Hawaii Medical Service Assoc. Outlook Revised to Stable

October 17, 2005

Standard & Poor’s Ratings Services has revised its outlook on Hawaii Medical Service Assoc. (HMSA) to stable from negative.

Standard & Poor’s also said that it affirmed its ‘A+’ counterparty credit and financial strength ratings on HMSA.

“We revised the outlook to stable because we believe HMSA’s pricing flexibility has not been materially constrained by regulatory intervention,” explained Standard & Poor’s credit analyst Joseph Marinucci. This concern had been a primary driver of the negative outlook. The stable outlook reflects our belief that HMSA will have about a 2% ROR on a rolling five-year basis, which considered adequate for the ratings.

The ratings reflect the company’s strong competitive position, very strong capitalization and liquidity, and strong financial flexibility. Offsetting these positive factors are the company’s geographic concentration, continued exposure to potentially harmful rate regulation in all underwritten markets, and diminished prospective earnings profile.

By year-end 2006, Standard & Poor’s expects HMSA’s enrollment to remain stable at 695,000-705,000 members. Pretax income is expected to diminish to $10 million-$20 million (a 1.0% ROR), but the company’s five-year average pretax ROR is expected to be about 2.0%, which is considered good to marginal. Capital adequacy and liquidity are expected to remain very strong for the rating.

HMSA is a provider of health benefits in Hawaii. By year-end 2005, HMSA’s membership is expected to be 690,000-700,000, which is about 60% of Hawaii’s insurable market and about 70% of the state’s employer group market.

The company offers a broad spectrum of products across all market segments in the private and public sectors. HMSA’s brand equity is strong and remains well supported by its broad networks, servicing capabilities, distribution relationships, and strong knowledge of its core Hawaii marketplace.

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