CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Blue Cross of Idaho Health Service, Inc.'s (BCI) Insurer Financial Strength (IFS) rating at 'A-'. The Rating Outlook remains Negative.
KEY RATING DRIVERS
Fitch's rating on BCI continues to reflect the company's very strong competitive position in the Idaho health insurance market, strong risk-adjusted capitalization and solid balance sheet, as well as the company's historically stable 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.
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, BCI's long-term presence and broad coverage in the Idaho market provides the company with excellent market knowledge and a very strong provider network.
Fitch revised the Rating Outlook on BCI's rating to Negative from Stable on Feb. 19, 2016, reflecting deterioration in the company's operating performance driven primarily by its participation in Idaho's state-based health insurance exchange associated with the Patient Protection and Affordable Care Act (ACA), weakness in its Medicare operations due to higher administrative costs and lower reimbursement rate increases, and a decline in the quality of the company's investment portfolio.
BCI has experienced utilization rates for exchange members that have been significantly above assumptions initially used to price policies offered on the exchange, leading to underwriting losses on this business. Similar experience has been reported by other participants in ACA-related business not only in Idaho, but in many other states. The company implemented significant rate increases on its exchange business in both 2015 and 2016 in an effort to bring pricing in line with developing claims experience; however, like many companies participating on exchanges across the United States, BCI continues to face profitability pressures on such business. Favorably, profitability in the company's Medicare business has improved significantly in 2016 relative to the same period in 2015, which has resulted in the company reporting a consolidated statutory underwriting gain of approximately $15 million in first-half 2016 (IH16) compared with an underwriting loss of approximately $20 million in 1H15.
Fitch views BCI's current capital strength, as measured by risk-based capital (RBC) and managed care premiums-to-equity ratios, to be strong and consistent with 'AAA' rating category guidelines. At year-end 2015, BCI's consolidated NAIC RBC ratio was a strong 401% of the company action level, down from 469% at year-end 2014.
Fitch considers the moderate improvement over the past year in BCI's asset risk profile, specifically a reduction in the company's allocation to below investment grade (BIG) bonds and common equity exposure, to be a favorable credit development. Fitch believes that the moderate decline in the company's risk adjusted capitalization over the past few years reduced the loss absorption buffer that has historically existed in the company's capital structure. At June 30, 2016, Fitch estimates that BIGs accounted for approximately 14% of BCI's consolidated bond portfolio and approximately 13% of the company's capital and surplus. This is down from 21% and 16%, respectively, at year-end 2014. Over this time period, the company's reported allocation to common stock declined from 40% of cash and invested assets to 25%.
RATING SENSITIVITIES
From a rating perspective, Fitch views BCI's concentrated market position in Idaho and comparatively small size and scale as limiting factors. Fitch believes that these characteristics leave the company more susceptible to earnings and capital volatility relative to its more geographically diversified peers. 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 without adversely affecting the company's balance sheet strength and profitability.
Key ratings triggers that could lead to a downgrade include significant deterioration in operating performance, RBC below 300%, BIG bonds and common stock investments exceeding 50% of TAC, 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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following rating with a Negative Outlook:
Blue Cross of Idaho Health Service, Inc.
--IFS rating at 'A-'.
Additional information is available at www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 15 Sep 2016)
https://www.fitchratings.com/site/re/887191
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