Jan 29 - Fitch Ratings has affirmed Health Care Service Corporation's (HCSC)
Insurer Financial Strength Rating (IFS) at 'A+', its long-term Issuer Default
Rating (IDR) rating at 'A', and the 'A' rating on the company's $500 million
issue of 4.70% senior unsecured notes due Jan. 15, 2021. The Ratings Outlooks
HCSC's ratings are founded on its strong competitive position, benefits derived
from its Blue Cross and Blue Shield license, conservatively structured balance
sheet strength and solid earnings profile. The rationale also considers HCSC's
significant reliance on its two key markets of Illinois and Texas.
HCSC is a leading provider of health insurance and managed care services in
Illinois, Texas, New Mexico, and Oklahoma. It is the nation's fourth-largest
health insurer and the largest nonpublic health insurer with greater than 13
A key competitive advantage is the company's exclusive right to use Blue Cross
and Blue Shield (Blues) trademarks in HCSC's four core states. In addition,
access to Blue Card, the Blue Cross Blue Shield Association's (BCBSA) national
account platform, has helped establish and grow HCSC's leading market position.
HCSC has a conservative balance sheet measured by strong statutory
capitalization, modest financial leverage and a high quality, liquid investment
portfolio. HCSC's NAIC RBC ratio was 613% of the company action level (CAL) at
year-end 2011 and is expected to remain near that level at the end of 2012.
Surplus increased by greater than 7% or $632 million to $9.5 billion through the
first nine months of 2012.
Debt to total capital as of Sept. 30, 2012 was 5%, which is considered very
modest for both the current rating category and the entire market sector. The
company has $500 million in senior unsecured debt with 4.7% coupon maturing in
Investment grade, publicly traded fixed income securities amounted to 83% of
HCSC's total investment portfolio at yearend 2011, exemplifying the company's
conservative investment strategy. HCSC's bond portfolio is primarily invested in
short term securities, greater than 80% of bonds had maturities less than 5
years, enhancing the company's ability to reinvest if interest rates increase.
However, the investment yield was less than 1%, exposing the negative aspects of
its short term investment strategy. HCSC's below investment grade bonds and
unaffiliated common stock investments amounted to less than 7% of surplus and
capital, comparing favorably to Fitch's median guidelines for the next higher
HCSC's annualized return on capital was considered strong at 12.5% through the
first nine months of 2012. Return on capital at this level is even more
impressive given the company's conservative capital position. HCSC's EBITDA
margin was 7.8% through Sept. 30, 2012, which is consistent with Fitch's median
guideline for the current rating category. The margin remains nearly unchanged
from the full year 2011 and continued to be largely driven by lower than
expected medical services utilization.
HCSC's revenue continues to be concentrated in the two significantly larger
states of Illinois and Texas, amounting to nearly 89% of total revenue through
the first three quarters of 2012. The lack of geographic diversity is a factor
in limiting HCSC's upward ratings movement.
The key rating triggers that could result in an upgrade include:
--Measured and profitable revenue diversification that reduces the company's
reliance on key markets of Illinois and Texas.
--Improvement in EBITDA margin to 9% or better.
The key rating triggers that could result in a downgrade include:
--An RBC ratio decline below 350% or a significant increase in financial
leverage above 15%.
--Sustained operating losses or a consistently lower level of profitability
measured by return on surplus below 5%.
--HCSC losing the ability to market itself as a Blues plan could result in a
Fitch affirmed the following ratings:
Health Care Service Corporation
--IFS at 'A+'; Stable Outlook;
--IDR at 'A'; Stable Outlook;
--$500 million 4.7% senior notes due January 2021 at 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors. The
issuer did not participate in the rating process, or provide additional
information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (Jan. 29,
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
Health Insurance and Managed Care (U.S.)