A.M. Best Comments on Ratings of Blue Shield of California and Its Subsidiary Following Acquisition Announcement

OLDWICK, N.J.--()--A.M. Best has commented that the financial strength rating of A (Excellent) and the issuer credit ratings of “a” of California Physicians’ Service (d/b/a Blue Shield of California) (Blue Shield) and its wholly owned life/health insurance subsidiary, Blue Shield of California Life & Health Insurance Company (Blue Shield Life), are unchanged following the announcement that Blue Shield has entered into a definitive agreement to acquire Care1st Health Plan, Inc. (Care1st) (Monterey Park, CA). The acquisition is expected to close in the second half of 2015. All companies are domiciled in San Francisco, CA, unless otherwise stated.

Blue Shield is expected to fund the purchase of Care1st through cash and investments. The immediate financial impact of the transaction on Blue Shield is expected to be offset by its ability to add to its earnings and diversification profile going forward. Upon the close of the transaction, A.M. Best anticipates that Blue Shield would retain Care1st’s experienced senior management team and also control the election of Care1st board members.

A.M. Best’s comment takes into consideration Blue Shield’s planned decline in capitalization relative to its historically strong levels, reduced financial flexibility, increased goodwill to capital ratio, as well as its favorable underwriting results and its dedication to achieving affordable health care for its members. A.M. Best expects that Blue Shield’s execution of integrating the acquisition of Care1st into its operations would enhance the organization’s market position by diversifying its products into the large and growing Medicaid/MediCal market. This acquisition is in line with the organization’s strategic growth initiatives and could also position Blue Shield to further increase the overall organization’s enrollment and revenue base.

A.M. Best expects Blue Shield to continue to maintain its favorable operating margins in its core business, as well as continuing to meet target margins at Care1st, consistent with Blue Shield’s projections. Although the acquisition will impact the organization’s overall risk-adjusted capitalization, it is anticipated that Blue Shield will continue to maintain an adequate level of capital with the integration of the new company and meet its projections for bolstering its capitalization going forward. A.M. Best will continue to monitor Blue Shield’s capability to successfully manage these new business risks, as well as Care1st’s ability to add to the organization’s overall enrollment, operating performance and capitalization.

Care1st is a for-profit, provider-founded managed care company based in Los Angeles County in California, serving Medicaid and Medicare members. The company has a well-positioned presence in government-funded programs with more than 500,000 members, of which a significant number of them are in the Medicaid and Medicare Advantage programs. However, these government-sponsored programs generally report lower operating margins than the commercial market segment and are also subjected to greater regulations, reviews and changes to reimbursement levels. Care1st has been successful at managing its core government businesses, producing favorable operating results in recent years and has been in operations for 20 years. It is Blue Shield’s intention to convert Care1st to a not-for-profit mutual benefit corporation and operate the combined entity consistent with Blue Shield’s 2% pledge. A.M. Best anticipates that the new company will bolster the operating profile of Blue Shield going forward, and that Care1st will be able to enhance its position as part of a much larger organization to manage the cost of health care and administrative expenses, thereby improving its earnings potential in the near-term future. Although Care1st primarily serves members in California, it also has a presence in Arizona and Texas.

The transaction is subject to regulatory approvals from California, Arizona and Texas, as well as clearance from certain federal agencies. A.M. Best will continue to discuss the many aspects of the transaction, which have yet to be finalized, and the ultimate impact on the risk-based capital calculation, as well as other financial and operating metrics. The current ratings of Blue Shield and its subsidiaries will be re-evaluated should the transaction fail to close as anticipated or there are any major divergences from A.M. Best’s expectations.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

  • Rating Members of Insurance Groups
  • Risk Management and the Rating Process for Insurance Companies
  • Understanding BCAR for U.S. and Canadian Life/Health Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Jennifer Afriyie
Financial Analyst
(908) 439-2200, ext. 5203
jennifer.afriyie@ambest.com
or
Christopher Sharkey
Manager, Public Relations
(908) 439-2200, ext. 5159
christopher.sharkey@ambest.com
or
Joseph Zazzera, MBA
Assistant Vice President
(908) 439-2200, ext. 5797
joseph.zazzera@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
james.peavy@ambest.com

Contacts

A.M. Best
Jennifer Afriyie
Financial Analyst
(908) 439-2200, ext. 5203
jennifer.afriyie@ambest.com
or
Christopher Sharkey
Manager, Public Relations
(908) 439-2200, ext. 5159
christopher.sharkey@ambest.com
or
Joseph Zazzera, MBA
Assistant Vice President
(908) 439-2200, ext. 5797
joseph.zazzera@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
james.peavy@ambest.com