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Rating Action:

Moody's downgrades Health Care Service Corporation's ratings by one notch, outlook stable; assigns ratings to new debt

26 May 2020


New York , May 26, 2020 -- Moody's Investors Service has downgraded the issuer rating and insurance financial strength (IFS) rating of Health Care Service Corporation (HCSC) to A3 and A2, respectively, from A2 and A1. In the same action, Moody's has assigned an A3 senior unsecured debt rating to HCSC's anticipated issuance of senior unsecured debt. The outlook on HCSC is stable.

RATINGS RATIONALE

The downgrade reflects our view that, in spite of the company's new leadership team and strategic direction, including a focus on growing the government business and developing its pharmacy capabilities, the company will continue to experience low single digit EBITDA margins driven by ongoing normalization in the individual market and high utilization and medical costs as the company grows market share. While enrollment growth in the government business has been strong in recent years, driven by Medicaid, underwriting gains have been lackluster due to high medical and administrative costs. We believe it will take some time for HCSC to refine its overall management of the government business and achieve cost efficiencies.

HCSC remains a very highly rated health insurer with considerable strengths including significant scale in the commercial business, a solid capital position, low financial leverage, and a high percentage of tangible equity. Moody's added, a key strength of HCSC continues to be the Blue Cross and Blue Shield brand and license under which it markets its products in Illinois, Texas, New Mexico, Montana, and Oklahoma which has helped the company to command a top market position in each of these states.

The financial impact of the coronavirus on health insurers in 2020 is highly uncertain and will depend on the pandemic's severity and duration. In the near term, given its fairly high proportion of administrative services only business, HCSC will benefit less than its peers from the deferral of nonessential procedures resulting from the coronavirus outbreak and related lockdown. Further, the spike in unemployment caused by the lockdown will likely have an adverse impact on HCSC's membership because of its commercial focus.

Following the anticipated debt issuance, leverage will be higher prospectively, but still at a modest level. In Q1 2020, HCSC had $1.75 billion drawn under its secured borrowing facility with the Federal Home Loan Bank (FHLB) of Chicago to deal with potential coronavirus related contingencies such as accelerating claims payments to providers and extending grace periods for client premium payments. The company expects to use net proceeds from its senior unsecured debt issuance to repay a portion of its existing borrowings from the FHLB and for other general corporate purposes. Liquidity will continue to be supported by the company's FHLB facility as well as a five-year $400 million unsecured revolving credit facility (not drawn) maturing in October 2021.

HCSC's credit strengths are tempered by the company's limited geographic area of operation, heightened industry risks for healthcare benefits companies, including federal and state health reforms, and -- albeit to a much lesser degree than previously -- by uncertainty with regard to the profitability of individual policies sold as part of the Affordable Care Act (ACA) due to unanticipated changes in regulations. In addition, HCSC and the health insurance sector as a whole will continue to be exposed to the potential risk of rising healthcare cost trends.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's stated that due to the downgrade, an upgrade for HCSC is unlikely in the near term; however, the following could result in an upgrade: 1) EBITDA margins in the 8% range or above, 2) sustained net annual organic membership growth of 2% or more, while maintaining profitability and 3) profitable geographical expansion. Conversely, the rating agency noted that the ratings could be downgraded if: 1) the RBC ratio falls below 400% CAL, 2) financial leverage rises above 30%, or 3) HCSC pursues M&A that presents significant integration challenges.

Moody's has taken the following rating actions:

Health Care Service Corporation -- long-term issuer rating downgraded to A3 from A2; insurance financial strength rating downgraded to A2 from A1.

Moody's has assigned the following ratings:

Health Care Service Corporation -- senior unsecured debt ratings at A3

Outlook actions:

.. Issuer: Health Care Service Corporation

… Outlook, remains stable

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations.

Health Care Service Corporation, a Mutual Legal Reserve Company has its headquarters in Chicago, Illinois. The company does business as Blue Cross Blue Shield of Illinois, Blue Cross Blue Shield of Texas, Blue Cross Blue Shield of New Mexico and Blue Cross Blue Shield of Oklahoma. For the twelve months ended March 31, 2020, the company reported premium revenues of $10.6 billion, consolidated statutory surplus of $18.3 billion and total medical membership (excluding BlueCard and Medicare Part D) of approximately 16.5 million.

The principal methodology used in these ratings was US Health Insurance Companies Methodology published in November 2019 available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187569 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stefan Kahandaliyanage, CFA
AVP-Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Scott Robinson, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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