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Fitch Affirms Blue Shield of California's IFS at 'A'; Outlook Remains Negative
May 25, 2017 / 3:45 PM / 7 months ago

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

(The following statement was released by the rating agency) CHICAGO, May 25 (Fitch) Fitch Ratings has affirmed Blue Shield of California's (BSC) Insurer Financial Strength (IFS) rating at 'A' (Strong). The Rating Outlook remains Negative. Today's rating action completes a periodic review of BSC's rating. Key factors considered in BSC's rating include the company's very strong capitalization and leverage characteristics, overall good earnings, and strong business profile. The Negative Outlook reflects BSC's declining earnings trend and the suppressive effect it has had on the company's ability to restore its risk based capitalization to levels supportive of a Stable Outlook. KEY RATING DRIVERS Fitch views BSC's capitalization and leverage metrics to be very strong. Key factors underlying this view are the company's very strong risk-based capitalization, moderate use of operating leverage and lack of financial leverage. BSC's risk-based capital ratio improved in 2016 due to earnings and to lower risk charges for affiliated company and underwriting risk as BSC began writing business that had previously been written by an affiliate and changed the way it includes certain contracts with risk-sharing components in its risk-based capital calculation. The company's ratio of premiums to stabilization fund excluding goodwill was 6.0x at year-end 2016, which is consistent with 'A' IFS category guidelines. Fitch anticipates this ratio declining moderately in 2017. Fitch characterizes BSC's financial performance and earnings as good. The company's 2014-2016 average medical benefit, EBITDA-to-revenues and annualized net return on average capital ratios were 83.7%, 3.4% and 2.7% respectively, which collectively, are consistent with Fitch's 'BBB' IFS rating category guidelines. BSC's 2016 operating EBITDA (which excludes net realized gains and losses and impairment charges) declined to $306 million from $331 million in the prior year while pre-tax operating income declined more significantly falling to $111 million from $194 million. The declines reflect higher than expected utilization in the company's individual business, and to a lesser extent, in portions of the company's employer group business. BSC's revenue growth has been strong in recent years derived primarily from Medicaid enrollment related to the company's 2015 acquisition of Care1st and individual enrollment sourced from the California health insurance exchange. Fitch believes that BSC has a strong business profile. Key contributing factors include the diversity of the company's enrollment by business line, large market share and significant scale benefits. Also considered are the concentration risks associated with BSC's concentrated enrollment in a single state (California). At year-end 2016 the majority of BSC's enrollment was derived from employer group business but meaningful components were derived from individual, Medicaid/MediCal (through the company's Care1st subsidiary) and Medicare contracts. Fitch views diverse enrollment favorably because it reduces reliance on any single market segment. BSC maintains a large market share in California where based on enrollment data, Fitch estimates the company is the third largest health insurer in California. With enrollment of roughly 3.9 million and 2016 operating revenues (premiums and fees) of $17.6 billion, Fitch believes that BSC has the scale necessary to maintain competitive provider networks and expense efficiency. Fitch considers quality and liquidity characteristics of BSC's investment portfolio to be strong. At year-end 2016 the company's cash and invested assets consisted of 64% fixed maturities securities, 21% equities and 15% cash and equivalents. The company's ratio of 'risky' assets (viewed by Fitch as investments in equity securities, bonds with below-investment grade ratings and alternative investments) was equal to 23% of BSC's stabilization fund at year-end 2016, which is consistent with Fitch's 'AA' IFS rating category guideline. Fitch believes that BSC's operating cash flows,cash generated from investments and access to a bank credit facility provide solid liquidity. RATING SENSITIVITIES Rating triggers that could lead to a rating downgrade: --A year-end 2017 RBC ratio (company action level basis) meaningfully below 350%; --Failing to generate an improved 2017 financial performance. Fitch would view a 2017 medical benefit ratio meaningfully higher than 85%, pre-tax operating income (excluding one-time items and net realized gains and losses and investment related impairment charges) meaningfully lower than $250 million and a net return on average capital meaningfully below 4% as indicators of a failure to improve 2017's financial performance. Rating Triggers that could lead to a return to a Stable Rating Outlook: --Generating a year-end 2017 RBC ratio that exceeds 350%; --Generating a year-end 2017 RBC ratio that falls moderately short of 350% but is accompanied by improved financial performance evidenced by a medical benefit ratio approximating 85%, pre-tax operating income (excluding one-time items and net realized gains and losses and investment related impairment charges) approximating $250 million, and a net return on average capital approximating 4%. Fitch has affirmed the following rating with a Negative Rating Outlook: Blue Shield of California --Insurer Financial Strength at 'A'. 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 +1-312-368-3146 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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