A.M. Best Assigns WellPoint Ratings - Analyst Blog

A.M. Best Co. assigned its debt rating to the senior unsecured notes due 2020 and 2040, which were recently issued by WellPoint Inc. (WLP), keeping the outlook "stable". The existing ratings of WellPoint and its subsidiaries were unchanged.

WellPoint completed the sale of its $1 billion senior notes on August 12 and the proceeds totaled over $986 million net of underwriting costs. WellPoint stated that the sale proceeds will be utilized for the repayment of WellPoint's short-term and long-term debts and for general corporate  expenses.

A.M. Best allotted a debt rating of "bbb+" to both the $700 million 4.35% senior unsecured notes due 2020 and the $300 million 5.80% senior unsecured notes due 2040. On the other hand, Fitch Ratings assigned an investment-grade rating of "A-" to the total debt of $1 billion, reiterating a negative rating outlook for WellPoint.

According to Fitch, WellPoint should use its debt proceeds to fund a $700 million debt maturing in January 2011 and a term loan of about $370 million maturing in July 2011.

Our Take

WellPoint is well positioned in its peer group and has a strong cash flow position, despite the unfavorable enrollment environment driven by the ongoing difficult global economic condition. WellPoint has been strengthening its portfolio through its acquisition strategy, leading to margin expansion and top-line growth. Further, the sale of WellPoint's in-house pharmacy benefits business to Express Scripts Inc. (ESRX) has strengthened the strong balance sheet and fueled a major stock repurchase.

Further, the rating agency A.M. Best expects WellPoint's debt to capital ratio to be at or below 30% at year-end 2010, which is currently at 27% as of June 30. Also, EBIT interest coverage is expected to remain at or above 10 times for fiscal 2010.

However, we remain concerned about the negative outlook issued by Fitch owing to the headwinds from health care reform. Although the reform aims to cover millions of uninsured people, but it will also adversely impact the company and other health insurers through new taxes and restrictions. Fitch stated that the reform could affect the managed care industry's structure and the operating profile of several companies.

Currently, WellPoint carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.