Fitch Affirms Centene Ratings at ‘BBB’; Revises Outlooks to Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings assigned to various Centene Corporation (CNC) insurance company subsidiaries at 'BBB'. The Rating Outlooks have been revised to Stable from Negative.

Today's rating actions follow completion of a periodic review of CNC's financial and operating profile. The rating actions reflect CNC's good capitalization and business profile and solid debt service capabilities and financial performance. The Outlook revisions to Stable reflects Fitch's heightened comfort that CNC's key financial metrics will continue to support the company's current ratings as it continues to integrate HNT and responds to potential changes in the Medicaid market from the November elections.

KEY RATING DRIVERS

Fitch characterizes CNC's capitalization and leverage as "good" ('bbb' category). Key considerations underlying this characterization are Fitch's projections that CNC's debt-to-EBITDA and financial leverage ratios (FLR) will range from 2.5x to 3.0x and 40% to 45%, respectively over the next 12 to 24 months. Other key considerations underlying Fitch's characterization of CNC's capitalization and leverage are the company's insurance subsidiaries' NAIC risk-based capital (RBC) ratios and ratios of premiums to surplus, which Fitch believes are likely to be in a range of 175% to 200% and 8.0x to 9.0x, respectively.

CNC has a "good" ('bbb' category) business profile. The company maintains a leading market share in the Medicaid market and roughly 79% of its at-risk membership is derived from Medicaid. The favorable aspects of this leading market position are tempered by heightened uncertainty around the Medicaid market due to the November 2016 election outcome that may result in reductions in federal Medicaid funding and by Fitch's long-held view that Medicaid membership is less able to generate profit margins and capital stability than commercial membership. Favorably, Fitch notes that CNC's membership is geographically diverse with members from California, Texas, Florida, Arizona and Georgia representing 51% of the total. Also considered in CNC's business profile assessment are the company's rapid organic and acquisition-related growth and overall effectiveness in managing growth-related risks.

CNC's debt service capabilities and financial flexibility is considered "good" ('bbb' category). Fitch projects CNC's operating EBITDA-based interest coverage ratios to be in a range of 7.0x to 10.0x over the next 12 to 24 months. Financial flexibility is derived from $700 million available under a $1 billion credit facility and proven capital market access. To date in 2016, CNC has issued $4.1 billion of senior notes and $3.1 billion of common shares, primarily to fund its acquisition of HNT and to redeem existing debt. The company's operating EBITDA-based interest coverage ratio through the first nine months of 2016 excluding HNT-related acquisition expenses was 8.7x.

Fitch categorizes CNC's financial performance and earnings as good ('bbb' category). Fitch projects CNC's near-term ratios of EBITDA-to-revenues in a range of 3% to 5% and its net income /average capital ratios at 4% to 6%. Through the first nine months of 2016 CNC's $1.2 billion of EBITDA (excluding $224 million of HNT-related acquisition fees) resulted in an EBITDA-to-revenue of 4.3% and its ratio of annualized net income-to-average capital was 5.8%.

RATING SENSITIVITIES

Upgrades could occur if CNC consistently generates (i) debt-to-EBITDA and FLRs approximating 2.0x and 35% respectively (ii) operating EBITDA-based and subsidiaries' dividend based interest coverage ratios approximating 10x and 5x respectively. 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 (i) debt-to-EBITDA and FLRs exceeding 3.0x and 45% respectively (ii) operating EBITDA-based and subsidiaries' dividend based interest coverage ratios approximating 4x and 2x, respectively. Downgrades could also occur if CNC experienced earnings disruptions related to the potential repeal and replacement of the Affordable Care Act, the integration of HNT or the company's recent rapid acquisition and organic driven membership and revenue growth.

Fitch has affirmed the IFS ratings for the following at 'BBB':

Health Net of California, Inc.

Health Net of Arizona, Inc.

Health Net Health Plan of Oregon, Inc.

The Rating Outlooks have been revised to Stable from Negative.

Fitch has affirmed and withdrawn the following rating assigned to HNT:

--Long-Term Issuer Default Rating (IDR) at 'BB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

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Fitch Ratings

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