Blue Cross & Blue Shield of Texas Still on S&PWatch.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 7/28/98-- Standard & Poor's single-'A' insurer financial strength and counterparty credit ratings on Blue Cross Blue Shield of Texas Inc. remain on CreditWatch with developing implications, where they were placed Oct. 21, 1997. Developing means ratings may be raised, lowered, or affirmed.

The ratings are based on the following major rating factors:

-- Good capitalization: Standard & Poor's views Blue Cross & Blue

Shield's capital position as a primary strength with a Standard & Poor's capital adequacy ratio of 145% at year-end 1997, however this is down considerably from 223% at year-end 1995.

-- The capital deterioration reflects substantial financial losses

experienced between 1995-1997 due to unfavorable morbidity relative to more competitive pricing structures implemented to build enrollment and substantial systems-related costs associated with building its managed care infrastructure. Standard & Poor's expects the plan to maintain capital levels that support its rating.

-- Diversified business profile: Blue Cross & Blue Shield enjoys

a good business profile due to its market leadership in terms of enrollment and its well-established relationships with providers throughout the state of Texas. Blue Cross & Blue Shield, as a not-for-profit corporation, provides health care benefits to approximately 15% of the Texas insured market. Enrollment has steadily risen to approximately 1.9 million members through May 1998, up from only 1.19 million members at the end of 1993. However, the plan has yet to establish itself as major competitor in the highly competitive urban centers throughout the state.

-- Uneven/Poor operating performance: Between 1995-1997 the plan

consistently underperformed expectations, as earnings continued to be weakened by nonrecurring charges associated with implementation of the point of service and health maintenance organization (HMO) networks, as well as competitive pricing adopted to build enrollment. The plan posted health insurance consolidated pretax losses of $36.7 million in 1997, $24.4 million in 1996, and $13.4 million in 1995. However, this comes after a period where the plan posted a cumulative consolidated pretax health insurance gain of $257 million between 1990-1994. In 1998, Standard & Poor's expects a consolidated health insurance gain of $8 million to 10 million, reflective of newly implemented provider contracting and pricing strategies. These results exclude Group Life & Health, Blue Cross & Blue Shield's wholly owned life insurance subsidiary, which has consistently generated pretax earnings of $5 million to 10 million per year.

Competitive market place: The Texas health insurance and managed-care industry has become increasingly competitive in recent years due to favorable demographics and low managed care penetration. The rapid consolidation that has occurred augmented by the arrival of well-capitalized national scale HMO operators, has resulted in a very difficult pricing environment as new competitors look to build critical mass. Standard & Poor's believes that it will be a challenge for the Texas plan to internally generate significant profitable HMO business over the intermediate term.

-- Evolving managed care development: Operating in a state where

managed-care penetration has been low, Blue Cross & Blue Shield faces a significant challenge to further tighten its point-of-service network and develop an HMO network to maintain its competitive position. However, the merger with Blue Cross & Blue Shield of Illinois is expected to significantly help its efforts in this area.

The rating reflects the likely probability that the merger with Health Care Service Corp. (HCSC; Single-'A'-plus financial strength rating) will go through in some form over the next 12 months. However, if the merger is officially called off, then there is a strong chance that Blue Cross & Blue Shield of Texas will be downgraded. Additionally, if the merger with HCSC is called off but the acquisition of the Harris Methodist Health Plan is consummated, this is likely to cause a further downgrade to the triple-'B' category. If however, the merger with HCSC is consummated, Blue Cross & Blue Shield will receive the single-'A'-plus insurer financial strength rating, even if the acquisition of Harris Methodist Health is completed, Standard & Poor's said.---CreditWire

    CONTACT: Arun N Kumar, 212/208-8453
              Mark Puccia, 212/208-1901
              Judy Chin, 212/208-5775
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