'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (Jan. 29,).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=723072

Health Insurance and Managed Care (U.S.) Sector Credit Factors