Fitch Rates Blue Shield of California ‘A’; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'A' Insurer Financial Strength (IFS) rating to California Physicians' Service, which conducts business as Blue Shield of California (BSC). The Rating Outlook is Stable.

The rating reflects the company's solid competitive position in the California health insurance market, robust capitalization and solid underlying profitability. The rating also reflects risks derived from the company's concentrated focus on the California health insurance market, such as heightened exposure to fiscal, competitive and general economic conditions in the state.

BSC has a solid competitive position with a market share that corresponds to Fitch's 'medium' market share guideline. The company's market share is bolstered by its ability to use the Blue Shield brand. Based on 2011 enrollment statistics and excluding specialty dental, vision and behavioral health plans, BSC is the third largest health insurance and managed-care company in California.

In terms of sheer size and scale, and using medical membership and revenues as measurement metrics, BSC straddles Fitch's 'modest' and 'small' 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.

BSC maintains very strong capitalization that is a key factor underlying its rating. The company does not have any outstanding debt and it uses comparatively little asset and reserve leverage. Risk-based capital (RBC) ratios are very strong; BSC's 2008 - 2011 average RBC ratio was well in excess of Fitch's median guideline for the company's current ratings. Additionally, the quality of the company's balance sheet is high and is characterized by a modest goodwill asset, a high-quality investment portfolio, and modest future commitments on capital.

Fitch considers BSC's profitability to be solid with 2007 - 2011 EBITDA / revenue averaging 4%. The agency anticipates that the company's returns will decline going forward as BSC has pledged to limit profitability to 2% of revenues and in 2011 began returning profits in excess of this cap to policyholders in the form of premium credits and to the community in the form of grants and contributions. Fitch's expectation is that despite this pledge, BSC's capital base will grow at a rate that is sufficient to support growth in the company's premiums, assets, and liabilities.

Fitch's view is that BSC's concentrated single-state operating profile will make it very difficult for the company to obtain an Insurer Financial Strength (IFS) rating higher than the 'A' rating category. Fitch believes that single state concentrations such as BSC's result in exposure to economic and political conditions that limit health insurance and managed care companies' feasible strategic alternatives and expose their capital bases to concentrated risks.

Factors 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 bases.

Factors that could lead to a rating downgrade include:

--BSC losing the right to use the Blue Shield name and trademarks in California 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 capital for a multi-year period or the company incurring large losses in capital that reduced its run-rate risk-based capital ratio below 350%, could lead to rating downgrades.

Fitch has taken the following rating action:

California Physicians Service dba Blue Shield of California:

--IFS 'A'; Outlook Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011);

--'Health and Managed Care (U.S.) Sector Credit Factors Special Report' (March 28, 2012).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

Health Insurance and Managed Care (U.S.) Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=674555

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Fitch Ratings
Primary AnalystMark RouckSenior Director
+1-312-368-2085
Fitch, Inc.
70 West Madison Street
Chicago, IL 60602
or

Secondary Analyst (Insurance)Doug PawlowskiSenior Director
+1-312-368-2054
or
Committee ChairpersonJulie BurkeManaging Director
+1-312 368 3158
or
Media Relations:Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Source: Fitch Ratings