Press Release - SEPTEMBER 20, 2018
A.M. Best Revises Outlooks to Positive for Health Care Service Corporation and Its Subsidiaries
FOR IMMEDIATE RELEASE
OLDWICK - SEPTEMBER 20, 2018
The ratings reflect HCSC’s balance sheet strength, which A.M. Best categorizes as strongest, as well as its marginal operating performance, favorable business profile and appropriate enterprise risk management.
The outlook revisions to positive reflect substantial strengthening of underwriting results over the last two years and the expectation of further revenue and earnings growth in the near to medium term. HCSC’s financial results improved on corrective action taken within its individual segment through rate increases, product modifications and operating expense reduction. A.M. Best expects HCSC’s underwriting and operating results to improve further in 2018, as medical cost trends continue to moderate and the company implements additional enhancements to its business model and product portfolio. In addition, the organization’s earnings in 2018 and 2019 will be impacted positively by elimination of the alternative minimum tax (AMT) as part of the Tax Cuts and Jobs Act passed in December 2017.
HCSC continues to maintain a more-than-sufficient level of risk-adjusted capitalization in support of its business and investment risks. HCSC’s capital and surplus reported growth of more than 25% during 2017, driven by robust earnings and unrealized gains, as well as the positive impact related to elimination of the AMT, which translated to $800 million. During 2018, capital and surplus has continued to increase, driven by stronger-than-expected earnings. A.M. Best expects the capital growth will continue to outpace the premium expansion, resulting in further strengthening of risk-adjusted capitalization. The organization’s financial flexibility is enhanced through access to $1.1 billion of Federal Home Loan Bank (FHLB) borrowing and a $400 million line of credit with eight banks. In 2017, HCSC called $315 million of its remaining senior notes due in 2021. The only outstanding debt at year-end 2017 was $1.1 billion of FHLB borrowing with financial leverage at 8.1%, which A.M. Best considers low when compared with peers. In addition, HCSC reduced its exposure to the high amount of receivables from the Illinois after the state took measures to finance its obligations and HCSC entered into agreements with external third parties to sell the receivables.
Additionally, HCSC benefits from its well-established market presence and leading overall market share in each of the five states in which it operates. Furthermore, HCSC has reported consistent enrollment gains in its group market and government sector business. The organization benefits from the growth of Blue-branded and non-branded ancillary products offered through Dearborn National companies. The Dearborn National companies contribute favorably to the overall organization, reporting positive operating results for the past three years.
Offsetting rating factors include recent overall underwriting losses and continuous weak earnings in government business. HCSC recorded more than $1 billion underwriting losses from 2014 through 2016, primarily related to individual market results. While earnings improved substantially after 2016, HCSC’s longer-term profitability trends remain below peers. HCSC has posted negative earnings in government lines of business over the last several years, and A.M. Best anticipates that the organization’s low Star ratings and lack of operational efficiency for Medicare Advantage and Medicaid products will continue to pressure results. HCSC is working to strengthen its capabilities for government business, as the organization remains committed to expanding this segment in its core geographies.
The outlooks have been revised to positive from stable, with the FSR of A (Excellent) and the Long-Term ICRs of “a+” affirmed for Health Care Service Corporation, a Mutual Legal Reserve Company and its following subsidiaries:
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