A.M. Best Assigns Ratings to Blue Cross and Blue Shield of Nebraska

A.M. Best Co. has assigned a financial strength rating of A (Excellent) and an issuer credit rating of “a” to Blue Cross and Blue Shield of Nebraska (BCBSNE) (Omaha, NE). The outlook assigned to both ratings is negative.

The ratings of BCBSNE reflect its superior level of capitalization, growing membership and strategic focus on operational efficiency and cost control. BCBSNE has historically maintained a very high level of capital and surplus, supported by both underwriting gains and stable investment income. Though the level of capitalization has been declining over the last five years, the current risk-based capital of 1644% is the highest among all the Blue Cross Blue Shield plans. BCBSNE continues to maintain such a high level of reserves, while fully insured premium grew 56% for the last five years, driven by strong membership growth achieved through new products offering, enhanced distribution strategy as well as increased focus on small group market. BCBSNE remains committed to cost control that should allow the company to maintain financial strength.

The negative outlook recognizes the decline in underwriting earnings and increased business transformation expenses. Despite its history of strong operating performance, during 2007 BCBSNE posted its first underwriting loss in five years. The loss was driven mainly by worse than expected results in individual lines of business. The company implemented corrective actions, and the underwriting results in the non-group sector are expected to improve. However, during the first six months of 2008, the medical loss ratio in both large and small groups deteriorated, leading to lower underwriting gains. Furthermore, although the administrative expenses have been stable over the last several years, BCBSNE plans major business transformation expenses, mainly related to system conversion, starting in late 2008/2009. A.M. Best is concerned that the significant increase in administrative costs combined with a growing medical loss ratio in group lines of business may put pressure on financial results and limit BCBSNE’s ability to further grow its capital and surplus.

For Best’s Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.