Fitch Affirms WellPoint's Senior Debt at 'BBB+' & IFS at 'AA-'; Outlook Remains Negative

Tue Sep 17, 2013 11:14am EDT

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(The following statement was released by the rating agency) NEW YORK, September 17 (Fitch) Fitch Ratings has affirmed its ratings on WellPoint, Inc. (WLP) including the 'BBB+' ratings on the company's senior unsecured notes and the 'AA-' Insurer Financial Strength (IFS) ratings assigned to various WellPoint insurance company subsidiaries. The Rating Outlook for WLP and its subsidiaries remains Negative. KEY RATING DRIVERS Large Market Position Size/Scale: Under Fitch's Insurance Rating Methodology, WellPoint Inc.'s (WLP) market position and size/scale characteristics are considered 'large' reflecting the company's leading market share in 14 states and significant scale benefits and operating efficiencies derived from its 36 million membership base and estimated $70 billion in annual revenues. Fitch believes that WLP's strong competitive position is directly linked to the company's right to use the Blue Cross and/or Blue Shield names and marks in 14 states. Stable Operating Performance: WLP consistently produces large amounts of absolute earnings and strong and stable EBITDA-based revenue margins and net returns on average capital (ROAC) that are consistent with Fitch's guidelines for the company's current ratings. From 2010 through 2012 the company generated average annual EBITDA of $5.2 billion and EBITDA-based margins and net ROAC of 8.7% and 8.4% respectively. Fitch notes however, that from 2010 to 2012, WLP's EBITDA and net income declined modestly reflecting tepid revenue growth and higher medical benefit ratios. The company's financial results through the first six months of 2013 were generally consistent with its longer-term results. WLP reported $3.2 billion of EBITDA and an EBITDA-based revenue margin and net ROAC of 9.1% and 8.8% respectively. Fitch expects WLP and its peers to experience a modest, gradual decline in operating margins as the Affordable Care Act (ACA) is implemented and a growing portion of the company's revenues are derived from lower margin government business, particularly Medicaid. From an overall earnings perspective, Fitch expects the impact of these declining margins to be somewhat offset by ACA related membership growth, particularly in the Medicaid market.

High Financial Leverage but Solid Interest Coverage: Fitch considers WLP's financial leverage to be high relative to that of its peers and to Fitch's median guidelines for the company's current rating category. The company's financial leverage and debt-to-EBITDA ratios were approximately 39% and 2.8x at June 30, 2013. Fitch anticipates only modest improvements in these ratios over the next 12 months. High financial leverage is the principal reason for the current negative outlooks and wider than standard notching gap between WLP's IDR and IFS ratings. WLP consistently generates operating-EBITDA-based interest coverage ratios that are moderately higher than Fitch's median guideline for WLP's current rating category. From 2010 through the first half 2013, the company's ratio of operating EBITDA to interest expense averaged 10.9x. Solid Statutory Capitalization: Fitch considers the capitalization metrics of WLP's insurance operating companies to be solid with a year-end 2012 organization-wide NAIC risk-based capital (RBC) of 288% (company action level basis) and June 30, 2013 annualized premiums-to-equity ratio of 2.7x. In addition, liquidity is strong, as the company's investment portfolio is concentrated in readily marketable securities and sufficient levels of cash and short-term investments are typically held at the parent company. RATING SENSITIVITIES Revision in Outlook to Stable: Fitch projects WLP's run-rate debt-to-EBITDA ratio and financial leverage ratio (FLR) to decline over the next 12-24 months but believes that it may be 2015 before these ratios decline to approximate 2.2x and the mid 30 percent range respectively. If Fitch determines that these projections are likely to be met, which the agency anticipates becoming evident by year-end 2014, and WLP's other run-rate financial trends, particularly consolidated NAIC RBC ratios in excess of 250% on a company action level (CAL) basis and EBITDA-based margins approximating 9%, remain consistent with 2012's results, Fitch plans to revise WLP's Outlook to stable. Downgrade Triggers: If by year-end 2014 Fitch determines that WLP is unlikely to reduce its run-rate debt-to-EBITDA ratio and FLR to 2.2x and the mid 30 percent range by year-end 2015, it will downgrade WLP's ratings one notch and the ratings on WLP's insurance company subsidiaries one or two notches. Other triggers that could lead to downgrades exclusive of the above, are run-rate EBITDA-to-revenue ratios less than 7%; operating EBITDA-to-interest ratios less than 7x; consolidated RBC ratios less than 250% of CAL; and a material goodwill impairment that causes Fitch to question the current value of an acquisition. Fitch has affirmed the following ratings: WellPoint, Inc. --5.000% senior notes due 12/15/2014 at 'BBB+'; --1.250% senior notes due 9/10/2015 at 'BBB+'; --5.250% senior notes due 1/15/2016 at 'BBB+'; --2.375% senior notes due 2/15/2017 at 'BBB+'; --5.875% senior notes due 6/15/2017 at 'BBB+'; --1.875% senior notes due 1/15/2018 at 'BBB+'; --2.300% senior notes due 7/15/2018 at 'BBB+'; --7.000% senior notes due 2/15/2019 at 'BBB+'; --4.350% senior notes due 8/15/2020 at 'BBB+'; --3.700% senior notes due 8/15/2021 at 'BBB+'; --3.125% senior notes due 5/15/2022 at 'BBB+'; --3.300% senior notes due 1/15/2023 at 'BBB+'; --5.950% senior notes due 12/15/2034 at 'BBB+'; --5.850% senior notes due 1/15/2036 at 'BBB+'; --6.375% senior notes due 6/15/2037 at 'BBB+'; --5.800% senior notes due 8/15/2040 at 'BBB+'; --4.625% senior notes due 5/15/2042 at 'BBB+'; --2.750% senior convertible debentures due 10/15/2042 at 'BBB+'; --4.650% senior notes due 1/15/2043 at 'BBB+'; --5.100% senior notes due 1/15/2044 at 'BBB+'; --Short-term IDR at 'F2'; --$2.5 billion commercial paper program at 'F2'. WellPoint, Inc. --Long-term IDR at 'A-'; Outlook Negative. Anthem Holding Corp. (formerly known as WellPoint Health Networks Inc.) --Long-term IDR at 'A-'; Outlook Negative. The following ratings have been affirmed with a Negative Outlook: Anthem Insurance Companies, Inc. --Long-term IDR at 'A+'; --9.00% surplus notes due 2027 at 'A'; --Insurer financial strength (IFS) at 'AA-'. The IFS ratings of the following issuers have been affirmed at 'AA-' with Negative Outlooks: Anthem Blue Cross Life & Health Insurance Company Anthem Health Plans, Inc. Anthem Health Plans of Kentucky, Inc. Anthem Health Plans of Maine, Inc. Anthem Health Plans of New Hampshire, Inc. Anthem Health Plans of Virginia, Inc. Blue Cross of California Blue Cross and Blue Shield of Georgia, Inc. Blue Cross Blue Shield Healthcare Plan of Georgia, Inc. Community Insurance Company, Inc. Empire HealthChoice HMO, Inc. Empire HealthChoice Assurance, Inc. HealthKeepers, Inc. Healthy Alliance Life Insurance Company HMO Missouri, Inc. Matthew Thornton Health Plan, Inc. Rocky Mountain Hospital & Medical Service, Inc. Contact: Primary Analyst Mark Rouck Senior Director +1-312-368-2085 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Bradley S. Ellis Director +1-312-368-2089 Committee Chairperson Jim Auden Managing Director +1-312-368-3146 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Aug. 19, 2013); --'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (Jan. 29, 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Health Insurance and Managed Care (U.S.) Sector Credit Factors here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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