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Global Credit Research - 27 Aug 2010
$170 million of rated debt outstanding
New York, August 27, 2010 -- Moody's Investors Service has affirmed the debt ratings of HealthSpring,
Inc. (HealthSpring, NYSE:HS) (senior secured at Ba3;
stable outlook) and the Ba1 insurance financial strength ratings (IFSR)
of its operating subsidiaries following the announcement of a definitive
agreement to acquire Bravo Health, Inc. (Bravo Health,
Ba1 operating company IFSR), a Medicare Advantage health insurer,
for $545 million in cash. The targeted completion date for
the acquisition is on or before the end of 2010, pending regulatory
In affirming HealthSpring's ratings and maintaining a stable outlook,
Moody's stated that while the company will increase its outstanding debt
by $500 million to finance the acquisition, raising Debt
to EBITDA from its current level of approximately 0.7 times,
as a standalone entity, to approximately 2 times, this metric
is expected to remain consistent with the current rating level.
However, given the company's concentration in Medicare Advantage
and the uncertainty as to the popularity and profitability of these products
as a result of healthcare reform, the rating agency noted that HealthSpring's
financial flexibility will be somewhat diminished at the higher leverage
Offsetting this concern, Moody's commented that the acquisition
will provide HealthSpring a larger membership base, providing opportunities
for operating efficiencies in offering its Medicare Advantage products,
which will result in an improvement in the company's credit profile.
Moody's Senior Vice President, Steve Zaharuk stated,
"With the scheduled reimbursement reductions to Medicare Advantage
plans under healthcare reform, healthcare insurers will be under
pressure to operate their plans more efficiently to optimize benefits
and meet the minimum loss ratio (MLR) requirements that are scheduled
to begin in 2014. This acquisition will provide HealthSpring additional
membership over which to spread its costs and new markets for growth."
According to the rating agency, the acquisition provides HealthSpring
a sizeable presence in Pennsylvania and Maryland, and adds to its
market position in Texas. Moody's added that HealthSpring's
integration plans anticipate minimal disruption to existing members and
networks, as both companies share similar medical management philosophies.
From a capital perspective, Moody's stated that it anticipates
HealthSpring to maintain its NAIC risk based capital (RBC) ratio at no
less than 150% of company action level (CAL). However,
the anticipated addition of goodwill will likely increase the ratio of
intangible assets to equity above 100%, which negatively
impacts the company's financial profile.
Moody's said that due to the financial uncertainties and political pressures
associated with Medicare Advantage, further upgrades for HealthSpring
are limited in the near-term; however, the following
could result in an upgrade: 1) additional geographic and product
diversification beyond Medicare Advantage, 2) successful integration
of Bravo Health with continued organic membership growth of 4%
annually with net margins of 3%, and 3) reducing leverage
to pre-acquisition levels. Conversely, HealthSpring's
ratings could be downgraded if: 1) the consolidated NAIC RBC ratio
fell below 100% CAL, 2) an impairment or loss of any of its
Centers for Medicare and Medicaid Services (CMS) contracts, or 3)
integration issues that lead to a significant loss of membership or earnings.
The last rating action on HealthSpring was on July 30, 2009,
when the ratings (senior debt at Ba3) were affirmed.
The following ratings were affirmed with a stable outlook:
HealthSpring, Inc. -- senior secured debt rating
at Ba3; corporate family rating at Ba3;
HealthSpring of Tennessee, Inc. -- insurance
financial strength rating at Ba1;
Texas HealthSpring, LLC -- insurance financial strength
rating at Ba1;
HealthSpring of Alabama, Inc. -- insurance
financial strength rating at Ba1.
HealthSpring, Inc. is headquartered in Nashville, Tennessee.
For the first six months of 2010 total revenue was $1.5
billion with Medicare Advantage membership (excluding Part D stand alone)
of approximately 197,400. As of June 30, 2010 the company
reported shareholders' equity of approximately $1.0 billion.
Bravo, Inc. is headquartered in Baltimore, Maryland
and operates Medicare Advantage coordinated care plans in Pennsylvania,
the Mid-Atlantic region and Texas. For the first six months
of 2010 total revenue was $835 million with Medicare Advantage
membership (excluding Part D stand alone) of approximately 99,300.
As of June 30, 2010 the company reported shareholders' equity of
approximately $167 million.
The principal methodology used in rating HealthSpring was Moody's Rating
Methodology for U.S. Health Insurers published in February
2007, which can be found at www.moodys.com in the
Rating Methodologies sub-directory under the Research & Ratings
tab. Other methodologies and factors that may have been considered
in the process of rating HealthSpring can also be found in the Rating
Methodologies sub-directory on Moody's website.
Moody's insurance financial strength ratings (IFSR) are opinions about
the ability of insurance companies to punctually pay senior policyholder
claims and obligations.
Senior Vice President
Financial Institutions Group
Moody's Investors Service
MD - Insurance
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms HealthSpring after announced acquisition; stable outlook
250 Greenwich Street
New York, NY 10007
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