Best Announces Rating Actions on Highmark

March 2, 2004

A.M. Best Co. announced that it has affirmed the majority of the financial strength ratings and a senior debt rating of Pittsburgh-based Highmark Inc.; however, Best said it had revised the rating outlooks to negative from stable.

“These rating actions affect Highmark’s $375 million 6.8 percent of senior notes due 2013 and 13 interactively-rated subsidiaries,” said Best. It also noted that it has downgraded the financial strength rating to “A-” (Excellent) from “A” (Excellent) of Highmark Casualty Insurance Company (HCIC), but revised the company’s rating outlook to stable from negative.

Best noted: “Two issues that place near-to-medium term downward pressure on Highmark’s financial strength include the Commonwealth of Pennsylvania’s upcoming regulatory review of Highmark’s–and the other three not-for-profit Blue plans’–surplus and claim reserve levels and Highmark’s health insurance business’ operating losses in Central Pennsylvania’s 21-county service area.

“Pennsylvania’s insurance regulator will scrutinize Highmark’s surplus and reserve levels and quantify any excess by mid-2004. Any resulting surplus and claim reserve caps and mandated policyholder refunds could hinder Highmark’s–and the other not-for-profit Blue plans’–ability to weather any softening of the pricing market for health insurance products, as well as an equity market downturn and/or deterioration in the credit market, should they occur. The regulator’s analysis–and resulting mandate–would not apply to the commonwealth’s for-profit health underwriters, potentially placing the Blues at a financial strength disadvantage.”

Best indicated that Highmark’s health insurance business continues to generate sizeable operating losses, which the company is addressing. However, it doesn’t see a return to profitability in the sector “in the near term.”

The rating agency explained that the “assignment of a negative outlook to the financial strength rating of United Concordia (Harrisburg, PA) and Highmark Life Insurance Company (Pittsburgh, PA) is driven by the pressure on the parent company’s surplus. The negative outlook does not reflect any deterioration in these subsidiaries’ stand-alone financial strength rating criteria. The downgrade of HCIC reflects the deterioration of the company’s operating performance over the last threeyears, driven by adverse development of workers’ compensation and loss reserves.”

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