NEW YORK, Feb. 7 /PRNewswire/ -- Standard & Poor's today affirmed its
double-'A'-minus counterparty credit and financial strength ratings on
Wellmark Inc. (doing business as Wellmark Blue Cross and Blue Shield of Iowa),
Wellmark of South Dakota Inc. (doing business as Blue Cross and Blue Shield of
South Dakota), Wellmark Community Insurance Inc., and Wellmark Health Plan of
Iowa Inc. At the same time, Standard & Poor's revised its outlook on these
companies (collectively referred to as Wellmark) to negative from stable.
These rating actions are based on the increased volatility of Wellmark's
capital base because of a higher level of investments in unaffiliated equities
as well as Standard & Poor's recent revision of its outlook on the overall
U.S. health insurance industry to negative. These industry challenges have
increased the importance of capital and stability of capital and have created
additional challenges to earnings.
Major Rating Factors:
-- Wellmark realigned its investment portfolio in 2001 by significantly
increasing the level of unaffiliated equity investments. The increased
capital charge associated with equity investments, coupled with strong
premium growth, contributed to the decline in the capital adequacy
ratio to about 200%. Although this level is still extremely strong, it
is not as strong as the company's levels in prior periods. With equity
investments constituting about 35% of cash and invested assets and
about 75% of capital, capital adequacy is exposed to greater
volatility.
-- Wellmark's earnings profile is good, with an estimated Standard &
Poor's year-end 2001 earnings adequacy ratio of about 120%. This ratio
is an improvement over the year-end 2000 ratio of 93% but is not at a
level consistent with the current rating level. Pretax GAAP income for
the first nine months of 2001 was $28 million. Standard & Poor's
expects Wellmark's full-year earnings to be about $34 million, which is
below Standard & Poor's expectations.
-- Wellmark maintains a strong business position, with leading market
shares in Iowa (about 50% of the state's population) and South Dakota
(about 39% of the state's population). Wellmark currently faces little
serious competition in either state, with membership in excess of 8
times (x) that of the nearest competitor in Iowa and 4x times that of
the nearest competitor in South Dakota.
-- Wellmark maintains very strong liquidity, with a liquidity ratio of
193% at year-end 2000 based on Standard & Poor's liquidity model.
-- Wellmark has significant geographic market concentration, operating
primarily in only two predominantly rural states. Although Iowa and
South Dakota historically have proven to be relatively favorable
operating environments, this concentration nonetheless exposes the
company more significantly to adverse developments on the legislative,
regulatory, and economic fronts. These events could include, but are
not limited to, provider contracting restrictions, pricing constraints,
and the deterioration of general business conditions.
-- Wellmark has very good financial flexibility based on its strong
capital position. The company has a $50 million line of credit but has
not borrowed against it.
OUTLOOK:NEGATIVE
Standard & Poor's will review the company's operating profile and capital
position over the next six to 12 months. If Standard & Poor's expects the
company's capital adequacy ratio to fall below 200%, if Standard & Poor's
expects pretax GAAP earnings to fall below levels considered strong, or if
Standard & Poor's believes the operating environment has become significantly
more unfavorable, the ratings are likely to be lowered. Standard & Poor's
expects Wellmark's enrollment to grow modestly by 1%-2% in 2002 as Wellmark
maintains its leading position in its core Iowa and South Dakota markets.
SOURCE Standard & Poor's
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Related links:
http://www.standardandpoors.com/ratings
CONTACT:
Neal Freedman, +1-212-438-1274, or Jack
Reichman, +1-212-438-7235, both of Standard & Poor's
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