S&P affirms Healthspring Inc. ‘B+’ rtg

(The following statement was released by the rating agency.)

— HealthSpring Inc. announced yesterday that it has entered into a
definitive agreement to acquire privately held Bravo Health Inc.
(B+/Stable/–), another Medicare focused health insurer, for $545.0 million in
cash.

— We believe that the acquisition will have a neutral effect on
HealthSpring’s credit profile despite the expected increase in debt leverage.

— As a result, we have affirmed our ‘B+’ counterparty credit rating on
HealthSpring.

— The stable outlook reflects our expectation that the company’s credit
profile over the next 12 months will remain intact.

Aug 27 – Standard & Poor’s Ratings Services said today that it affirmed its
‘B+’ counterparty credit rating on HealthSpring (HS.N: ) Inc.

Standard & Poor’s also said that the outlook on HealthSpring remains
stable.

The speculative-grade rating on Nashville, Tenn.-based HealthSpring
reflects rating weaknesses such as its very narrow product scope in Medicare
programs, its limited historical geographic diversification (which it expects
improve), a slight capital deficiency at the regulated subsidiaries (based on
Standard & Poor’s capital model), and a large amount of intangibles relative
to equity on the balance sheet. In addition, we believe reduced government
funding of the Medicare Advantage program over the next 10 years will likely
pressure the company’s long-term operating margins.

We consider HealthSpring’s rating strengths to include its established
market position in Medicare Advantage (MA) and Medicare Part D products; a
successful, tightly managed coordinated care model that has controlled medical
costs well historically; a good earnings profile based on current and
historical operating margins; an above-average operating expense structure;
and a conservative, liquid investment portfolio.

HealthSpring will fund the Bravo transaction with a combination of
unregulated cash, $100 million in borrowings under an amended existing credit
facility, and $400 million in new loans that it will establish simultaneously
with transaction closing. “We view HealthSpring’s planned acquisition of Bravo
Health Inc. as having the potential to improve its overall business profile,
as Bravo adds good geographic diversification in regions entirely new to
HealthSpring, such as Pennsylvania and the Mid-Atlantic,” said Standard &
Poor’s credit analyst James Sung. “In addition, Bravo has a nascent but
capable Medicaid platform that the company is launching in Texas and
Maryland.”

Strategically, we view the two companies as a good fit, as both share
similar business models that have focused almost exclusively on Medicare
Advantage and auto-assigned Medicare Part D business, with sound medical
management programs and operating cost structures. Conversely, we believe that
the acquisition comes with significant–but manageable–integration risks, as
Bravo will be HealthSpring’s largest acquisition by far (dwarfing its 2007
acquisition of Leon Medical Health Plans) since its inception in 2000. Both
companies have achieved strong membership growth rates over the past year, and
one watch area for us will be HealthSpring’s ability to continue growing and
retaining membership through the 2011 plan selling season as the pending
acquisition develops.

The stable outlook on HealthSpring reflects on our view that the
company’s creditworthiness is unlikely to change materially over the next 12
months based on our expectations for full-year 2010 and 2011 operating results
and credit metrics. This outlook incorporates our assumption that HealthSpring
will complete the acquisition (by the fourth quarter of 2010, at the earliest)
without any integration or operational issues that weaken the company’s
prospective business profile or financial results. In the event this occurs,
if the company were to experiences significant business deterioration or a
decrease in earnings, or if its key credit metrics fall to a level
unsupportive of current ratings, we would likely consider a one-notch
downgrade.
RELATED CRITERIA AND RESEARCH

— Holding Company Analysis, June 11, 2009.

Complete ratings information is available to RatingsDirect subscribers on
the Global Credit Portal at www.globalcreditportal.com and RatingsDirect
subscribers at www.ratingsdirect.com. All ratings affected by this rating
action can be found on Standard & Poor’s public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
Primary Credit Analyst: James Sung, New York (1) 212-438-2115;

[email protected]
Secondary Credit Analysts: Neal Freedman, New York (1) 212-438-1274;

[email protected]

Deep Banerjee, New York (1) 212-438-5646;

[email protected]

(New York Ratings team)

(email: [email protected]; Reuters messaging:
edith.honan.thomsonreuters.net; Tel:1-646-223-6323)

S&P affirms Healthspring Inc. ‘B+’ rtg