Fitch Affirms Blue Cross of Idaho’s IFS at ‘A-‘

The following is from Fitch Ratings on April 21:

Fitch Ratings has affirmed Blue Cross of Idaho Health Service, Inc.'s (BCID) 'A-' Insurer Financial Strength (IFS) rating. The Rating Outlook is Stable.

KEY RATING DRIVERS

Fitch's rating on BCID reflects the company's very strong competitive position in the Idaho health insurance market, excellent risk-adjusted capitalization, solid balance sheet, and stable record of operating performance. The rating also reflects the company's limited geographic diversification, small scale relative to national and multi-state competitors, and uncertainty derived from the evolving regulatory environment.

BCID's primary business is selling health insurance products and services in the state of Idaho under the Blue Cross trademark. The company has a leading market position in the state of Idaho, providing health insurance coverage to approximately 500,000 medical and 313,000 stand-alone dental members as of Dec. 31, 2014.

Fitch views the company's right to use the Blue Cross trademark as a significant competitive advantage in the Idaho health care market. In addition, BCID's long-term presence and broad coverage in the Idaho market provides the company with excellent market knowledge and a very strong provider network.

Based on Fitch's sector credit factors for the U.S. Health Insurance and Managed Care industry, Fitch considers BCID's lack of scale and geographic concentration as implying an IFS rating of 'BBB'. BCID's small size is partially offset by the company's dominant market position in Idaho.

Fitch views BCID's historical financial performance and profitability, as measured by EBITDA margins and net returns on average capital, to be consistent with an IFS rating of 'A'. However, over the next 2-3 years, Fitch believes that BCID's financial performance is more likely to be reflective of an IFS rating of 'BBB'.

In the case of BCID, Fitch believes that near-term margin compression and declines on overall profitability could be pronounced if the company successfully grows its government- sponsored and individual business. This is due to increased costs related to the Affordable Care Act of 2010 (ACA) and because these businesses typically operate at lower margins than group business, which currently represents the bulk of BCID's operating portfolio. Fitch believes that an exchange-driven underwriting loss generated by the company in 2014 will be improved in 2015 through knowledge gained from utilization data from the company's exchange members.

Fitch views BCID's current capital strength, as measured by risk- based capital (RBC) and managed care premiums to equity ratios, to be very strong and consistent with an 'AAA' rating level. At year- end 2014 BCID's NAIC RBC ratio was a very strong 505 percent of the company action level.

Looking over the next 12-24 months, Fitch expects BCID's capital to grow at a slower rate than premiums, if the company continues to grow its membership in the individual and Medicare/Medicaid markets as planned.

Fitch therefore anticipates a continued modest decline in BCID's risk-adjusted capitalization, but expects it to remain supportive of at least an 'AA' rating category. Specifically, BCID's asset and premium leverage ratios are likely to rise from recent low levels, while the RBC ratio could decrease closer to 400 percent over the next few years.

Fitch's Stable Outlook reflects the agency's expectation that BCID's very strong RBC levels and dominant market position in Idaho will allow the company's ratings to absorb an expected decline in margins and overall profitability in the next 12-24 months. BCID has no material debt outstanding and no goodwill on its balance sheet.

RATING SENSITIVITIES

From a rating perspective, Fitch views BCID's concentrated market position in Idaho and comparatively small size and scale as limiting factors. These characteristics, along with its geographic concentration in a single state, leave the company more susceptible than geographically diversified peers to earnings and capital volatility.

Fitch therefore believes that a ratings upgrade is unlikely in the absence of a transformational event that reduces the company's exposure to its single market and enhances the overall size and scale of the company's operations while maintaining the company's balance sheet strength and profitability trends.

Key ratings triggers that could lead to a downgrade include a sustained earnings decrease that weakens RBC below 300 percent, significant enrollment losses that materially erode the company's current market share, or the loss of the right to use the Blue Cross trademark and brand.

Fitch has affirmed the following rating with a Stable Outlook:

Blue Cross of Idaho Health Service, Inc.

--IFS rating at 'A-'.

Additional information is available at 'fitchratings.com'

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014);

--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (January 2015).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=756650

Health Insurance and Managed Care (U.S.)

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=855328

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=983348

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