CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Blue Shield of California's (BSC) Insurer Financial Strength (IFS) rating at 'A' with a Stable Rating Outlook. Today's rating action completes a periodic review of BSC's rating.
'Scores' assigned to highlighted credit factors underlying BSC's rating and the scores' relative influence on the rating are discussed below under Key Rating Drivers.
KEY RATING DRIVERS
Market Position and Size/Scale scored 'a'; 'higher' influence on rating: BSC maintains a 'medium'-sized market profile and size/scale characteristics. Key factors underlying BSC's market position include the company's large but geographically concentrated market share in California, where Fitch estimates the company is the state's third-largest health insurer. They also include its diverse enrollment base which consists primarily of employer group enrollment but also includes meaningfully sized individual and Medicare enrollment. In addition, Fitch expects BSC's previously announced acquisition of Care1st Health Plan Inc. (Care1st) to provide the organization with access to the Medicaid/MediCal market, a market in which it has historically not maintained a presence. With 3.5 million members and a $4.2 billion stabilization fund at year-end 2014 and $13.6 billion of 2014 revenues, BSC's size/scale metrics overlap Fitch's 'small' and 'medium' size/scale categorizations.
Financial Performance and Earnings scored 'bbb+'; 'higher' influence on rating: BSC's 2012-2014 average medical benefit, EBITDA-to-revenues and annualized net return on average capital ratios were 84.5%, 3.7% and 4.5%, respectively, which are generally consistent with Fitch's 'BBB+' rating category guidelines. Fitch's view is that BSC's non-profit status and pledge to policyholders to limit its net income to 2% of revenues is likely to suppress the company's financial performance metrics at the 'BBB' rating category. BSC's 2014 financial results improved markedly compared with recent years although net results were adversely affected by higher income tax expense related to the company's loss of its state income tax exemption and the non-deductibility of certain expenses related to the Affordable Care Act's implementation. Key factors driving 2014's pre-tax results include strong membership growth, primarily in the California individual exchange and non-exchange markets, and to a lesser extent, in the employer group market that drove revenue growth. In 2014, BSC generated $635 million of EBITDA and $162 million of net income.
Capitalization and Leverage scored 'aa+'; 'moderate influence on rating: Key factors underlying this score are the company's strong risk-based capitalization (RBC), comparatively low premiums-to-net worth ratio and lack of financial leverage. The score has a negative forward trend reflecting BSC's plan to fund its acquisition of Care1st by liquidating investment portfolio assets which will reduce RBC. Also contributing to the negative trend is 2014 year-over-year (yoy) growth in each of BSC's premiums, assets, and liabilities that outpaced the yoy growth in BSC's net worth for the first time since 2011.
Investments and Liquidity scored 'a'; 'moderate' influence on rating: BSC's investments provide solid support for the company's insurance liabilities. The company invests predominately in investment-grade fixed maturity securities and in recent years the portfolio has consisted of approximately 70% fixed maturities, 25% equities and 5% cash. The company has historically invested more heavily in equity securities than many publicly-traded health insurers. Fitch believes this is a reasonable strategy given BSC's strong capitalization and equity securities' higher returns over the long term compared with fixed maturity investments, although it does expose BSC's assets to more equity market volatility.
Debt Service Capabilities and Financial Flexibility scored 'aa-'; 'lower' influence on rating: BSC's operating EBITDA averaged $306 million from 2012 through 2014 and the company does not have any debt service requirements. Fitch views BSC's strong competitive position in California, consistent earnings, and comparative lack of financial commitments as factors that support the company's financial flexibility, and Fitch believes that BSC has access under foreseeable circumstances to the debt and bank credit markets. Partially offsetting these favorable factors is the company's status as a non-stock public-benefit corporation, which prevents it from accessing the public equity markets.
RATING SENSITIVITIES
Fitch believes that Blue Shield of California's concentrated enrollment in California makes it very difficult for the company to obtain an IFS rating higher than 'A+'. Fitch's view is that single-state enrollment concentrations result in exposure to economic and political conditions that limit feasible strategic alternatives and expose companies' capital bases to concentrated risks.
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 market;
--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%.
Rating triggers that could lead to a rating downgrade:
--BSC losing the ability to market itself as a Blue Shield company, or changes in Fitch's view of the Blue Shield brand's worth from a marketing perspective, could result in a multi-notch downgrade;
--Run-rate risk-based capital ratios (company action level basis) below 350%;
--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 revenue target;
--Care1st's inability to generate enrollment and earnings that cause Fitch to question the value of the goodwill asset the BSC organization will report subsequent to the acquisition's close.
Fitch has affirmed the following rating:
--Insurer Financial Strength at 'A' .
Additional information is available on www.fitchratings.com
Applicable Criteria
Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes) (pub. 12 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576
Insurance Rating Methodology (pub. 04 Sep 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985831
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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