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Rating Action:

Moody's rates Medical Card System's senior bank debt B2

12 Aug 2010

$175 million secured bank facility rated

New York, August 12, 2010 -- Moody's Investors Service has assigned a B2 senior secured debt rating to Medical Card System, Inc.'s (MCS's) $175 million five-year bank term loan. The proceeds of the issuance will be used to fund a special dividend to stockholders, repay existing indebtedness, and for general corporate purposes. In the same rating action, Moody's has also assigned a B2 corporate family rating to MCS and a Ba2 insurance financial strength (IFS) rating to MCS's regulated operating subsidiary, MCS Advantage, Inc. The outlook on the ratings is stable.

MCS is a privately-owned company incorporated and headquartered in Puerto Rico. Through its three insurance operating subsidiaries, the company offers insurance coverage and products to the residents of Puerto Rico. MCS Advantage, Inc., the largest operating subsidiary, offers Medicare Advantage Plan and Prescription Drug Program insurance coverage pursuant to contracts with Centers for Medicare and Medicaid Services (CMS). The other operating subsidiaries provide comprehensive healthcare services under the Puerto Rico Health Reform Program (Medicaid) and group life and health insurance products for groups and individuals in the commercial market. During 2009, approximately 53% of MCS's premiums were generated from its Medicare Advantage business while 34% was from its Medicaid operations.

Moody's stated that the Ba2 IFS and B2 senior debt ratings reflect the relatively small size of MCS and its geographic concentration, with 100% of its revenues being generated in Puerto Rico. The ratings also reflect the company's high concentration of business in a handful of government contracts (i.e. Medicare and Medicaid). The rating agency noted that the loss or impairment of one of these contracts would have a considerable impact on the revenues and earnings of the company.

In addition, Moody's pointed out that MCS's business profile benefits from its leading market share in managed care in Puerto Rico, measured by premiums, and its number one or number two market position in each of its Medicare, Medicaid, and commercial business segments, based on both premiums and membership. The company also has one of the largest networks of physicians and facilities in Puerto Rico, having contracts with over 13,000 primary care physicians, specialty care physicians and ancillary physicians and 66 hospitals.

The rating agency added that the ratings also reflect the negative impact on financial flexibility of the $175 million bank term loan, which will result in an expected debt to EBITDA ratio in a range between 1.6x and 2.0x and result in negative shareholders' equity as a majority of the proceeds will be used to pay a dividend to stockholders. While the company currently meets the regulatory capital requirements in Puerto Rico, MCS's consolidated capital adequacy on an NAIC risk-based capital (RBC) ratio basis is considered by Moody's to be relatively weak at less than 100% of company action level (CAL). It should be noted that in 2014 the regulatory requirements in Puerto Rico will step up to the 100% CAL level. Somewhat offsetting these considerations, however, is the company's relatively solid after-tax profit margins, which have averaged 2.7% over the last three years.

Moody's said its ratings are based on the expectation that there are no changes or impairments in MCS's Medicare Advantage contracts with the Centers for Medicare and Medicaid Services (CMS) or Puerto Rico Health Reform Program contract with the Puerto Rico Health Insurance Administration.

Moody's stated that the ratings could move up if the consolidated RBC ratio increases above 100% of company action level, if the debt to EBIT ratio is sustained below 2x, if net earnings margins were to be consistently in the 3% range, and if the company increased the percentage of its earnings derived from commercial business. However, if there were a loss of membership of 10% or more in any year, if the company's consolidated RBC ratio falls below 50% of company action level, if net margins fall below 1%, or if there is a loss or impairment of one of the government contracts, then Moody's said the ratings could be moved down.

The following ratings were assigned with a stable outlook:

Medical Card System, Inc. -- B2 senior secured debt rating; B2 corporate family rating;

MCS Advantage, Inc. -- Ba2 insurance financial strength rating.

Medical Card System, Inc. is headquartered in San Juan, Puerto Rico. As of December 31, 2009 MCS reported approximately $114 million in shareholders' equity on a GAAP basis and medical membership of approximately 693,000 (excluding Medicare Part D stand alone membership). For calendar year 2009 total revenues were approximately $1.6 billion.

The principal methodology used in rating MCS was Moody's Rating Methodology for U.S. Health Insurers, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating MCS can also be found in the Rating Methodologies sub-directory on Moody's website.

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

For more information, please visit our website at www.moodys.com/insurance.

New York
Stephen Zaharuk
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
MD - Insurance
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's rates Medical Card System's senior bank debt B2
No Related Data.
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