Ultimate Parent: Health Care Svc Corp Mut Legal Reserve HEALTH CARE SERVICE CORPORATION, A MUTUAL LEGAL RESERVE COMPANY RATING RATIONALE

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1 A+ Ultimate Parent: Health Care Svc Corp Mut Legal Reserve HEALTH CARE SERVICE CORPORATION, A MUTUAL LEGAL RESERVE COMPANY 300 East Randolph Street Chicago, IL Web: Tel: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A+ Outlook: Stable Best s Financial Size Category: XV RATING RATIONALE Rating Rationale: The ratings of Health Care Service Corporation (HCSC) and its subsidiaries reflect the company s leading market presence and brand strength in its primary health insurance markets, enrollment and premium growth, strong risk-adjusted capital, as well as its diverse product portfolio. These strengths are partially offset by recent underwriting and net losses, the impact of the Affordable Care Act (ACA) provisions and exchange business on the company s balance sheet and financial results, the impact of regulation on its primary business line, competitive market pressure and earnings concentration. The health insurance operations of HCSC (which operates as Blue Cross Blue Shield of Illinois/Texas/New Mexico/Oklahoma/Mon A.M. Best Company, Oldwick, NJ Printed July 8, Page 1 of 8

2 tana), as well as its HMO subsidiaries and lines of business, have a well-established market presence in their respective markets and benefit considerably from its brand strength in these markets. The company has leading overall market shares in each of the five states in which it operates. Additionally, the company has achieved leading shares in healthcare exchange enrollment in these markets. These enrollment gains have contributed to continued organic premium growth for the organization. HCSC has a strong level of capital in support of its business and investment risks. HCSC has a history of capital growth through retained earnings. The company s risk-adjusted capital was on an upward growth trend in preparation for enrollment gains with the introduction of health insurance exchanges. Due to the significant enrollment growth and recent statutory losses, risk-adjusted capital has declined; however, it remains strong, and the company has very favorable capital adequacy on a risk-adjusted basis. HCSC offers a diverse product portfolio designed to meet the ever-changing needs of individuals and large, medium and small employer groups that also meet regulatory required benefits and benefit levels. This comprehensive portfolio offers a continuum of products designed to enhance member retention and to offer employers cost-effective employee benefits solutions. Also, HCSC has a strong complementary portfolio of life and ancillary health product offerings written by its subsidiaries, which are licensed in all 50 states and the District of Columbia. HCSC has recently reported underwriting and net losses mostly driven by the impact of provisions of ACA and new exchange enrollment. The company s operating performance was negatively affected by the grandfathering of individual commercial plans as this provision was not included in the company s pricing assumptions for this segment. Additionally, the high degree of uncertainty around risk corridor payments resulted in the company accounting for a considerably smaller portion of the risk corridor receivable than originally anticipated. HCSC s operating cash flow was also impacted by the company s reinsurance receivable for exchange enrollment. To a much lesser degree, underwriting and net income was also impacted by the company s expansion into Medicare and Medicaid as the company invested significantly in these operations. HCSC s primary line of business is health insurance, which is a highly regulated industry both on a state and federal level. The health insurance industry has been heavily impacted by ACA in recent years. As the company expands its government-funded business, it will see an increased level of regulatory requirements in this business line. External economic and market conditions in each of the operating markets pose a challenge for HCSC to continue to grow its commercial group businesses organically as the majority of HCSC s enrollment remains employer-based. The commercial employer market has been very competitive with many national and regional carriers vying for business. Moreover, HCSC s earnings continue to be geographically concentrated in the markets of Illinois and Texas, with employerbased business driving the majority of the results. Although earnings have historically been strong, A.M. Best expects a certain degree of volatility around earnings which could continue to be impacted by provisions of ACA over the next few years. A.M. Best believes a positive rating action on HCSC is unlikely in the near to medium term. A negative rating action could occur if the organization is unable to sustain operating profitability, reports a considerable deterioration in risk-adjusted capital or experiences a significant decline in premium revenue and/or enrollment. KEY FINANCIAL INDICATORS ($000) Total Net Capital & Premiums Total Net Year Assets Surplus Written Revenues Income ,718,574 7,793,536 19,722,014 19,667,777 1,092, ,603,800 8,909,829 20,182,710 19,958,096 1,203, ,517,614 9,553,748 20,685,942 20,714,282 1,007, ,713,554 10,271,633 22,446,494 22,804, , ,829,421 9,942,246 27,604,396 27,838, ,884 (*) Data reflected within all tables of this report has been compiled from the companyfiled statutory statement. CORPORATE OVERVIEW Health Care Service Corporation (HCSC) is a Mutual Legal Reserve Company that conducts business as Blue Cross and Blue Shield of Illinois/Texas/New Mexico/Oklahoma/Montana where it provides health insurance coverage to over 14 million members. HCSC is a leading provider of health insurance products and services to individuals and employer groups in each of its five core states. HCSC s life subsidiary, Dearborn National Life Insurance Company, and its insurance subsidiaries, Dearborn National Life Insurance Company of New York and Colorado Bankers Life Insurance Company, offer individual and group life insurance and ancillary products in 50 states and the District of Columbia. With the products available through Dearborn National, HCSC can provide a complete array of health and life insurance products to both individuals and employer groups. HCSC s complementary group life product offerings are marketed through the distribution systems of HCSC as well as other Blue Cross 2015 A.M. Best Company, Oldwick, NJ Printed July 8, Page 2 of 8

3 and Blue Shield plans in numerous states. The life companies fulfill the product diversity goals of HCSC. Dearborn National has laid out an operating strategy that is designed to utilize the parent company s marketing position by leveraging its relationships within the Blue Cross Blue Shield system while maintaining selective distribution outside the Blues network. Dearborn National aligns its core complimentary group product offerings as well as its voluntary product base with its parent s medical products in its home states. BUSINESS PROFILE Health Care Service Corporation (HCSC) (d/b/a Blue Cross Blue Shield of Illinois/Texas/New Mexico/Oklahoma/Montana) offers Blue branded indemnity, preferred provider option (PPO) and Consumer Driven Health Plan (CDHP) products. In addition the organization offers health maintenance organization (HMO), point-of-service (POS), Medicare and Medicaid products through several subsidiaries and lines of business. For large multi-state employer groups, HCSC also provides access to the national Blue Cross and Blue Shield network through its BlueCard program participation. Health subsidiaries include GHS Health Maintenance Organization (OK), HCSC Insurance Services Company, GHS Managed Health Plans, Inc and GHS Insurance Company. Lines of business are the HCSC - Illinois HMO Line of Business and HCSC - Texas HMO Line of Business. The company s HMOs are focused on serving commercial individuals and employer groups of various sizes. The company also offers Blue Cross and Blue Shield branded Medicare Supplemental, Medicare Advantage and Medicare Part D prescription drug coverage directly or through its subsidiary, HCSC Insurance Services Company. Scope of Operations: The company s health operations are defined by three market segments: Group, Government and Retail. The Group market segment includes Small Group, Large Group and National Accounts. Small Group represents employer groups with 150 or less employees in Illinois, 100 or less in New Mexico and Texas and 50 or less employees in Montana. In all states, groups of 50 employees and under are more regulated by the state Department of Insurance than other market segments. Product offerings for this segment are standard- ized and include PPO, HMO, POS and indemnity, and are available only on a fully insured basis. Policyholders in this market are more price sensitive than other markets and may change carriers frequently due to price. Small Group employers have the new option of utilizing Small Business Health Options Program (SHOP) in order to provide benefits for its employees. Large Group represents employer groups with 151-1,999 employees in Illinois, 101-1,999 employees in Texas and Oklahoma, 101 or more employees in New Mexico and 51 or more employees in Montana. HCSC serves this segment with a cross section of products from PPO and HMO plans to multiple option product offerings (including dual and triple option plans). Self-funding is available to groups of 100 employees or more. Within the Large Group market segment, HCSC manages multiple group accounts that do not fall in to the traditional group segment definition such as the Federal Employee Health Benefits Program (FEP), Illinois Labor Accounts and Illinois Municipal Accounts. National Accounts primarily represents employer groups with over 1,000 employees as well as the processing of BlueCard claims for members covered under other Blue Cross and Blue Shield plans. HCSC offers a variety of healthcare plans to national account customers, including PPO, POS, HMO and indemnity products. The majority of the national accounts covered by HCSC are self-funded. The Government Market segment is comprised of different government plans in each state. HCSC currently participates in Medicaid programs in New Mexico and Texas, and in Medicare Part D in all five core states. The over age 65 sub-segment offers Medicare Supplemental plans which are administered by HCSC; as well as Medicare Advantage and Medicare Part D prescription drug coverage offered by its wholly owned subsidiary, HCSC Insurance Services Company (HISC) and GHS Managed Health Plans. The Retail Markets segment is divided into two sub-segments: the under age 65 group and student health. In the under age 65 sub-segment, the company offers a variety of individual and family plans, ranging from comprehensive plans to high-deductible catastrophic coverage. These products are offered in all five core states both on healthcare exchanges and off. HCSC has seen significant growth in its individual enrollment through the first open enrollment period in late 2013/early 2014 and has realized leading market shares of this enrollment base. HCSC provides student health coverage through its subsidiary Academic Health Plans, which it acquired in Health insurance products are sold through several distribution channels. They include general agents, brokers and consultants. In Illinois 2015 A.M. Best Company, Oldwick, NJ Printed July 8, Page 3 of 8

4 and Texas, the company utilizes general agents to sell to the individual market and small group employers markets. Brokers mainly market to employer groups of more than 50 lives in all states. Direct sales accounts for a good portion of individual under and over 65 sales in all states. In all states, consultants market to the national accounts. HCSC recognizes the competitive advantages and operating efficiencies that can be achieved through maintaining state-of-the-art technology infrastructure and systems. The company utilizes several systems for functions such as paying claims, identifying fraudulent claims and maintaining membership. These systems allow the company to better manage its resources and evaluate data. Blue Chip is the company s claim adjudication system that processes all health claims for Illinois, New Mexico, Texas and Oklahoma. The Blue Chip system works with other systems within the organization to generate specific utilization and cost information reports. In addition, the company scans all incoming claim documents, which allows a digitized image of the document to be immediately available in any claims office. Scanning of the claim documents also allows for a more effectively controlled claim inventory process. The company also recognizes the importance of using the Internet to communicate information about its products and services. Members can access information about pending health claims, receive an electronic explanation of benefits, search for providers and view the drug formulary. Group administrators can view information about HCSC products online and self-funded accounts can utilize online billing. Brokers can complete an application online as well as monitor the status of submitted cases. Key small group producers are able to obtain an online proposal and quote. Territory: The company is licensed in the District of Columbia, AK, AZ, AR, CO, CT, DE, FL, GA, ID, IL, IN, KY, ME, MD, MA, MI, MN, MO, MT, NE, NJ, NM, OH, OK, OR, PA, SC, TX, UT, VA, WV and WI. Business Trends: HCSC s strategy for growth relies equally on organic growth as well as on business combinations. The December 1998 merger with Blue Cross and Blue Shield of Texas was the first major step in HCSC s strategic expansion. This transaction provided the combined entity with a significant market presence in the Texas market, while adding needed scale to the overall healthcare operation. In July 2001, HCSC acquired the assets of Blue Cross and Blue Shield of New Mexico, which provided further access to expand into new markets. The company has maintained a strong local presence in sales, marketing, provider relations and contracting offices. Administrative functions are centrally integrated. In November 2005, HCSC and Blue Cross and Blue Shield of Oklahoma completed the merger with Group Health Service of Oklahoma, d.b.a. Blue Cross and Blue Shield of Oklahoma. In 2007, HCSC merged its line of business, HCSC HMO-New Mexico, into Blue Cross Blue Shield of New Mexico. On October 28, 2009, HCSC announced a membership transition agreement with WellPoint, Inc., and its UniCare subsidiaries commercial membership from the Illinois and Texas markets. Under the agreement, HCSC offered guaranteed replacement coverage for individual and group members in those states. Through this agreement HCSC achieved membership transfers of over 200,000 in In September 2013, HCSC completed an affiliation with Blue Cross and Blue Shield of Montana; this transaction added approximately 239,000 members to the HCSC organization as well as further diversified its business geographically. In May 2014, HCSC acquired Lovelace Health Plan, a provider owned health plan in New Mexico adding approximately 110,000 commercial and government program members. In addition to acquisitions of health insurance companies, HCSC has acquired supplemental business as well. On August 15, 2008, HCSC acquired MEDecision, a provider of healthcare information technology for case, disease and utilization management, and has developed secure health information access and exchange capabilities. Additionally, on October 31, 2008, HCSC acquired TMG Health, a leading provider of business provider outsourcing for Medicare, Medicaid, and group retiree health plans. This follows investments in prior years in Prime Therapeutics, a pharmacy benefit management company, and a joint venture between HCSC s subsidiary, THIN, an electronic claims and information network, which, effective June 2009, was merged into Availity, LLC, an advanced Internet-based e-health exchange. HCSC along with WellPoint, Inc. and Blue Cross Blue Shield of Michigan made equal investments in Bloom Health. This joint effort enables the offering of a nationwide private exchange and defined contribution platform for employers to manage their employee health benefit offerings. Market Share/Market Presence: HCSC is a market leader in all five Blue branded states. The Illinois division has 7.9 million members, who comprise a little more than one half of HCSC s total enrollment. The Texas division has nearly 5.2 million members and primarily serves the large local market segment. The New Mexico division has over 500,000 members, the Oklahoma division has approximately 840,000 members, and the Montana division covers nearly 243,000 members. The vast majority of membership is enrolled in a managed 2015 A.M. Best Company, Oldwick, NJ Printed July 8, Page 4 of 8

5 care plan (PPO/POS/HMO). Group business accounts for over fourfifths of HCSC s business. HCSC group accounts include over one half of Fortune 500 employers in HCSC home states. HCSC also participates with the Blue Cross Blue Shield Association National Blue- Card program which accounts for approximately 2.6 million additional members. Although individual business makes up a smaller portion of HCSC s overall enrollment, HCSC enrollment grew by 79% to reach about 1.7 million individual members. HCSC continues to have one of the largest individual membership bases in the country. OPERATING PERFORMANCE Operating Results: HCSC reported strong premium growth in 2014 driven by strong enrollment growth in all segments but it is most pronounced in individual, Medicaid and Medicare business. Operating results turned negative in 2014 for the first time in the last five years. The negative results are primarily being driven by higher than anticipated utilization for the company s individual enrollment, as well as the uncertainty around the ACA risk corridor payments for exchange enrollment. Based on these factors, HCSC conservatively established a premium deficiency reserve and set up a receivable for only a small portion of the risk corridor payment from the government. Additionally, the company had increased administrative expenses incurred for the company s growing business segments. Increased operational expenses were incurred due to healthcare exchanges; as well as investments in its Medicare Advantage and Medicaid business lines. The organization s strong results through 2012 has mainly been due to favorable underwriting results as net investment income remains significantly lower than historic levels due to the low interest rate environment; as well as due in part to write downs taken on affiliated subsidiaries. Operating margins showed compressed in 2013 mainly due to the increased medical loss ratio in the company s commercial business due to minimum loss ratios under healthcare reform legislature and competitive pricing pressure. A.M. Best believes that HCSC should return to profitability in the medium term but margins most likely will remain suppressed based on continued economic pressure on employer groups, strategic operational investments and healthcare exchange product performance. Addition- ally, A.M. Best expects the low interest rate environment to continue to affect investment income returns. BALANCE SHEET STRENGTH Capitalization: HCSC reported a decline in risk-adjusted capital due mostly to increased business risk associated with the strong premium growth the company reported in 2014 but also in part due to a decline in capital related to net losses reported for the year. Although it declined the company still maintains a strong level of risk-adjusted capital in support of its business and financial risks. Additionally, HCSC has a history of using its capital strength to support its subsidiaries. Capital infusions were made to Dearborn National Life Insurance Company $23 million in 2010 as well as $5.0 million to GHS Insurance Company in 2010 and $10 million in Contributions of $1.5 million in 2011 and $10 million in 2012 were made to Colorado Bankers Life Insurance Company. In 2013 and 2014, HCSC contributed $200 million to HCSC Insurance Services Company and $15 million to GHS HMO in 2013 in support of premium growth. Subsequent to the Texas HMO purchases from NYLCare, the company issued a $400 million debt offering in June 2001, which paid down $267 million of commercial bank debt. In January 2011, HCSC issued $500 million of senior unsecured notes which mature January The January 2011 issuance proceeds were primarily used to repay the $400 million senior notes that matured on June 15, 2011 and the remainder used for general corporate purposes. HCSC s debt-tocapital ratio as of year-end 2014, was less than 4%, and is well below the industry norm and is expected to remain stable in the near term. Liquidity: HCSC maintains a very liquid, high quality and well-diversified portfolio with cash and cash equivalents comprising almost onethird of invested assets. HCSC s investment strategy is to match shortterm maturities with its ongoing obligations. The company utilizes a 13 week rolling cash flow model to ensure all cash requirements are 2015 A.M. Best Company, Oldwick, NJ Printed July 8, Page 5 of 8

6 met normal operating and investment cash flows. The company manages its portfolio in two allocations; Working Capital and Capital and Surplus. The long-term perspective for the Working Capital is to maintain a highly liquid, low risk short-term balance sheet while Capital and Surplus emphasizes preservation of capital. Some investment management functions are performed internally. The company also engages the services of external advisers and consultants in the management of the company s invested assets. The investment portfolio is conservatively managed and provides adequate liquidity. A majority of assets held are fixed income securities and the vast majority is investment grade with an average duration of about three years. HCSC has a fairly limited exposure to the public equity markets and diversifies the portfolio across numerous funds. On October 25, 2011, HCSC closed on a five year credit facility for $400 million. There were no balances outstanding against the facility at year end MANAGEMENT Officers: President and Chief Executive Officer, Patricia A. Hemingway Hall; Presidents, Michael E. Frank (Montana Division), Ted Haynes (Oklahoma Division), Bert E. Marshall (Texas Division), Mark Owen (Government Markets), Kurt B. Shipley (New Mexico Division), Maurice S. Smith (Illinois Division), Jeffrey R. Tikkanen (Retail Markets); Executive Vice President and Chief Administrative Officer, John Cannon III; Executive Vice President and Chief Officer, Paula A. Steiner (Strategy, Public and Gov t Relations and Emerging Markets); Executive Vice Presidents, Karen M. Atwood (Service and Technology), Colleen F. Reitan (President Plan Operations); Senior Vice President and Chief Financial Officer, Kenneth S. Avner; Senior Vice President and Chief Information Officer, Steven Betts; Senior Vice President and Chief Marketing Officer, J. Darren Rogers; Senior Vice President and Chief Actuary, Janice Knight; Senior Vice President and Controller, James Kedela; Senior Vice President and Chief Legal Officer, Ken O Rourke (Interim); Senior Vice President and Chief Medical Officer, Stephen Ondra; Senior Vice Presidents, Kevin Cassidy (Enterprise Sales & Account Management Illinois Markets), Carolyn Dawson (Health Care Management), Steve Hamman (Provider Engagement and Enterprise Network Solutions), Thomas C. Lubben (Compliance and Audit), Nazneen Razi (H/R). Directors: Dianne Brewer Gasbarra, M.D., Timothy L. Burke, Milton Carroll, Robert T. Clarke, Waneta Coester Tuttle, Michelle L. Collins, James R. Corrigan, Tieman H. Dippel, Jr., Dennis J. Gannon, Patricia A. Hemingway Hall, Chase T. Hibbard, Thomas R. Hix, Elaine M. Mendoza, M. Ray Perryman. Balance Sheet Assets ($000) 12/31/2014 Total bonds $ 6,382,633 Total common stocks ,622,729 Real estate ,917 Cash & short-term invest ,235 Health care recvble ,675 Amounts recov reins ,422 Net deferred tax asset ,555 Prems and consids due ,943,592 Accrued invest income ,423 Uninsured A&H plans ,018,925 Other assets ,005,314 Assets $17,829,421 Liabilities ($000) Claims payable $ 2,327,285 Unpaid claims adj ,894 Accrued med incent pool ,380 Advance premiums ,664 Comm taxes expenses ,982,565 Unallocated items ,312 Borrowed money ,930 Health policy reserves ,738,834 Other liabilities ,311 Total Liabilities $ 7,887,174 Unassigned surplus ,456,234 Other surplus ,013 Total $17,829, A.M. Best Company, Oldwick, NJ Printed July 8, Page 6 of 8

7 HEALTH CARE SERVICE CORPORATION, A MUTUAL LEGAL RESERVE COMPANY Total Admitted Assets Years in billions of dollars FINANCIAL SUMMARY ($000) as of 12/31/2014 Capital & Surplus $ 9,942,246 Net Premiums Written $ 27,604,396 Assets $ 17,829,421 Total Life Insurance Issued $ Total Life Insurance In Force $ 2015 A.M. Best Company, Oldwick, NJ Printed July 8, Page 7 of 8

8 Why is this Best s Rating Report important to you? A Best s Rating Report from the A.M. Best Company showcases the opinion from the leading provider of insurer ratings of a company s financial strength and ability to meet its obligations to policyholders, as well as its relative credit risk. The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of the insurance companies since A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. The rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company or A.M. Best Europe Rating Services Limited. For the latest Best s Financial Strength Ratings along with their definitions and A.M. Best s Terms of Use, visit the A.M. Best website at You may also obtain AMB Credit Reports by visiting our site or calling our Customer Service department at , ext To expedite your request, please provide the company s identification number (AMB#) A.M. Best Company, Oldwick, NJ Printed July 8, Page 8 of 8