November 29, 2017 / 6:16 PM / a year ago

Fitch Affirms Centene's Ratings at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, November 29 (Fitch) Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings assigned to various Centene Corporation (CNC) insurance company subsidiaries at 'BBB' (Good). The Rating Outlooks are Stable. KEY RATING DRIVERS The affirmation continues to reflect CNC's good financial performance and business profile with top-tier market share in the Medicaid market. Important considerations limiting CNC's rating is the company's high financial leverage ratio as well as its rapid organic and acquisition-related growth and concentration in Medicaid. CNC's financial performance and earnings is considered good and modestly better than the current rating and carries moderate influence. Net income return on capital has fallen from the low double digits before the Health Net, Inc. acquisition to an annualized 7.1% through the first nine months of 2017, but remains a positive influence on the rating. The EBITDA-to-revenues ratio has improved since the Health Net acquisition to 4% through the first three quarters of 2017, but remains below expectations for the current rating category. CNC's capitalization and leverage is considered good, but modestly below the current rating and carries a higher influence. The company's elevated financial leverage ratio at greater than 40% and estimated organization-wide RBC ratio of approximately 175% of the company action level are lower than expectations for the rating category. CNC's debt-to-EBITDA of 2.3x at Sept. 30, 2017 is a favorable influence on the capitalization and leverage score; however, this ratio is expected to deteriorate moderately as a result of the Fidelis Care acquisition. CNC's business profile is good and consistent with the current rating with moderate influence given the company's sizeable market share and geographic diversification. CNC maintains a leading position in the U.S. Medicaid market, which creates material product concentration. In Fitch's view, in comparison with insurers with more diverse membership, this concentration suppresses CNC's business profile score. CNC announced an agreement to buy Fidelis Care for $3.75 billion in a deal that is expected to close in the first quarter of 2018. CNC plans to fund the purchase with $2.3 billion of new equity and $1.6 billion of new long-term debt. Fidelis Care is a New York health insurer providing mostly Medicaid business, but also a moderate amount of individual policies on New York's ACA exchange. Fitch's view is that CNC's insurance company subsidiaries' capitalization and financial performance metrics are unlikely to meaningfully deteriorate as a result of the acquisition. Additionally, Fitch believes that CNC's financial leverage will remain materially unchanged from current levels and remain consistent with rating sensitivities given the mix of debt and equity used to fund the acquisition. RATING SENSITIVITIES Upgrades could occur if CNC consistently generates debt to EBITDA and financial leverage approximating 2.0x and 35% respectively, or operating EBITDA-based interest coverage approximating 10x. Upgrades could also occur if CNC grows its commercial membership, which in Fitch's view would reduce risks derived from the company's current Medicaid concentration and potentially increase the company's EBITDA-based profit margin. Downgrades could occur if CNC consistently generates debt to EBITDA and a financial leverage exceeding 3.0x and 45%, respectively, or operating EBITDA-based interest coverage approximating 4x. Downgrades could also occur if CNC experienced earnings disruptions related to the potential repeal and replacement of the Affordable Care Act, the integration of Fidelis Care, or the company's recent rapid acquisition and organically driven membership and revenue growth. FULL LIST OF RATING ACTIONS Fitch has affirmed the following IFS ratings at 'BBB': Health Net of California, Inc. Health Net of Arizona, Inc. Health Net Health Plan of Oregon, Inc. The Rating Outlooks are Stable. Contact: Primary Analyst Doug Pawlowski, CFA Senior Director +1-312-368-2054 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Brad Ellis, CFA Director +1-312-368-2089 Committee Chairperson Jeff Mohrenweiser Senior Director +1-312-368-3182 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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