Hawaii Medical Service Association's financial strength and counterparty credit ratings have been lowered to "A" from "A+" by Standard & Poor's Ratings Services because of declining profitability at the state's largest health insurer.

The ratings agency also said it had a negative outlook for HMSA, saying it could lower the ratings another notch if the insurer's downward profit trend persists and puts additional pressure on its capitalization.

"This downgrade stems from HMSA's diminishing profitability and operating performance for 2007 and 2008, which should be materially lower than previously expected," said Standard & Poor's credit analyst Hema Singh in a press statement.

Financial strength ratings represent Standard & Poor's opinion of the financial security of an insurance company, while its counterparty credit ratings evaluate a company's ability to pay its obligations.

HMSA last week reported a $10.9 million loss in the third quarter, bringing its year-to-date losses to about $16 million.

Standard & Poor's said the insurer's profitability problems could be traced primarily to rising medical costs, "which continue to surpass expectations." It said that trend should continue into next year as HMSA continues to fund major information technology enhancements and continues its $50 million program to help hospitals improve patient care and physicians to acquire electronic medical records systems.

HMSA spokesman Cliff Cisco said the insurer maintains the rating to help employer groups assess its financial strength and that HMSA has no significant debt. He said HMSA had been aware of the possibility of a downgrade since Standard & Poor's had looked at its finances. He said the current rating is still above the "A-" it once had.

"It's not unexpected because of the operating losses we've had," Cisco said. He said Standard & Poor's also took the view that the state's reimposition of rate regulation next year could put pressure on earnings.

The ratings agency projected HMSA's membership will remain at about 707,000 through the end of the year and that it should experience modest growth next year of 1 percent. That should result in HMSA claiming membership of 710,000 to 720,000.

Standard & Poor's forecast HMSA's pretax losses will be $10 million to $15 million next year.

"Although this will cause surplus decline, HMSA's capital adequacy and liquidity should remain very strong for the rating," the agency said.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.