AM Best has downgraded the Financial Strength Rating (FSR) to B+ (Good) from B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb-” (Good) from “bbb+” (Good) of Oregon Dental Service (ODS). Concurrently, AM Best has downgraded the FSR to B+ (Good) from B++ (Good) and the Long-Term ICR to “bbb-” (Good) from “bbb” (Good) of Moda Health Plan, Inc. (Moda Health). Moreover, the Credit Ratings (ratings) of both companies, each domiciled in Portland, OR, are placed under review with negative implications.
The ratings of ODS reflect its balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
The ratings of Moda Health reflect its balance sheet strength, which AM Best assesses as adequate, as well as its marginal operating performance, limited business profile and appropriate ERM. Moda Health’s ratings also reflect the strategic importance to ODS.
Delta Dental of California (DDC) announced on Sept. 27, 2021, that it sold back to Moda Holdings Group, Inc. the $152.4 million equity stake investment it made in 2019 for a 49.5 percent share in Moda Partners, Inc. According to the president and CEO of Moda, DDC’s strategic investment of a few years ago provided assistance in sustaining and expanding strategies at a critical time.
The rating downgrades are a result of the deterioration in ODS’ risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), to a projected very weak level for 2021 from a very strong level in 2020. The lower BCAR assessment was driven by a sizable reduction in capital as a result of partially funding the transaction with cash. The ratings of ODS have been placed under review with negative implications based upon the decline of capital at the company and the limited financial flexibility and access to capital, as well as AM Best’s concern regarding the capital impact to the organization as it relates to the company’s ERM program. These ratings will remain under review until ODS provides AM Best with a clear plan to improve its capital position. The ratings of Moda Health have been placed under review with negative implications, reflecting changed conditions concerning the ratings of its parent company, ODS. These ratings will more than likely come out from under review along with ODS’ ratings.
The acquisition was financed with a combination of cash and debt issued to DDC. This debt along with the two external surplus notes totaling $60 million issued by Moda Health, is expected to increase the adjusted financial leverage significantly for ODS. Moda Health is unaffected financially and operationally by the transaction. However, the company received lift to its ratings based upon the strategic importance and implicit capital support from the owners of Moda Partners, Inc., ODS and DDC. The rating downgrades reflect the change in ownership of Moda Partners, Inc., and in direct correlation with the rating actions taken on ODS, AM Best has removed one notch of lift to Moda Health.
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