[February 13, 2014]

Fitch Downgrades BCBS of Florida's Ratings; Outlook Stable

Fitch Ratings has downgraded Blue Cross and Blue Shield of Florida's (BCBSF) Insurer Financial Strength (IFS) rating to 'A' from 'A+' and the company's Issuer Default Rating (IDR) to 'A-' from 'A'. The Rating Outlook is Stable.

Todays' rating action follows Fitch's review of publicly available documents filed as part of a plan executed by BCBSF on Jan. 1, 2014, under which the company reorganized as part of a policyholder owned not-for-profit mutual insurance holding company (MIHC) system.

KEY RATING DRIVERS

Fitch's decision to downgrade BCBSF's ratings reflects its belief that the BCBSF organization is likely to adopt more aggressive diversification and capital management strategies subsequent to the reorganization than the company has historically employed.

Fitch considers the economic interests of BCBSF policyholders as materially unchanged by the reorganization due to certain voting rights and rights to asset distributions that the reorganization conferred upon them. Additionally, Fitch believes that aside from the expected shift in approach to capital management noted above, near-term credit factors that have historically supported BCBSF's ratings are largely unaffected by the reorganization.

Under the re-organization, BCBSF transferred approximately $1.6 billion of assets (statutory accounting basis), including $1 billion of fixed income securities and common stocks, to a newly formed holding company. Fitch believes that this transfer increases the likelihood that these assets will be used to support activities that are tangentially related to, or invested in lower credit-quality businesses, than BCBSF's traditional health insurance operations. While Fitch believes that such investments could provide strategic benefits to BCBSF and the MIHC over the longer term, it believes that both the nature of such investments, and their potential for success, are uncertain and that significant execution risk therefore exists.

Additionally, BCBSF's reorganization plan includes projections indicating that subsequent to the asset transfers and through 2016, the company's NAIC risk-based capital ratios and operating leverage are expected to deteriorate to levels that in Fitch's view are no longer supportive of the company's previous ratings. Specifically, Fitch estimates that the organization's NAIC RBC ratio, including affiliated insurers on an organization-wide company action level basis, could decline to 325% by year-end 2016 from 402% immediately following the reorganization and 543% at year-end 2013. Similarly, based on data in the reorganization plan, Fitch estimates that BCBSF's ratio of premiums to surplus increases to 9.9x by year-end 2016 copared to 7.7x immediately following the reorganization and 3.4x at year-end 2013.

BCBSF's ratings continue to reflect the company's strong market position in Florida, overall solid capitalization and low financial leverage. These favorable characteristics are partially offset by financial performance metrics that are generally weaker than Fitch's 'A' rating category median guidelines.

RATING SENSITIVITIES

Factors that could lead to a rating upgrade:

--Evidence that diversification and capital deployment strategies adopted by the BCBSF organization are likely to be successful and that the execution risks accompanying such strategies are adequately managed.

Factors that could lead to rating downgrades:

--BCBSF's inability to market itself as a Blue Cross and Blue Shield company could result in a multi-notch downgrade;

--A material decline in BCBSF's enrollment in Florida or a perceived deterioration in the company's competitive position;

--BCBSF choosing to price its products such that premiums, assets, and liabilities grew at materially faster rates than capital for a multi-year period;

--Run-rate risk-based capital ratios below 250% on a company action-level basis.

Fitch has downgraded the following ratings and maintained a Stable Rating Outlook:

Blue Cross and Blue Shield of Florida, Inc.

--IFS to 'A' from 'A+';

--IDR to 'A-' from 'A'.

Additional information is available at 'www.fitchratings.com'.

The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013);

--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (Dec. 18, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Health Insurance and Managed Care (U.S.)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724819

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820548

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