CENTENNIAL: S&P Global Ratings raised long-term issuer credit rating on Centene Corp. (the holding company of the group) to ‘BBB-‘ from ‘BB+’.

At the same time, S&P raised long-term financial strength ratings on Centene’s core insurance companies to ‘A-‘ from ‘BBB+’. The outlook is stable.

The upgrade reflects credit-quality improvements at Centene. “We had put our ratings on Centene on a positive outlook in May 2018. At that time, we had stated that we would raise the ratings if Centene met our expectations for geographic and product diversification, profitability (3%-4% return on revenue), and capitalization (‘BBB’ level as per our capital model). Centene has met those upgrade triggers, and we expect it to maintain those metrics in the future,” S&P said in a release.

The outlook is stable. S&P expects Centene to maintain its core market strengths, continue to undertake profitable growth (return on revenue around 3%-4%), and maintain capital adequacy close to the ‘BBB’ level as per insurance capital model. “If the WellCare acquisition is completed, financial leverage will likely increase to 43%-44% from the 38% as of September 2019. However, post-acquisition, our base-case forecast assumes a de-levering trajectory that would bring leverage down to 40% over the next two years”.

“Our base-case forecast for Centene, as well as for all our current ratings in the U.S. health insurance sector, assumes that the Affordable Care Act (ACA) in its current form continues, perhaps with some tweaks but without any major overhaul. We state this knowing that the Texas V. U.S.A. ACA legal challenge is currently being appealed. If ACA is ultimately found unconstitutional, we would revisit our sector forecasts based on that new information.

“We may lower the ratings if Centene cannot de-lever after an acquisition to its long-term target of 35%-40%, if it loses ground in its Medicaid business segment, or if profitability remains consistently below the current levels”. There is limited upside to the ratings over the next 12-24 months.