S&P ratings on Blue Cross Blue Shield of North Carolina

NEW YORK--(BUSINESS WIRE)--July 14, 2004--On July 14, 2004, Standard & Poor's Ratings Services revised its outlook on Blue Cross and Blue Shield of North Carolina (BCBSNC) to negative from stable.





At the same time, Standard & Poor's affirmed its 'A+' counterparty credit and financial strength ratings on BCBSNC.



The outlook revision reflects proposed legislation by North Carolina's Department of Insurance that could have a negative effect on the company's capital level and earnings potential. Although Standard & Poor's commented on the proposal in June 2004 before the end of the state's short legislative session, there is now a degree of uncertainty regarding what form this bill might take in the full session in early 2005. The bill, in some form, will likely be introduced during the full session, but the extent of its possible effect on BCBSNC is unknown at this time. It is the uncertainty regarding what form this bill might take that has resulted in the negative outlook.



The proposal in its current form would require BCBSNC to return some of its surplus to consumers because of the company's strong risk-based-capital position. Any surplus above an indicated level will immediately be deemed inappropriate and would need to be corrected within a short timeframe.



The insurer financial strength rating on BCBSNC is based on the company's leading market share in North Carolina, extremely strong capital and operating performance, and good membership growth.



Outlook



The negative outlook reflects Standard & Poor's belief that some form of negative legislation will likely be introduced in early 2005. Once a new proposal is presented it will be evaluated for its possible effect on BCBSNC. If Standard & Poor's determines that the legislation would result in capital and earnings that are not supportive of an 'A+' rating, then the rating will likely be lowered.



Standard & Poor's believes that BCBSNC's overall membership base will grow at a good rate, with some likely shifting from the insured to the self-funded accounts. The company should be able to provide the product options and high customer service that is necessary for its continued overall membership growth. Pricing for 2004 was set at rates that should maintain some profit margin for the company, yet not be as profitable as 2003. For year-end 2004, Standard & Poor's expects consolidated pretax GAAP income of $230 million to $240 million, reflecting a slight increase in the medical loss ratio and a reduction in administrative expenses as a percentage of operating revenue. It is expected that BCBSNC will likely maintain its capital adequacy at the current level of about 220%.