|[May 08, 2014]
Fitch Affirms Blue Shield of California's IFS at 'A'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed Blue Shield of California's (BSC) Insurer
Financial Strength (IFS) rating at 'A'. The Rating Outlook is Stable.
Today's affirmation completes a periodic review of BSC's rating and
recent financial performance. Key factors considered in the review
include expectations for comparatively rapid growth in BSC's membership
due to the company's participation on the California health insurance
exchange and pressure on profitability and capitalization derived from
industry-wide pressures and from decisions made by BSC to partially fund
strategic initiatives with existing capital.
KEY RATING DRIVERS
Industry Profile and Operating Environment: BSC's membership consists
primarily of employer group and, to a lesser extent, individual
insurance membership. The company's membership from the
Medicare/Medicaid business is comparatively modest. Under Fitch's rating
methodology probable IFS ratings for health insurers that focus on the
employer group and individual markets (i.e. commercial market) range
from 'A' to 'BBB'.
Market Position and Size/Scale: Fitch views BSC as maintaining
'medium'-sized market profile and size/scale characteristics indicating
a probable IFS ratings range from 'A' to 'BBB'. Key factors underlying
BSC's market position include the comparatively high concentration of
the company's membership by product type and geography, and large market
share in California. Approximately 85% of the company's consolidated
membership base is derived from employer group products with the balance
derived from individual and senior market membership. BSC generates
essentially all of its revenues in California where based on direct
premiums, Fitch estimates it is the third largest health insurer. With
2.9 million members at year-end 2013, $4.1 billion in stabilization
funds, and $11 billion in revenues in 2013, BSC's size/scale metrics
that overlap Fitch's 'small' and 'medium' categorizations.
Capitalization, Leverage and Financial Flexibility: Fitch views BSC's
capitalization and leverage metrics to be consistent with those expected
at the 'AAA' IFS rating category. Key factors underlying Fitch's view
are the company's very strong risk-based capital ratio (RBC), low
operating leverage ratio and lack of financial leverage. Fitch
anticipates pressure on BSC's capitalization metrics over the next
several years as the company plans to partially fund strategic
initiatives such as large scale information technology projects, and
potential acquisitions, with existing capital.
Fitch believes that BSC maintains adequate financial flexibility which
is supported by the company's strong competitive position in California,
consistent earnings and comparative lack of financial commitments.
Partially offsetting these strengths is the company's status as a
non-stock corporation which prevents access to public equity markets.
Financial Performance: Fitch considers BSC's financial performance to be
consistent with that expected at the 'BBB' IFS rating category. BSC's
2009-2013 average medical benefit, EBITDA-to-revenues and annualized net
return on average capital ratios were 86.1, 3.2%, and 5.2% respectively
and are generally consistent with Fitch's 'BBB' median rating category
guidelines. Fitch's view is that BSC's nonprofit status and pledge to
policyholders that it will limit its net income to 2% of revenues is
likely to suppress the company's financial performance metrics at the
'BBB' rating category.
Fitch believes that the financial results of policies BSC sources from
the California health insurance exchange, like those of policies sourced
by other insurers from various states' health insurance exchanges, are
uncertain. The agency attributes this to the lack of historical
utilization and cost trend data on exchange populations. As part of its
ratings review of BSC, Fitch stress-tested its projection of BSC's 2014
financial results and year-end 2013 risk-based capital ratio by altering
the benefit ratio assumptions on BSC's projected exchange-sourced
business. The results of the stress test did not have a meaningful
impact on Fitch's expectations of BSC's 2014 financial performance or
Fitch believes that BSC's single-state profile makes it very difficult
for the company to obtain an IFS rating higher than the 'A' rating
category. Fitch's view is that single-state concentrations result in
exposure to economic and political conditions that limit feasible
strategic alternatives and expose companies' capital bases to
Rating triggers that could lead to a rating upgrade within the 'A'
rating category include:
--Profitable market share gains within the company's core California
--Growth in the size and scale of BSC's revenue and earnings base while
maintaining the company's 2% of revenues run-rate net earnings target;
--Run-rate EBITDA/revenue and net income/average capital ratios that
more closely approximate Fitch's 'A' rating category guidelines of 7%
while maintaining risk-based capital ratios (company action level basis)
greater than 350%.
Rating triggers that could lead to a rating downgrade:
--BSC losing the ability to market itself as a Blue Shield company could
result in a multi-notch downgrade;
--Run-rate risk-based capital ratios (company action level basis) below
--Run-rate ratios of premiums to stabilization fund (i.e. net worth)
that exceed 5.0x;
--Membership growth that causes Fitch to question BSC's ability to
generate run-rate net earnings consistent with the company's 2% of
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 2013);
--'Health and Managed Care (U.S.) Sector Credit Factors Special Report'
Applicable Criteria and Related Research:
Insurance Rating Methodology
Health Insurance and Managed Care (U.S.)
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