AM Best Affirms HCSC Ratings Amid 2025 Earnings Strain
Key Points
- AM Best kept Health Care Service Corporation’s main units at A+ with a stable outlook
- HCSC’s 2025 underwriting results weakened on higher medical costs across all lines
- The 2025 Cigna Medicare and CareAllies deal expanded HCSC’s footprint and capital needs
- Despite expected 2025 losses, HCSC’s risk-adjusted capitalization stays at ‘strongest’
AM Best reaffirms strong ratings and balance sheet
AM Best has affirmed the Financial Strength Rating of A+ (Superior) and Long-Term Issuer Credit Ratings of “aa-” (Superior) for Health Care Service Corporation Group (HCSC Group) and maintained a stable outlook. The agency also affirmed the A (Excellent) FSR and “a” (Excellent) ICRs of Health Care Service Corp Medicare & Supplemental Group Members, likewise with a stable outlook. AM Best assesses HCSC’s balance sheet strength as “strongest,” supported by risk-adjusted capitalization at the strongest level under Best’s Capital Adequacy Ratio (BCAR). The company has generated consistent capital and surplus growth over time, generally outpacing premium growth. AM Best noted that HCSC’s statutory financial leverage has recently increased to just under 20% after a new debt issuance in 2024 and Federal Home Loan Bank (FHLB) borrowings in 2025, but said leverage remains acceptable for the rating level. Earnings before interest and taxes interest coverage has historically been strong prior to 2025, and operating cash flows remained strong through the latter part of 2025. HCSC’s investment portfolio is described as liquid and relatively low risk, held predominantly in investment-grade fixed income securities and cash or cash equivalents, with no material concentration exposures identified by the rater.
Operating challenges in 2025 and expected near-term losses
While affirming the ratings, AM Best highlighted deterioration in HCSC’s operating performance in 2025. The company and the wider industry experienced higher-than-expected utilization, claims costs and member acuity across commercial, individual, Medicare and Medicaid lines. These pressures, driven by inpatient and outpatient services, pharmaceutical cost trends and a shifting membership mix after Medicaid redeterminations, began to emerge in the fourth quarter of 2024, after pricing was already set for 2025. Throughout 2025, underwriting results worsened more than expected, with claims trends remaining elevated, leading to lower-than-targeted margins in the latter half of the year and an unexpected loss in the third quarter. AM Best expects HCSC’s absolute capital to decline somewhat in the near term, reflecting anticipated operating losses through year-end 2025, but still forecasts BCAR at the strongest level. For 2026, HCSC has repriced its business and refined strategies across lines of business to improve operating results, building on what AM Best describes as adequate operating performance, a favorable business profile and appropriate enterprise risk management.
Cigna Medicare acquisition reshapes HCSC’s profile
HCSC closed its acquisition of The Cigna Group’s Medicare and CareAllies businesses in the first quarter of 2025. AM Best reports that the transaction had a limited effect on HCSC’s overall balance sheet strength metrics but materially broadened the company’s business profile. The deal expanded HCSC’s geographic diversification beyond its core Blue Cross Blue Shield-branded states and increased exposure to Medicare Advantage and supplemental health lines. It also brought new network relationships, membership growth and additional revenue. The acquired entities, now grouped under HCSC Medicare & Supplemental Group, include Medicare Advantage, Medicare Part D, Medicare Supplement and CareAllies operations. AM Best assesses this group’s balance sheet strength as “very strong,” supported by bolstered capital levels during 2025, relatively modest underwriting leverage of 3.6 times, strong liquidity and a conservatively invested portfolio similar to HCSC’s. However, the agency notes that consolidated underwriting and net income trends have been challenged by changes to Medicare reimbursement and higher-than-expected medical cost trends, effects it expects to continue into 2026.
Medicare & Supplemental Group capital support and growth plans
HCSC has committed to providing additional capital to its Medicare & Supplemental entities to fund growth, novated business and acquisition-related costs and operating losses. AM Best projects the group’s BCAR will remain at the strongest level at year-end 2025, underpinned by strengthened absolute capital and sound liquidity. The Medicare & Supplemental portfolio has contributed substantially to net premium growth in HCSC’s core target Medicare Advantage and supplemental markets, helping to offset attrition in the Medicaid line from redeterminations. Historically, the group has exhibited consistent membership growth across government business, particularly Medicare Advantage, Medicare Supplement, Medicare Part D and other supplemental accident and health offerings. Management is focused on premium optimization, Star ratings, risk adjustment payments, and cost and expense efficiency across Medicare Advantage plans to improve future performance, while steady investment income remains a meaningful contributor to net earnings. AM Best notes that these entities benefit from rating enhancement as part of the HCSC enterprise and are expected to receive financial and operational support if needed.
Liquidity, flexibility and market position underpin ratings
Beyond capitalization, AM Best cites HCSC’s contingent liquidity and financial flexibility as supporting factors for its ratings. The company’s available cash, a five-year, $1.25 billion senior unsecured revolving credit facility with a bank consortium, and more than $2 billion in borrowing capacity from the Federal Home Loan Bank of Chicago provide multiple funding sources. HCSC holds a leading market position in its five core Blue Cross states, which AM Best views as a foundation for further membership growth across multiple lines. The broader HCSC portfolio, including owned and affiliated companies, delivers diversified capabilities such as solutions for complex and chronic conditions aimed at lowering the cost of care. In AM Best’s view, HCSC’s favorable business profile and enterprise risk management, together with its capital strength and liquidity, offset the recent strain in underwriting performance and support the decision to maintain stable outlooks on both the core HCSC Group and the Medicare & Supplemental Group ratings.
Key Takeaways
- AM Best’s decision to keep HCSC at A+/A reflects confidence that capital strength and liquidity can absorb near-term operating losses from 2025’s elevated medical costs.
- The Cigna Medicare and CareAllies acquisition materially shifted HCSC’s growth profile toward Medicare and supplemental health, increasing diversification but also exposing the group to reimbursement and cost pressures.
- Capital infusions and conservative investment policies at HCSC Medicare & Supplemental Group are central to sustaining ‘strongest’ BCAR levels while the new businesses scale and work through challenging Medicare trends.
- HCSC’s leadership positions in core Blue states, combined with sizable bank and FHLB funding lines, give it room to adjust pricing and strategy into 2026 without undermining its current credit standing.
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