Oldwick, NJ – AM Best has assigned a Financial Strength Rating (FSR) of A- (Excellent) and a Long-Term Issuer Credit Rating (Long-Term ICR) of “a-” (Excellent) to WellPoint Insurance Services, Inc. (WISI) (Honolulu, HI). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect WISI’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management. In addition, the rating takes into account the support provided by WISI’s parent, Anthem, Inc. (Anthem) [NYSE: ANTM].
WISI’s risk-adjusted capitalization, as measured by Best Capital Adequacy Ratio (BCAR), was at the strong level at year-end 2020. However, AM Best expects WISI’s BCAR to decline in 2021, driven by premium growth combined with capital contraction due to reserve strengthening for its core lines of business. WISI projects its capital growth to resume in 2022 as profitability returns to historical levels. From 2016 through 2020, the capital has grown organically by more than 60% through retained earnings and no dividend to the parent. The balance sheet strength is further supported by WISI’s conservative investment portfolio with the majority of holdings allocated to high-quality fixed income securities. The parent company maintains flexible capital between the core and its protected cell, under which the majority of the cell’s capital is comprised of $25 million in surplus notes from the core.
WISI has recorded positive, albeit somewhat fluctuating, operating performance with five-year average return on equity of 10%. Since 2018, the underwriting gains were predominantly supported by the business in the protected cell – Federal Employees Health Benefits Program (FEP) premiums assumed from Anthem’s health insurance affiliates. The core corporate insurance lines of business – Workers Compensation and Excess Managed Care E&O – have posted uneven results, including losses in the past two years. These results have been driven in part by fluctuations in claims severity and changes in exposures, which resulted in the need for reserve strengthening in recent years, including sizeable reserve increases through the nine months of 2021. WISI expects the financial performance of corporate reinsurance lines to improve in 2022 and its FEP business to maintain stable profitability.
WISI is a Hawaii-domiciled captive and a wholly owned subsidiary of Anthem. WISI was established in 2006 primarily for the purpose of formalized self-insurance and an instrument of corporate risk management. In 2018, WISI established a segregated cell to assume FEP healthcare premium from Anthem affiliates in order to optimize capital at statutory entities. In 2020, the assumed premium was about $1.9 billion and accounted for the major part of WISI’s volume. The cell structure provides a formal separation of FEP from other WISI business, provides transparency for Hawaii’s regulators and allows for potential future WISI expansion into assuming other health lines.
In addition, the ratings of WISI include the support from Anthem. WISI’s importance to the parent has increased in recent years as the volume of business in both the core and the cell has expanded. Anthem has demonstrated explicit and implicit support of WISI, including acting as a borrower on behalf of the cell for the surplus notes. WISI benefits from the parent’s operational resources and expertise. Furthermore, Anthem has more than sufficient financial strength to provide additional support to WISI if needed.
AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.