OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has downgraded the financial strength rating (FSR) to B+ (Good) from B++ (Good) and issuer credit rating (ICR) to "bbb-" from "bbb" of Capital District Physicians' Health Plan, Inc. (CDPHP). A.M. Best also has downgraded the FSR to B (Fair) from B+ (Good) and ICR to "bb" from "bbb-" of CDPHP's subsidiary, CDPHP Universal Benefits, Inc. (UBI). The ratings have been removed from under review with negative implications and assigned a negative outlook. Both companies are domiciled in Albany, NY.

The downgrading of CDPHP's ratings reflects its reduced financial flexibility due to its need to support the weakly capitalized subsidiary, UBI. Since UBI has not been able to grow capital because of underwriting losses in four of the past five years, CDPHP provided $48.5 million of surplus notes to support the rapid growth of UBI's premium revenue. In 2008, CDPHP provided $25 million in surplus notes, and $17.7 million was given in 2007. CDPHP remains sufficiently capitalized for its business risks; however, A.M. Best is concerned that following the deteriorated underwriting performance and significant expenses in a major system conversion, CDPHP's capital and surplus has declined, and the amount of excess capital available to support UBI has been reduced significantly. Furthermore, repayment of the surplus notes is not expected in the near term.


UBI's ratings were downgraded due to its substantial underwriting losses and historic dependence on surplus notes from CDPHP to support its expansion. Following a marginal gain in 2007, UBI posted a $12.3 million underwriting loss and 5.9% negative underwriting margin in 2008. The deteriorated results were mainly driven by an 880 basis points increase in the commercial medical loss ratio and the addition of the Medicare Advantage product, which has a higher loss ratio. While CDPHP's consolidated capital level"”which includes UBI"”remains adequate, the level of capitalization at UBI on a stand-alone basis is weak and considered low for the ratings.

The offsetting factors for all ratings include membership growth, conservative investment holdings and innovative initiatives to link physicians' reimbursement to quality and cost of care. CDPHP has successfully grown Medicare Advantage enrollment by gradually expanding the service area, offering health maintenance organization and preferred provider organization products as well as marketing to both individuals and groups. UBI has experienced double-digit increases in both membership and revenue since 2005; however, the growth rate subsided during 2007-2008. To further differentiate itself from competition and build on the strong local provider ties, CDPHP deployed an innovative system that allows integrated financial and healthcare management. A.M. Best believes that this strategy may improve cost controls and enhance CDPHP's competitive position; however, the benefits may not be realized in the near term. CDPHP and UBI maintain a conservative investment allocation that allowed CDPHP to incur very limited investment losses and UBI to avoid any losses amid the financial markets downturn in 2008. Prior to the retroactive assessment levied by New York State to close its budget gap, the combined companies posted a modest gain for 2008, and expect to do likewise in 2009.

The negative outlook recognizes the declined underwriting results and operating losses at both companies in first quarter 2009. A.M. Best is concerned that should these losses persist, UBI may need additional capital. Moreover, the capitalization at CDPHP may decline further from the high expenses for its system conversion as well as any operating losses the company may incur. However, A.M. Best recognizes that CDPHP has implemented initiatives that may improve operating results at both companies for the remainder of 2009.


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

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.





A.M. Best Co.

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Source: A.M. Best Co.