Fitch Affirms Health Care Service Corp.; Revises Outlook to Negative

CHICAGO--()--Fitch Ratings has affirmed Health Care Service Corporation's (HCSC) ratings, including its 'A+' Insurer Financial Strength (IFS) rating and 'A-' senior unsecured debt rating. Fitch has revised HCSC's Rating Outlook to Negative from Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Negative Outlook follows HCSC's growing operating losses and corresponding reductions in the company's risk-based capitalization. The rating affirmation is supported by HCSC's large market position and size/scale as well as its Blue Cross Blue Shield branding. Further, HCSC's balance sheet remains conservatively structured with modest financial leverage and a high-quality, liquid investment portfolio. The company's concentration in the two key markets of Illinois and Texas continue to be a limiting factor on the ratings.

HCSC's reported net losses of ($282) million for the full year 2014 and ($434) million for the first half of 2015. Medical benefits and expenses associated with the company's material addition of members sourced from ACA exchanges as well as growing premium deficiency reserves are responsible for the losses. Failure to report improving results will put downward pressure on ratings. Further, Fitch believes it will be difficult for HCSC to restore profitability to historic levels in the near future given the large volume of lower margin business sourced from ACA exchanges.

The deterioration in HCSC's risk-based capitalization is material and places downward pressure on ratings. Surplus has fallen to $9.4 billion as of June 30, 2015 from $9.9 billion at year-end 2014. HCSC's NAIC RBC ratio was 478% of the company action level (CAL) at year-end 2014 and is consistent with current rating category guidelines. RBC has declined significantly from 614% of the CAL at year-end 2013, and Fitch estimates could fall to approximately 400% of the CAL by year-end 2015 if losses continue at the same rate as the first half of 2015.

Debt-to-total capital remained modest at 6% as of June 30, 2015, which Fitch views favorably relative to both the current rating category and the entire market sector. HCSC has $500 million in senior unsecured debt with 4.7% coupon maturing in January 2021 and $127 million of borrowings from the Federal Home Loan Bank of Chicago.

Lack of geographic diversification has historically prevented HCSC's IFS rating from reaching the 'AA' rating category. HCSC's revenue continues to be concentrated in Illinois and Texas, accounting for 84% of premium through the first half of 2015. The company's next largest state in terms of premiums is Oklahoma, accounting for approximately 8% of premium.

RATING SENSITIVITIES

The key rating triggers that could result in a downgrade include:

--Further deterioration in the pre-tax (loss) to-revenue margin in the second-half 2015;

--An inability to return to net profitability over the next 12 months;

--An RBC ratio decline below 350% or a significant increase in financial leverage above 15%.

The key rating triggers that could result in a return to a Stable Rating Outlook include:

--Expectation of a return to sustained profitability;

--Maintain an RBC ratio above 400% of the company action level.

Fitch has affirmed the following ratings and revised the Outlook to Negative from Stable:

Health Care Service Corporation

--IFS at 'A+'; Outlook to Negative from Stable;

--IDR at'A'; Outlook to Negative from Stable;

--$500 million 4.7% senior notes due January 2021 at 'A'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992634

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992634

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Douglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
Fitch Ratings, Inc.
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 Schneider, CPA, +1-312-606-2321
Senior Director
or
Media Relations
Hannah James, New York, + 1-212-908-0500
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Douglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
Fitch Ratings, Inc.
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 Schneider, CPA, +1-312-606-2321
Senior Director
or
Media Relations
Hannah James, New York, + 1-212-908-0500
hannah.james@fitchratings.com