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Fitch Places WellPoint on Rating Watch Negative

Posted on: Tuesday, 27 September 2005, 15:00 CDT

Fitch has placed most of the ratings of WellPoint, Inc. (WellPoint) and its subsidiaries on Rating Watch Negative. At the same time, Fitch has affirmed Wellpoint's commercial paper rating at 'F2' and has withdrawn WellPoint's 'BBB+' subordinated debt rating as the company no longer has subordinated debt outstanding. The rating action affects approximately $4.6 billion of outstanding long-term debt and commercial paper. A list of the company's ratings can be found below.

Today's rating action follows WellPoint's announcement that it has agreed to acquire WellChoice, Inc. (WellChoice) for approximately $6.5 billion. The deal is structured 49% in cash and 51% in shares of WellPoint common stock. Fitch expects WellPoint to fund the cash portion of the purchase price primarily with debt, which, depending on conditions at the close of the transaction, could result in the addition of $2.7 billion of debt to WellPoint's balance sheet. The transaction is expected to close in the first quarter of 2006.

WellPoint is the result of the Nov. 30, 2004, merger with WellPoint Health Networks Inc. (WHN) by Anthem, Inc., which created the nation's largest health insurer based on medical enrollment. Anthem, Inc. changed its name to WellPoint, Inc. immediately following the completion of the transaction. The company now provides health benefits under the Blue Cross and/or Blue Shield names and marks in 13 states.

Fitch's primary concerns involve integration risk and financial leverage. Anthem and WHN were the fourth and second largest health insurers in the nation, respectively, at the time of their merger last year. As two of the largest players in a very complex and competitive industry, these companies had separately completed the acquisitions of six Blues Plans since 1999. While both companies have developed a very strong track record of successful integrations over the years, Fitch is concerned about integration challenges related to WellChoice and ongoing integration challenges related to the former Anthem and WHN.

Fitch expects WellPoint's debt to EBITDA ratio to increase to approximately 1.4 times (x) and trend down to a level below 1.0x by the end of 2007. Likewise, Fitch expects the debt-to-total capital ratio to increase to approximately 23% and trend down to below 20% by the end of 2007.

WellChoice provides health benefits primarily in the State of New York to approximately five million medical members. It has exclusive rights to use the Blue Cross and Blue Shield names and marks in 10 counties in and around the New York City metropolitan area, as well as six counties in upstate New York. In addition, the company is licensed to use the Blue Cross and/or the Blue Shield names and marks, with varying levels of exclusivity, in several additional counties in upstate New York. The company completed its initial public offering of common stock in November 2002 but had been operating as Empire Blue Cross and Blue Shield for many years prior.

As the close of the transaction approaches, Fitch will evaluate WellPoint's financial position at that time, as well as market conditions and any changes to the proposed funding of the acquisition, to determine the appropriate action, if any, to take on the company's ratings. At that time, Fitch will either downgrade the company's ratings, affirm the ratings and remove the Rating Watch, or maintain the Rating Watch, pending further development. Although Fitch considers the acquisition of WellChoice to be strategically sound, the near-term concerns outlined above outweigh the longer term strategic benefits that potentially can be achieved from the acquisition.

Fitch's ratings on WellPoint and its subsidiaries are supported by excellent operating performance, solid combined capitalization of its operating subsidiaries, strong management team, and improved diversification of earnings, revenues, and total enrollment. WellPoint has a very strong provider network and has a leading market share in nearly every market in which it uses the Blue Cross and/or Blue Shield brand.

The ratings also continue to reflect the competitive pressures in several of the company's markets, driven by price competition, increasing medical cost trends, and the evolving regulatory and political environment affecting the health insurance and managed care industry.

Fitch anticipates continued strong operating performance from the company for the foreseeable future and expects management to focus on debt reduction over the near term to restore the company's leverage measures to a more conservative level.

With approximately 28.8 million medical members, Indianapolis-based WellPoint is the nation's largest publicly traded health insurance and managed care company. The company reported net income of nearly $1.2 billion in the first half of 2005 on total revenues of $22.4 billion.

Fitch has placed the following ratings on Rating Watch Negative:

WellPoint, Inc.

-- Long-term issuer at 'A-';

-- 3.750% senior notes due 2007 'A-';

-- 4.250% senior notes due 2009 'A-';

-- 5.000% senior notes due 2014 'A-';

-- 5.950% senior notes due 2034 'A-';

-- 6.800% senior notes due 2012 at 'A-';

-- 3.500% senior notes due 2007 at 'A-';

-- Short-term issuer at 'F2';

-- Commercial paper at 'F2'.

Anthem Holding Corp. (formerly known as WellPoint Health Networks Inc.)

-- Long-term issuer at 'A-';

-- 6.375% senior notes due 2006 at 'A-';

-- 6.375% senior notes due 2012 at 'A-'.

Anthem Insurance Companies, Inc.

-- Insurer financial strength at 'AA-';

-- 9.00% surplus notes due 2027 at 'A-';

-- 9.125% surplus notes due 2010 at 'A-'.

HealthKeepers, Inc.

Priority Health Care, Inc.

Peninsula Health Care, Inc.

Blue Cross of California

UNICARE Life & Health Insurance Company

BC Life & Health Insurance Company

UNICARE Health Plans of the Midwest, Inc.

Blue Cross and Blue Shield of Georgia, Inc.

Blue Cross Blue Shield Healthcare Plan of Georgia, Inc.

HMO Missouri, Inc.

-- Insurer financial strength at 'AA-'.

Fitch has affirmed the following ratings:

Wellpoint, Inc.

-- Short-term issuer at 'F2';

-- Commercial paper at 'F2'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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