NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Blue Cross of Idaho Health Service, Inc.'s (BCID) 'A-' Insurer Financial Strength (IFS) rating. The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's rating on BCID reflects the company's excellent competitive position in the Idaho health insurance market, strong risk adjusted capitalization, solid balance sheet, and steady operating performance. The rating also reflects the company's limited geographic diversification, small scale relative to national and multi-state competitors, and uncertainty derived from the evolving regulatory environment.
BCID's primary business is selling health insurance products and services in the state of Idaho under the Blue Cross trademark. The company has a leading market position in the state of Idaho, providing health insurance coverage to approximately 441,000 medical and 280,000 stand-alone dental members as of Dec. 31, 2013.
Fitch views the company's right to use the Blue Cross trademark as a significant competitive advantage in the Idaho health care market. In addition, BCID's long-term presence and broad coverage in the Idaho market provides the company with excellent market knowledge and better-than peer provider network access.
Based on Fitch's sector credit factors for the U.S. Health Insurance and Managed Care industry, Fitch considers BCID's lack of scale and geographic concentration as implying an IFS rating of 'BBB'. BCID's small size is partially offset by the company's dominant market position in Idaho.
Fitch views BCID's historical financial performance and profitability, as measured by EBITDA margins and net returns on average capital, to be consistent with an IFS rating of 'A'. However, over the next 2-3 years, Fitch believes that BCID's financial performance is more likely to be reflective of an IFS rating of 'BBB'.
In the case of BCID, Fitch believes that near term margin compression and declines on overall profitability could be pronounced if the company successfully grows its government-sponsored and individual business. This is due to increased costs related to Affordable Care Act of 2010 (ACA) and because these businesses typically operate at lower margins than group business, which currently represents the bulk of BCID's operating portfolio.
Fitch views BCID's current capital strength, as measured by RBC and managed care premiums to equity ratios, to be consistent with an 'AAA' rating level. At year-end 2013 BCID's NAIC risk-based capital (RBC) ratio was a very strong 581% of the company action level.
Looking forward over the next 12-24 months, Fitch expects BCID's capital to grow at a slower rate than premiums, if the company aggressively grows its membership in the individual and Medicare/Medicaid markets, as planned.
Fitch therefore expects BCID's risk-adjusted capitalization to decline but remain supportive of at least an 'AA' rating category. Specifically, BCID's asset and premium leverage ratios are likely to rise from recent low levels, while the RBC ratio could decrease closer to 400% over the next few years.
Fitch's Stable Outlook reflects the agency's expectation that BCID's very strong risk-based capital (RBC) levels and dominant market position in Idaho will allow the company's ratings to absorb an expected decline in margins and overall profitability in the next 12-24 months.
BCID has no material debt outstanding and no goodwill on its balance sheet. The company's investment portfolio at Dec. 31, 2013 included a 28% allocation to equities, which raises its risk profile somewhat.
Underwriting income in 2013 was $35 million and represented an $8 million improvement compared with 2012 due to a modest reduction in the loss ratio, which fell to 86.3% in 2013 from 86.7% in 2012. Despite improved underwriting results net income declined by $8 million year over year to $39 million. Lower realized investment gains and a higher tax rate accounted for the difference.
From a rating perspective, Fitch views BCID's concentrated market position in Idaho and comparatively small size and scale as limiting factors. These characteristics leave the company more susceptible than geographically diversified peers to earnings and capital volatility, due to its geographic concentration in a single state.
Fitch therefore believes that a ratings upgrade is unlikely in the absence of a transformational event that reduces the company's exposure to its single market and enhances the overall size and scale of the company's operations while maintaining the company's balance sheet strength and profitability trends.
Key ratings triggers that could lead to a downgrade include a sustained earnings decrease that weakens RBC below 300%, significant enrollment losses that materially erode the company's current market share, or the loss of the right to use the Blue Cross trademark and brand.
Fitch has affirmed the following rating with a Stable Outlook:
Blue Cross of Idaho Health Service, Inc.
--IFS rating at 'A-'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (December 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
Health Insurance and Managed Care (U.S.)