Fitch Downgrades WellPoint's Sr Notes to 'BBB' / Financial Strength to 'A+';
Rating Outlook Stable
CHICAGO -- August 5, 2014
Fitch Ratings has downgraded its ratings on WellPoint, Inc.'s (WLP) senior
unsecured notes to 'BBB' from 'BBB+' and the Insurer Financial Strength (IFS)
ratings assigned to various WellPoint insurance company subsidiaries to 'A+'
from 'AA-'. In addition, the Rating Outlook is revised to Stable. WLP's
short-term rating and the rating on the company's $2.5 billion commercial
paper (CP) program are affirmed at 'F2'.
KEY RATING DRIVERS
Today's rating actions reflect Fitch's view that WLP's run-rate financial
leverage metrics are likely to remain elevated relative to expectations for
WLP's previous ratings levels. Specifically, Fitch now believes that the
company's run-rate ratios of debt-to-EBITDA and debt-to-capital are unlikely
to decline to approximately 2.2x and 35% by year-end 2015. Previously Fitch
had identified an inability to meet these ratings sensitivities as key factors
that could lead to downgrades of WLP's ratings.
Fitch believes that WLP is likely to manage its debt-to-capital ratio in the
35%-40% range going forward, reflecting a tendency toward re-financing rather
than paying down maturing debt and, possibly, issuing additional debt to fund
various growth-related initiatives. Further, given these tendencies and margin
pressure from health-care reform and from the increasing portion of WLP's
membership derived from government-sponsored business, Fitch believes that
WLP's debt-to-EBITDA ratios are likely to be in 2.5-3.0x range for at least
the next 12-18 months. Ratios at these levels are consistent with Fitch's
'BBB' IFS rating category guidelines.
Other key ratings drivers that underlie WLP's IFS ratings are materially
unchanged and include the following:
Debt Service Capabilities and Financial Flexibility: WLP's debt service
capabilities and financial flexibility characteristics are consistent with
those expected at the 'A' IFS rating category. Fitch believes that the
company's operating EBITDA-based interest coverage ratios over the next 12-18
months will be in the range of 8x-11x. Despite WLP's comparatively high
financial leverage, the company retains good financial flexibility and
liquidity. In recent years WLP has maintained approximately $2 billion of
holding company cash and investments and it has access to a $2 billion credit
line that was untapped at June 30, 2014.
Market Position Size/Scale: Under Fitch's rating methodology for health
insurers WLP's market position and size/scale characteristics are considered
'large' and supportive of 'AA' rating category IFS ratings. Key factors
underlying WLP's 'large' categorization is the diversity of its membership,
both from a business line and geographic perspective, strong market shares in
various geographic markets, and the very large size of the company's
membership and revenue bases. WLP's membership includes meaningful
contributions from the commercial, Medicaid and Medicare markets, and the
company maintains leading market shares in 14 states where it is licensed to
use the Blue Cross and or Blue Shield brands. Based on its 37.3 million
members and over $70 billion in annual revenues, WLP is the second-largest
health insurer in the U.S.
Financial Performance and Earnings: WLP has a solid earnings profile that is
consistent with 'A' IFS rating category expectations. From 2011-2013 the
company generated average annual EBITDA of $5.2 billion and ratios of
EBITDA-to-revenues and net income-to-average capital that averaged 8.0% and
7.4%, respectively. Fitch views the company's Blue Cross and Blue Shield
licenses in key geographic markets and the company's significant size and
corresponding scale benefits as key factors underlying its earnings profile.
Fitch expects WLP's and the overall health insurance sector's margins to be
pressured as companies cope with Affordable Care Act provisions that expand
mandated benefits, limit underwriting capabilities, and impose additional fees
and minimum benefit ratios on Medicare Advantage business. In addition, fiscal
issues at the state and federal levels are pressuring Medicaid and Medicare
Advantage funding. These pressures are offset somewhat by the health insurance
sector's ability to pass significant portions of medical cost inflation on to
end-consumers, which Fitch believes will help grow absolute levels of revenues
and earnings even in periods of declining margins.
Due to WLP's elevated financial leverage, Fitch has applied non-standard
notching to increase the number of notches between the company's Issuer
Default Rating (IDR) and ratings on the company's senior unsecured notes.
Fitch would consider applying standard notching, resulting in a one-notch
upgrade to the rating on WLP's senior unsecured notes, if the company's
run-rate debt-to-EBITDA ratio was approximately 2.5x.
Rating sensitivities that could lead Fitch to upgrade all of WLP's ratings
--Run-rate debt-to-EBITDA and debt-to-capital ratios of approximately 2.2x and
--Maintenance of organization-wide NAIC risk-based capital (RBC) ratios (on a
company action-level basis) above 250%;
--Run-rate EBITDA-based margins approximating 9%.
Rating sensitivities that could lead to downgrades of all of WLP's ratings
--Run-rate debt-to-EBITDA or debt-to-capital ratios that exceed 3.0x and 40%,
--Organization-wide NAIC RBC ratios (on a company action-level basis) below
--Run-rate operating EBITDA-based interest coverage less than 6x or
EBITDA-to-revenue ratios less than 6%;
--Acquisitions that Fitch believes carry inordinate integration risks or are
--Material goodwill impairments that cause Fitch to question the value of one
of WLP's acquisitions;
--One or more of its subsidiaries' losing the right to use the Blue Cross or
Blue Shield brands.
Fitch has taken the following ratings:
--Long-term IDR downgraded to 'BBB+' from 'A-'; Outlook Stable;
The following ratings were downgraded to 'BBB' from 'BBB+':
--5.000% senior notes due 12/15/2014;
--1.250% senior notes due 9/10/2015;
--5.250% senior notes due 1/15/2016;
--2.375% senior notes due 2/15/2017;
--5.875% senior notes due 6/15/2017;
--1.875% senior notes due 1/15/2018;
--2.300% senior notes due 7/15/2018;
--7.000% senior notes due 2/15/2019;
--4.350% senior notes due 8/15/2020;
--3.700% senior notes due 8/15/2021;
--3.125% senior notes due 5/15/2022;
--3.300% senior notes due 1/15/2023;
--5.950% senior notes due 12/15/2034;
--5.850% senior notes due 1/15/2036;
--6.375% senior notes due 6/15/2037;
--5.800% senior notes due 8/15/2040;
--4.625% senior notes due 5/15/2042;
--2.750% senior convertible debentures due 10/15/2042;
--4.650% senior notes due 1/15/2043;
--5.100% senior notes due 1/15/2044;
The following ratings were affirmed:
--Short-term IDR at 'F2';
--$2.5 billion CP program at 'F2'.
Anthem Holding Corp.
--Long-term IDR downgraded to 'BBB+' from 'A-'; Outlook Stable.
Anthem Insurance Companies, Inc.
--Long-term IDR downgraded to 'A' from 'A+'; Outlook Stable.
--9.00% surplus notes due 2027 downgraded to 'A-' from 'A';
--IFS downgraded to 'A+' from 'AA-'.
The IFS ratings of the following issuers have been downgraded to 'A+' from
'AA-' and their Outlooks revised to Stable from Negative:
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.
Healthy Alliance Life Insurance Company
HMO Missouri, Inc.
Matthew Thornton Health Plan, Inc.
Rocky Mountain Hospital & Medical Service, Inc.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 13, 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (December
Applicable Criteria and Related Research:
Health Insurance and Managed Care (U.S.)
Insurance Rating Methodology
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Fitch Ratings, Inc.
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