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Rating Action:

Moody's downgrades WellPoint's ratings (senior to Baa2) following announcement of AMERIGROUP acquisition; stable outlook

09 Jul 2012

Approximately $10.3 billion of debt affected

New York, July 09, 2012 -- Moody's Investors Service has downgraded WellPoint, Inc.'s (WellPoint; NYSE: WLP) senior debt rating to Baa2 from Baa1 and the insurance financial strength (IFS) ratings of its operating subsidiaries (see list below) to A2 from A1 following the announcement that it had entered into a definitive agreement to acquire AMERIGROUP Corporation (AMERIGROUP; NYSE: AGP; senior debt rating at Ba2) for approximately $4.9 billion. The outlook on the ratings is stable. The transaction, which is subject to regulatory approval, is expected to close in the first quarter of 2013.

RATINGS RATIONALE

Moody's commented that the downgrade largely reflects the negative impact of the transaction on WellPoint's financial flexibility, which is expected to be financed predominantly with debt. In addition, the rating agency noted that the proposed financing of the transaction and recent heightened level of acquisition activity indicate the company has a higher tolerance for financial leverage going forward as well as a willingness to be more aggressive than was incorporated in the ratings. Thus, the downgrade also recognizes that WellPoint's financial profile is expected to be less conservative going forward than it had been historically, regardless of whether or not the transaction closes.

As a result of the acquisition, financial leverage (debt to capital where debt includes unfunded pension liability and operating leases) is expected to increase from 31.7% as of December 31, 2011 to approximately 40% proforma at the close of the transaction. The increase in leverage is a result of $4.2 billion of expected new debt along with the assumption of $475 million of AMERIGROUP's debt. Although WellPoint intends to lower its financial leverage over the next two years, projected financial leverage is still expected to exceed 35% by the end of 2014. The rating agency also stated that the rating action reflects the additional integration risk associated with the transaction, especially in light of another recent acquisition (1-800-CONTACTS, unrated), expansion of WellPoint's CareMore model, and the operational considerations associated with healthcare reform.

Offsetting some of these concerns, Moody's added, is the added diversity and opportunities the acquisition provides to WellPoint. Steve Zaharuk, Moody's Senior Vice President, commented: "Although the recent Supreme Court ruling has lowered Medicaid expansion projections, there are excellent growth prospects from: 1) states that are still expected to expand Medicaid eligibility under the Affordable Care Act, 2) states that will move their Medicaid populations into managed care, and 3) upcoming dual eligible business opportunities." "With respect to the dual eligibles," Zaharuk added, "the combination of AMERIGROUP's strong Medicaid platform with WellPoint's Medicare experience should make the company very competitive as states begin the bidding process for this business." The rating agency noted that the key question surrounding this opportunity, however, will be WellPoint's ability to integrate AMERIGROUP's management into WellPoint's culture and to effectively market products without the BlueCross/Blue Shield brand.

Commenting on WellPoint's solid business profile, Moody's said that the additional membership, growth opportunities and Medicaid revenue from AMERIGROUP will strengthen WellPoint's overall business profile. However, in addition to an increase in financial leverage, the transaction weakens the company's financial profile as a result of anticipated lower EBITDA margins, increased goodwill, and additional pressure on retaining consolidated risk-based capital (RBC) ratio at 250% of company action level (CAL). The rating agency commented that while WellPoint's RBC ratio is in the 250% of CAL range, AMERIGROUP's RBC ratio is in the 200% of CAL range. An additional positive consideration is WellPoint's cash position, which remains targeted at a level of at least $1 billion of cash and investments at the parent, is very strong and considerably higher than its national competitors.

Moody's indicated that WellPoint's ratings could be upgraded if: 1) EBITDA margins are above 7%, 2) the consolidated RBC ratio is maintained at or above 250% of CAL, 3) overall annual medical membership growth is 2% or more, and 4) financial leverage is brought down to at least 35% on a sustained basis. However, the ratings could be further downgraded if: 1) EBITDA earnings margins decline below 5%, 2) overall medical membership decreases by more than 5%, 3) unadjusted financial leverage increases above 40%, or 4) the consolidated RBC ratio falls below 200% CAL.

The principal methodology used in rating WellPoint was Moody's Rating Methodology for U.S. Health Insurance Companies published in May 2011.

The following ratings were downgraded with a stable outlook:

WellPoint, Inc. -- senior unsecured debt rating to Baa2 from Baa1; provisional senior unsecured debt shelf rating to (P)Baa2 from (P)Baa1; provisional subordinated debt shelf rating to (P)Baa3 from (P)Baa2; provisional preferred stock shelf rating to (P)Ba1 from (P)Baa3;

Anthem Insurance Companies, Inc. -- insurance financial strength rating to A2 from A1; surplus note rating to Baa1(hyb) from A3(hyb);

Blue Cross of California -- insurance financial strength rating to A2 from A1;

Empire HealthChoice Assurance, Inc. -- insurance financial strength rating to A2 from A1;

Anthem Health Plans, Inc. -- insurance financial strength rating to A2 from A1;

Anthem Health Plans of Virginia, Inc. -- insurance financial strength rating to A2 from A1;

Community Insurance Company -- insurance financial strength rating to A2 from A1.

The following rating was affirmed with a stable outlook:

WellPoint, Inc. -- short-term debt rating for commercial paper of Prime-2 (P-2).

WellPoint, Inc., domiciled in Indiana, offers various group and individual medical products, including indemnity, preferred provider organization (PPO), point of service (POS) and health maintenance organization (HMO) plans. The company reported total revenues of approximately $15.4 billion for the first three months of 2012. As of March 31, 2012, shareholders' equity was approximately $23.5 billion and medical membership (excluding BlueCard and Medicare Part D members) was approximately 28.7 million.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations.

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Stephen Zaharuk
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Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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SUBSCRIBERS: 212-553-1653

Moody's downgrades WellPoint's ratings (senior to Baa2) following announcement of AMERIGROUP acquisition; stable outlook
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