|[February 13, 2014]
Fitch Downgrades BCBS of Florida's Ratings; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has downgraded Blue Cross and Blue Shield of Florida's
(BCBSF) Insurer Financial Strength (IFS) rating to 'A' from 'A+' and the
company's Issuer Default Rating (IDR) to 'A-' from 'A'. The Rating
Outlook is Stable.
Todays' rating action follows Fitch's review of publicly available
documents filed as part of a plan executed by BCBSF on Jan. 1, 2014,
under which the company reorganized as part of a policyholder owned
not-for-profit mutual insurance holding company (MIHC) system.
KEY RATING DRIVERS
Fitch's decision to downgrade BCBSF's ratings reflects its belief that
the BCBSF organization is likely to adopt more aggressive
diversification and capital management strategies subsequent to the
reorganization than the company has historically employed.
Fitch considers the economic interests of BCBSF policyholders as
materially unchanged by the reorganization due to certain voting rights
and rights to asset distributions that the reorganization conferred upon
them. Additionally, Fitch believes that aside from the expected shift in
approach to capital management noted above, near-term credit factors
that have historically supported BCBSF's ratings are largely unaffected
by the reorganization.
Under the re-organization, BCBSF transferred approximately $1.6 billion
of assets (statutory accounting basis), including $1 billion of fixed
income securities and common stocks, to a newly formed holding company.
Fitch believes that this transfer increases the likelihood that these
assets will be used to support activities that are tangentially related
to, or invested in lower credit-quality businesses, than BCBSF's
traditional health insurance operations. While Fitch believes that such
investments could provide strategic benefits to BCBSF and the MIHC over
the longer term, it believes that both the nature of such investments,
and their potential for success, are uncertain and that significant
execution risk therefore exists.
Additionally, BCBSF's reorganization plan includes projections
indicating that subsequent to the asset transfers and through 2016, the
company's NAIC risk-based capital ratios and operating leverage are
expected to deteriorate to levels that in Fitch's view are no longer
supportive of the company's previous ratings. Specifically, Fitch
estimates that the organization's NAIC RBC ratio, including affiliated
insurers on an organization-wide company action level basis, could
decline to 325% by year-end 2016 from 402% immediately following the
reorganization and 543% at year-end 2013. Similarly, based on data in
the reorganization plan, Fitch estimates that BCBSF's ratio of premiums
to surplus increases to 9.9x by year-end 2016 copared to 7.7x
immediately following the reorganization and 3.4x at year-end 2013.
BCBSF's ratings continue to reflect the company's strong market position
in Florida, overall solid capitalization and low financial leverage.
These favorable characteristics are partially offset by financial
performance metrics that are generally weaker than Fitch's 'A' rating
category median guidelines.
Factors that could lead to a rating upgrade:
--Evidence that diversification and capital deployment strategies
adopted by the BCBSF organization are likely to be successful and that
the execution risks accompanying such strategies are adequately managed.
Factors that could lead to rating downgrades:
--BCBSF's inability to market itself as a Blue Cross and Blue Shield
company could result in a multi-notch downgrade;
--A material decline in BCBSF's enrollment in Florida or a perceived
deterioration in the company's competitive position;
--BCBSF choosing to price its products such that premiums, assets, and
liabilities grew at materially faster rates than capital for a
--Run-rate risk-based capital ratios below 250% on a company
Fitch has downgraded the following ratings and maintained a Stable
Blue Cross and Blue Shield of Florida, Inc.
--IFS to 'A' from 'A+';
--IDR to 'A-' from 'A'.
Additional information is available at 'www.fitchratings.com'.
The issuer did not participate in the rating process, or provide
additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors
Special Report' (Dec. 18, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
Health Insurance and Managed Care (U.S.)
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