CHICAGO, Dec 20, 2011 (BUSINESS WIRE) –Fitch Ratings has affirmed Health Care Service Corporation (HCSC) credit ratings as follows:
— Insurer Financial Strength (IFS) at ‘A+’;
— Long-term IDR at ‘A’;
— $500 million 4.70% senior unsecured notes due June 15, 2021 at ‘A’.
The Rating Outlook is Stable.
The rating rationale is HCSC’s continued leading market position, strength derived from its Blue Cross and Blue Shield license, balance sheet strength and solid earnings. The rationale also factors HCSC’s limited geographic diversity and significant reliance on its two key markets of Illinois and Texas.
Fitch’s ratings reflect HCSC’s position as the leading provider of health insurance and managed care services in Illinois, Texas, New Mexico, and Oklahoma. with 13.1 million members as of Sept. 30, 2011, HCSC is the nation’s fourth-largest health insurer, and the largest nonpublic health insurer in the U.S. by membership.
Fitch views HCSC’s exclusive right to use the Blue Cross and Blue Shield (Blues) trademarks in its four core states as a key competitive advantage. These rights, as well as HCSC’s access to Blue Card, the Blue Cross Blue Shield Association’s (BCBSA) national account platform, have helped establish and grow the company’s leading market position.
Fitch favorably views HCSC’s strong balance sheet fundamentals, which reflect excellent statutory capitalization, modest financial leverage, conservative investment portfolio and excellent liquidity. HCSC’s statutory capital levels have historically remained strong, driven primarily by very good operating earnings. At year-end 2010, HCSC’s NAIC risk-based capital (RBC) ratio was 542% of the company action level, and outstanding debt was modest at 5.5% of total capital.
HCSC generated solid earnings through Sept. 30, 2011, with pretax margin increasing to 7.9% from 6.3% in the prior year-period. Fitch views these results favorably as they represent solid trends, this despite new medical loss ratio (MLR) restrictions as part of the 2010 Federal Health Reform bill. The margin improvement was largely driven by lower than expected medical services utilization.
Fitch also considers HCSC’s limited geographic diversity and premium concentration. 88% of HCSC’s 2010 business revenue is concentrated in the two significantly larger states of Texas and Illinois and 99% of revenue when including Oklahoma and New Mexico. The lack of geographic diversity is a key factor in limiting HCSC’s upward ratings potential.
The key rating trigger that may result in Fitch upgrading HCSC includes a change in the company’s operating profile in a way that is profitable and lessens the company’s reliance on earnings from its two key markets of Illinois and Texas.
The key rating triggers that could result in Fitch downgrading HCSC include:
— an RBC ratio decline below 350%;
— Adopting pricing strategies that would result in sustained operating losses;
— Changes to existing Health Reform legislation that Fitch believes would increase HCSC’s adverse selection risk and lead to material earnings and interest coverage declines.
Additional information is available at ‘ fitchratings.com ‘. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
— ‘Insurance Rating Methodology’ (Sept. 22, 2011);
— ‘U.S. Health Insurance and Managed Care Rating Methodology’ (March 31, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
U.S. Health Insurance and Managed Care Rating Methodology fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613545
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SOURCE: Fitch Ratings
Fitch, Inc. Primary Analyst: Manish J. Patel, +1-312-368-3188 Associate Director 70 W. Madison St., Chicago, IL 60602 or Secondary Analyst: Mark E. Rouck, CPA, CFA, +1-312-368-2085 Senior Director or Committee Chairperson: Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321 Senior Director or Media Relations Brian Bertsch, +1-212-908-0549 (New York) brian.bertsch@fitchratings.com
Copyright Business Wire 2011