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Rating Action:

Moody’s upgrades Molina Healthcare’s ratings; changes outlook to positive

24 April 2019

New York , April 24, 2019 -- Moody's Investors Service has upgraded the senior unsecured debt ratings of Molina Healthcare Inc. (Molina, NYSE: MOH) to B2 from B3 and the insurance financial strength (IFS) ratings of six of Molina's regulated operating subsidiaries (see list below) to Ba1 from Ba2. The outlook on Molina, a provider of government sponsored health care products for low-income families and individuals, and its rated operating subsidiaries has been changed to positive from stable.

RATINGS RATIONALE

The upgrade of Molina's ratings and the positive outlook on the holding company and insurance subsidiaries reflects the substantial progress management has made in improving Molina's financial profile since late 2017. Specifically, the company reported 2018 GAAP net income of $707 million, compared to a loss of over $500 million in 2017. The company's pre-tax margin was 5.3% in 2018, positioning it well among Medicaid focused health insurers, although partially because of the company's strong results in the individual marketplace. Along with the improvement in profitability, the company reported improvements in financial flexibility, with adjusted debt-to-capital declining to 50.9% and debt to EBITDA to 1.2x as of year-end 2018. Since announcing its loss of Medicaid contracts in early 2018 in New Mexico and Florida, Molina has been successful in subsequent re-procurements, including getting a partial award in Florida. Lastly, Molina has remedied internal control weaknesses, as reported in the 2017 10K.

Moody's recognizes Molina's strong management as a more fundamental driver of the upgrades. Molina's improvement in its credit profile was driven by changes in operating policies and procedures implemented by the new management team. Under previous management, the company had grown rapidly, with ten acquisitions in 2015 and 2016, leading to operating challenges.

Notwithstanding the upgrades, Moody's B2 senior unsecured debt rating and Ba1 IFS rating of its operating subsidiaries continues to reflect the company's constrained financial flexibility as adjusted debt to capital remains above 50%. It also reflects the company's concentration risk in Medicaid, as exemplified by the aforementioned loss of Medicaid contracts in 2018, as well as the company's smaller footprint in the individual market. Furthermore, the ratings consider the rapidity of the turnaround and the need for management to demonstrate sustainability of results going forward.

The four-notch differential between the Ba1 IFS and B2 senior unsecured debt, which is greater than Moody's standard three-notch differential for insurance groups, represents the increased potential for loss to debt holders relative to policyholders for issuers with below investment grade IFS ratings. If Molina continues to perform at a high level in 2019, and management, thereby, demonstrates sustainability of results, Moody's would likely restore the standard three-notch differential. Therefore, if the positive outlook for the IFS ratings are resolved with a one notch upgrade, the debt rating could go up by two notches. Furthermore, if Molina's improved performance is sustained, the resolution of the positive outlook could occur sooner than the typical 12-18 month time frame.

RATINGS DRIVERS

Factors that could lead to rating upgrades, include: (i) a maintenance of profitability, as measured by the EBITDA margin (with Moody's adjustments) of at least 3.0%; and (ii) adjusted debt to capital declines below 50% and adjusted debt to EBITDA remains below 3.0x; (iii) earnings coverage of at least 6x; (iv) steady profitable organic growth of medical membership.

While a downgrade is unlikely in the next 12-18 months given the positive outlook, factors that could lead to ratings being affirmed with a stable outlook include: (i) a material decline in profitability, with an EBITDA margin (with Moody's adjustments) below 3.0% in 2019; or (ii) no improvement in adjusted debt-to-capital from current levels and/or debt/EBITDA increasing to above 3.5x; or (iii) an additional 15% decline in membership in 2019, or the unexpected loss of a major Medicaid contract.

The following ratings were upgraded:

..Issuer: Molina Healthcare, Inc.

....Senior Unsecured Regular Bond/Debenture, to B2 from B3

..Issuer: Molina Healthcare of California

....Insurance Financial Strength, to Ba1 from Ba2

..Issuer: Molina Healthcare of Michigan, Inc

....Insurance Financial Strength, to Ba1 from Ba2

..Issuer: Molina Healthcare of New Mexico, Inc

....Insurance Financial Strength, to Ba1 from Ba2

..Issuer: Molina Healthcare of Ohio, Inc

....Insurance Financial Strength, to Ba1 from Ba2

..Issuer: Molina Healthcare of Texas, Inc.

....Insurance Financial Strength, to Ba1 from Ba2

..Issuer: Molina Healthcare of Washington Inc

....Insurance Financial Strength, to Ba1 from Ba2

Outlook Actions

..Issuer: Molina Healthcare, Inc.

..Issuer: Molina Healthcare of California

..Issuer: Molina Healthcare of Michigan, Inc

..Issuer: Molina Healthcare of New Mexico, Inc

..Issuer: Molina Healthcare of Ohio, Inc

..Issuer: Molina Healthcare of Texas, Inc.

..Issuer: Molina Healthcare of Washington Inc

....Outlook, changed to positive from stable

Molina Healthcare, Inc. is headquartered in Long Beach, California. In 2018 total revenue (including investment income) was $18.9 billion with net income of $707 million. Medical membership as of December 31, 2018 was approximately 3.8 million members. As of December 31, 2018 the company reported total equity of $1.6 billion.

The principal methodology used in these ratings was U.S. Health Insurance Companies published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dean Ungar
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Scott Robinson
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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