OREANDA-NEWS. Fitch Ratings has affirmed Blue Cross of Idaho Health Service, Inc.'s (BCI) Insurer Financial Strength (IFS) rating at 'A-'. The Rating Outlook is revised to Negative from Stable.

The outlook revision primarily reflects BCI's weakened financial performance over the past two years. The outlook also reflects lower quality distribution within BCI's bond portfolio in recent years coupled with the company's high portfolio allocation to common equity investments.

KEY RATING DRIVERS

Fitch's rating on BCI continues to reflect the company's very strong competitive position in the Idaho health insurance market, strong risk-adjusted capitalization and solid balance sheet, as well as the company's historically stable 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.

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, BCI's long-term presence and broad coverage in the Idaho market provides the company with excellent market knowledge and a very strong provider network.

BCI's historically strong operating performance has deteriorated over the past two years due primarily to higher care utilization rates associated with its participation in Idaho's state-based health insurance exchange associated with the Patient Protection and Affordable Care Act (ACA). Similar experience has been reported by other participants in ACA-related business not only in Idaho, but in many other states.

BCI implemented significant rate increases on its exchange business in both 2015 and 2016 in an effort to bring pricing in line with developing claims experience. It is currently unclear if the increases will be sufficient to return the company's operating performance within the next two years to the level of stability it experienced historically. Operating losses and growth of this business has had a moderately adverse effect on BCI's capitalization.

Fitch notes a growing exposure of BCI's capital to below investment grade (BIG) bonds in recent years. At Sept. 30, 2015, approximately 10% of the company's bond portfolio was allocated to NAIC Class 4 and 5 securities, and the company's overall BIG allocation represents approximately 15% of capital and surplus. Combined with the company's statutory reported equity investments, this measure increases to 52%, which Fitch views as uncharacteristically high relative to its peers. Fitch expects the company to report similar portfolio characteristics for Dec. 31, 2015. Fitch believes that recent moderate decline in the company's risk adjusted capitalization reduces the loss absorption buffer that has historically existed in the company's capital structure, which puts the company more at risk, particularly given recent capital market volatility.

Fitch views BCI'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 'AAA' rating category guidelines. At year-end 2014, BCI's NAIC RBC ratio was a very strong 505% of the company action level. Fitch anticipates a moderate decline in RBC ratio for year-end 2015, but expects the level to remain at consistent with 'AAA' levels.

RATING SENSITIVITIES
From a rating perspective, Fitch views BCI's concentrated market position in Idaho and comparatively small size and scale as limiting factors. These characteristics, along with the geographic concentration of its enrollment 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 continued poor operating performance, RBC below 300%, below investment grade bonds and common stock investments exceeding 50% of TAC, 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.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following rating and revised the Outlook to Negative from Stable:

Blue Cross of Idaho Health Service, Inc.
--IFS rating at 'A-'.