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Fitch Affirms Blue Shield of California's IFS at 'A'; Outlook Stable
May 30, 2013 / 8:03 PM / 4 years ago

Fitch Affirms Blue Shield of California's IFS at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 30 (Fitch) Fitch Ratings has affirmed Blue Shield of California's (BSC) Insurer Financial Strength (IFS) rating at 'A'. The Rating Outlook is Stable. KEY RATING DRIVERS Today's affirmation follows a periodic review of BSC's rating and recent financial performance. The rating action reflects the company's strong competitive position and large market share in California, capitalization metrics that are better than median guidelines for the current rating, and ratings benefits derived from the company's overall high-quality balance sheet. BSC's rating also reflects the company's size and scale characteristics which Fitch considers comparatively small in relation to those of many publicly-traded competitors and the impact of BSC's single-state focus. Additionally, the rating considers the uncertain impact that portions of the Affordable Care Act (ACA) scheduled to be implemented in 2014, such as the individual mandate and California insurance exchange formation, could have on BSC's core employer-group market. Fitch's expectation is that BSC's 2013 financial results will approximate 2012's, reflecting modestly higher utilization and generally consistent cost trends. Going forward into 2014, Fitch believes that BSC's margins will be modestly pressured by the loss of the exclusive nature of the company's contract with the California Public Employees Retirement System (CALPERS). BSC's 2012 financial results generally trailed 'A' rating category guidelines but were consistent with Fitch's expectations given the company's status as a non-profit company and BSC's policy of limiting annual net earnings to two percent of revenues. BSC reported $204 million of net income in 2012 on $10.5 billion of revenues. Fitch calculates the company's 2012 medical claim ratio at 85.1% and EBITDA-to-revenue margin at 3.6%. Based on metrics such as state-wide direct premiums and enrollment, Fitch considers BSC the third-largest health insurer and managed-care company in California. The company's large market share is bolstered by its ability to use the Blue Shield brand, which Fitch believes is highly-recognized and favorably-viewed by consumers. BSC maintains very-strong capitalization metrics that exceed median guidelines for the 'A' rating category. The company has no outstanding debt and is able to fund its current operations internally. Risk-based capital ratios are very strong and asset and reserve leverage is low. Fitch's expectation is that BSC's stabilization fund (i.e. net worth) will continue to grow at a rate that is commensurate with premium, assets and reserves. Fitch considers the quality of BSC's balance sheet to be strong and characterized by a high quality and liquid fixed maturities portfolio, stable claim reserves, and relatively few potential claims on the company's capital. Like many Blue Cross/ Blue Shield licensees, BSC has a higher allocation to equity investments than publicly-traded competitors. However, Fitch believes that the company maintains the capital strength to ride-out reasonably-foreseeable equity market downturns. In terms of size and scale, and using medical membership and revenues as measurement metrics, BSC overlaps Fitch's 'small' and 'medium' categorizations. Fitch typically uses medical membership and revenues as key size/scale metrics because it believes that they have a significant impact on a company's ability to realize scale benefits and ultimately influence earnings and capital formation. Fitch believes that BSC's concentrated focus on the California market, where the company generates essentially all of its revenues and earnings, makes it very difficult for BSC to obtain an IFS rating higher than the 'A' rating category. Fitch's view is that single-state concentrations result in exposure to economic and political conditions that limit feasible strategic alternatives and expose companies' capital bases to concentrated risks. RATINGS SENSITIVITIES Rating triggers that could lead to a rating upgrade within the 'A' rating category include: --Market share gains within the company's core California market; --Enhanced size and scale of BSC's revenue and earnings base; --Run-rate EBITDA/revenue and net income/average capital ratios that more closely approximate Fitch's 'A' rating category guidelines of 7% while maintaining risk-based capital ratios (company action level basis) greater than 350%. Rating triggers that could lead to a rating downgrade: --BSC losing the ability to market itself as a Blue Shield company could result in a multi-notch downgrade; --BSC choosing to price its products such that premiums, assets, and liabilities grew at materially faster rates than its stabilization fund for a multi-year period; --Losses in capital that reduced run-rate risk-based capital ratio below 350%; --Run-rate ratios of premiums to stabilization fund (i.e. net worth) that exceed 5.0x. Fitch has affirmed the following rating: California Physicians Service dba Blue Shield of California, --IFS rating at 'A'; Outlook Stable. Contact: Primary Analyst Mark Rouck CPA, CFA Senior Director +1-312-368-2085 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Doug Pawlowski, CFA Senior Director +1-312-368-2054 Committee Chairperson Julie Burke, CPA, CFA Managing Director +1-312-368-3158 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (January 2013); --'Health and Managed Care (U.S.) Sector Credit Factors Special Report' (January 2013). Applicable Criteria and Related Research: Insurance Rating Methodology — Amended here Health Insurance and Managed Care (U.S.) here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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