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A.M. Best Removes Ratings of WellPoint, Inc. and Its Subsidiaries From Under Review; Assigns Ratings to AMERIGROUP Companies

ELV | April 25, 2013

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of the core insurance subsidiaries of WellPoint, Inc. (WellPoint) (Indianapolis, IN) [NYSE: WLP]. The outlook assigned to these ratings is stable.

Concurrently, A.M. Best has removed from under review with negative implications and affirmed the ICR and debt ratings of “bbb+” of WellPoint and the debt rating of “a-” on the surplus notes of Anthem Insurance Companies, Inc. (Indianapolis, IN).

Additionally, A.M. Best has assigned an FSR of A- (Excellent) and ICRs of “a-” to AMERIGROUP Community Care New Mexico (Albuquerque, NM), AMERIGROUP Florida Inc. (Tampa, FL) , AMERIGROUP Maryland Inc. (Hanover, MD), AMERIGROUP Nevada Inc. (Las Vegas, NV), AMERIGROUP New Jersey Inc. (Iselin, NJ), AMERIGROUP Ohio Inc. (Cincinnati, OH), AMERIGROUP Tennessee Inc. (Nashville, TN), AMERIGROUP Texas Inc. (Houston, TX) and AMGP Georgia Managed Care Co. (Atlanta, GA). All the above companies are subsidiaries of WellPoint. The outlook for these ratings is stable. (See link below for a detailed listing of the companies.)

The ratings of WellPoint and its subsidiaries were placed under review following the announcement that it had entered into a definitive agreement to acquire AMERIGROUP Corporation (AMERIGROUP). This transaction closed in late December 2012. A.M. Best has since had discussions with management regarding the business strategy around the AMERIGROUP acquisition and integration as well as WellPoint’s consolidated 2013 outlook for operating results and key financial metrics.

The ratings of the AMERIGROUP subsidiaries reflect positive operating results, premium and enrollment growth, as well as the business and geographic diversity these companies provide to WellPoint. Through the acquisition of the AMERIGROUP subsidiaries, WellPoint increased its state-sponsored business by approximately 150% and now has a Medicaid presence in 20 states including eight of WellPoint’s core BlueCross BlueShield (Blue) states. It is projected that the state-sponsored business will continue to contribute favorably to premiums growth and operating earnings for WellPoint. While state-sponsored business is a growing market segment, margins are considerably lower than WellPoint’s commercial business and they could be pressured in the future due to the uncertainty surrounding funding of managed Medicaid programs, as state budgets remain under significant economic pressure and decisions on the expansion of the program vary on a state-to-state basis.

The affirmation of the ratings for the insurance subsidiaries of WellPoint reflect the organization’s leading market share in its core markets, favorable operating results, strong operating cash flows and good level of risk-adjusted capitalization. WellPoint has a strong membership base serving almost 36 million members and is a market leader in its 14 Blue markets. WellPoint’s core Blue plans continue to report strong operating results and generate strong cash flows from operations, which contribute positively to the financial flexibility of the organization. Commercial membership has declined due to strategic pricing and product actions in certain states and market segments as well as due to competitive pricing pressure. Additionally, margins have shown some compression due to the change in business mix, Medicare reimbursement and competitive and economic pressures on pricing as well as operational investments being made by WellPoint in preparation for health insurance exchanges and in its Medicare market segment.

The affirmation of the ICR and debt ratings of WellPoint acknowledges its good level of financial flexibility through a strong parent company cash balance, good level of subsidiary dividends, its $2.5 billion commercial paper program and its available $2 billion credit facility, as well as the expectation of a moderation of its share repurchase program. WellPoint’s debt-to-capital ratio was 38.1% at March 31, 2013, which is considered high. The elevation in its leverage is due to the financing of the acquisition of AMERIGROUP; however, it is anticipated that the ratio will come down over the medium term. Interest coverage has declined but remains good at almost eight times. Fixed charge coverage continues to decline due to the increased level of quarterly dividends to shareholders and was approximately four times at December 31, 2012, down from five times in 2011.

WellPoint also has a high amount of goodwill and other intangible assets on its balance sheet in comparison to its peers. As of March 31, 2013, these assets comprised approximately 45% of its total asset base and 109% of total consolidated shareholders’ equity. A.M. Best does note that WellPoint’s Blue trademarks represent a significant portion of its $9.1 billion of total intangible assets. A.M. Best recognizes that although debt-to-capital and goodwill and intangible assets to equity are high, these ratios are anticipated to moderate over time, and parent company financial flexibility remains good due to favorable operating trends, good operating cash flow and strong subsidiary dividends.

WellPoint and its core insurance subsidiaries are well positioned for their current ratings. Negative rating actions could occur if operating earnings from the organization’s health operations weaken considerably, the subsidiaries’ capitalization declines significantly or if leverage metrics increase drastically.

For the AMERIGROUP subsidiaries, positive rating movement could occur if the these entities show continued enrollment and premium growth, become a more significant contributor to overall earnings and increase the level of their risk-adjusted capitalization at certain lower capitalized entities. Conversely, negative rating actions could occur if operating earnings from their core Managed Medicaid operations weaken considerably, capitalization declines or they are negatively impacted by state budget constraints.

For a complete listing of WellPoint, Inc. and its key life/health subsidiaries’ FSRs, ICRs and debt ratings, please visit http://www.ambest.com/press/042511wellpoint.pdf.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.