[September 04, 2014]

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

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

Group Rating Methodology Applied: HIP's rating reflects use of a group rating methodology that considers the operational and financial aspects of HIP's subsidiaries including Group Health Options, Inc. (GHI). Fitch believes that a group rating methodology is appropriate due to GHI's role in rounding out the organization's product portfolio, financial support provided that HIP has historically provided to GHI, overlapping management between the two companies, and the companies' rights to elect an equal number of EmblemHealth Inc.'s, HIP's parent company, board members. Throughout the remainder of this comment references to Emblem incorporate both HIP and GHI.

Market and Size/Scale: Fitch views Emblem as maintaining 'small' market position and size/scale characteristics. The probable IFS rating category based on this characteristic is 'BBB'. Key considerations in Fitch's categorization include the company's comparatively small absolute earnings-base and the concentrated nature of the company's membership, both from a geographic and key contract perspective. Emblem currently derives 55% of its medical membership from a contract with the city of New York. Given long-ties between Emblem and the city, Fitch believes that this contract's likelihood of on-going renewal is greater than that of a typical large-group employer contract. However, the contract also represents a much larger portion of Emblem's membership than that typically represented by large group employer contracts.

Also considered in Fitch's assessment of Emblem's market position and size/scale characteristics are the company's large market shares in New York and Connecticut where Fitch estimates Emblem's 2013 direct health premiums at approximately 15% of each states' total.

Capitalization and Leverage: Fitch considers Emblem's capitalization and leverage characteristics consistent with those expected at the 'A' rating category level. The company has no debt in its capital structure and its organization-wide NAIC risk-based capital (RBC) and operating leverage ratios were 260% and 5.2x respectively. There is a wide disparity between HIP's and GHI's individual capitalization metrics with HIP's metrics consistent with 'AA' IFS rating category guidelines and GHI's consistent with below 'BBB' guidelines.

Since HIP and EmblemHealth Inc. are non-profit corporations with no external debt obligations, Fitch's assessment of Emblem's financial performance considers it ability to generate profits required to grow capital at rates that are commensurate with premium and liability growth. From 2010 through June 30, 2013, Emblem's GAAP basis stockholders' equity grew at a 5.3% compound annual growth rate (CAGR) while the company's annualized premiums were flat and liabilities grew at 1% CAGR.

Financial Performance: Fitch considers Emblem's longer-term financial performance to be consistent with 'BBB' rating category guidelines with medical benefit ratios and BITDA margins averaging 87.4% and 2.2%, respectively from 2009-2013. The company's first half 2014 (1H'14) financial performance was poor reflecting the effect of premium rate declines and lower premiums on retrospectively rated policies that more than offset the effect of modest enrollment gains. The results also reflected higher claims on commercial and Medicare business, due in part to higher than expected costs for drugs used to treat hepatitis C.

Fitch's expectation is that Emblem's financial performance and earnings over the next 12-24 months will be pressured to approximate those of recent years. Near-term revenues are expected to decline 2%-3% as Emblem gradually exits the small group market. These declines are expected to be partially offset by growth in Medicaid and the exchange sourced individual revenues. Net earnings are expected to decline materially compared with 2013 reflecting the impact of ACA-related fees and higher pharmacy-related benefit costs.

RATING SENSITIVITIES

Fitch's view is that Emblem's rating is constrained to the 'BBB' rating category by the concentration risks derived from the company's geographically concentrated membership in New York and Connecticut and single contract concentration with the city of New York.

Within the 'BBB' rating category specific rating sensitivities that could trigger an upgrade in HIP's rating include:

--Run-rate EBITDA-to-revenue and net income-to-average capital ratios approximating 3%;

--Improved consistency and absolute financial performance within each of Emblem's reportable segments (Commercial, Medicare, and Government Sponsored), and in the aggregate.

Key rating sensitivities that could trigger a downgrade in HIP's rating include:

--Non-renewal of Emblem's contract with the city of New York. Due to the contract's large contribution to total medical membership, the rating implications would likely be significant;

--Run-rate EBITDA-to-revenue and net income-to-average capital ratios less than 1%;

--No longer maintaining 'A' rating category capitalization and leverage metrics; specifically utilizing some form of debt as a financing mechanism, or maintaining organization-wide NAIC RBC (company action level basis) ratios approximating 200% and organization-wide premiums-to-surplus ratios above 9.0x.

Fitch has affirmed the following rating with a Stable Outlook:

Health Insurance Plan of Greater New York

--IFS at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (November 2013);

--'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (August 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

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

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=766788

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=864794

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