AM Best Upgrades Issuer Credit Ratings of Delta Dental of California and Its Affiliates
AM Best has upgraded the Long-Term Issuer Credit Ratings (Long-Term ICR) to "a+" (Excellent) from "a" (Excellent) and affirmed the Financial Strength Rating (FSR) of A (Excellent) of Delta Dental of California (DDC) (San Francisco, CA), and its affiliates, Delta Dental Insurance Company (Wilmington, DE), Delta Dental of Pennsylvania (DDP) (Mechanicsburg, PA) and Delta Dental of New York, Inc. (New York, NY). The outlook of the Long-Term ICRs have been revised to stable from positive, while the outlook of the FSR is stable. These companies collectively are known as Delta Dental of California Group.
The Credit Ratings (ratings) reflect Delta Dental of California Group's balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.
The Long-Term ICR upgrade reflects the improvement in the group's balance sheet fundamentals, achieved through consistent capital growth and moderation of investment risks. Delta Dental of California Group has maintained the strongest level of risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR). The organization reported a double-digit compound annual capital growth over a five-year period (2016-2021), primarily driven by earnings and unrealized gains. The group has maintained favorable overall liquidity and has access to additional sources of operating liquidity. Further contributing to the rating upgrade is the decline in materiality of surplus notes to capitalize affiliate companies, as these entities have accumulated additional unrestricted capital and surplus over the recent years. In addition, an investment in Moda Partners, Inc. (Moda) made in 2018 by DDC, generated a large, unrealized investment gain in 2020 as Moda's wholly owned subsidiary, Moda Health Plan, Inc, received Affordable Care Act risk corridor payments following the Supreme Court decision. This reduced the risk that DDC would have to provide additional capital support. In 2021, this investment was liquidated as DDC sold its investment back to Moda, realizing the previous year's gain.
Delta Dental of California Group continues to report strong operating results, characterized by a five-year return on revenue (ROR) of 7.1% and return on equity (ROE) of 16.1%. While premium declined slightly on a five-year basis due to California's Medicaid contract shifting to administrative services only (ASO) in 2018, premium growth in 2021 was 12.3%. Profitability improvedmaterially in 2021 as premium growth rebounded and more than offset higher utilization. Premium growth was due to a combination of member growth and the nonrecurrence of pandemic member relief given through premium holidays in 2020. Delta Dental of California Group continues to report favorable profitability metrics versus its selected peers and the benchmark.
Dentegra Group, Inc. (Dentegra) is a non-profit Delaware holding company formed by DDC and DDP to oversee and coordinate the strategic activities of the entities and their affiliates. Dentegra is one of the largest dental plan administrators in the United States and offers dental plans that are provided on a fully insured and an employer self-funded basis. DDC is the largest member company of the Delta Dental Plans Association. Collectively, the companies of the Delta Dental of California Group provide coverage to approximately 39 million people. The companies are active participants in numerous state exchanges for small groups and individuals, as standalone dental policies or through medical partnerships. Additionally, dental coverage is provided to Medicaid recipients in a number of states, and Medicare Advantage dental benefits are offered through numerous partnerships with medical carriers. The group continues to expand through membership growth in numerous segments. DDC provides the group's affiliates with efficient technological capabilities to support growing operations in multiple lines of business.
The group's ERM program is supported by a well-established governance structure, with culture and risk management controls. In addition, it utilizes the three lines of defense strategy. The top risk scenarios are stress tested to ascertain if the capital position exceeds minimum levels, and whether solvency was maintained to meet management's business plan. The organization continues to invest in cyber security infrastructure and maintains cyber liability insurance coverage. AM Best will continue to monitor the organization's ERM practices as the group's operations evolve and new risks emerge.
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