CHICAGO--(BUSINESS WIRE)--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 are:
--Run-rate debt-to-EBITDA and debt-to-capital ratios of approximately 2.2x and 35%, respectively;
--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 are:
--Run-rate debt-to-EBITDA or debt-to-capital ratios that exceed 3.0x and 40%, respectively;
--Organization-wide NAIC RBC ratios (on a company action-level basis) below 225%;
--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 aggressively financed;
--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 18, 2013).
Applicable Criteria and Related Research:
Health Insurance and Managed Care (U.S.)
Insurance Rating Methodology