In a report published today, Fitch Ratings said that it expects health insurance and managed care companies' interest coverage to remain solid through the second half of 2012 despite some negative trends.
The agency believes that the publicly traded health insurers and managed care companies it monitors will generate second-half 2012 EBITDA-based interest coverage ratios in the 10x to 13x range. This projection represents a modest decline from first-half 2012's EBITDA-based coverage ratio of 14.1x. Fitch believes that second-half 2012 earnings and interest coverage will be pressured by declining EBITDA-based margins and modest increases in financial leverage and interest expense.
The sector’s EBITDA margin was 8.3 percent in first-half 2012, and according to Fitch. This represents a meaningful decline from 9.4 percent in the prior-year period. First-half 2012 interest expense increased 17 percent over the prior-year period, reflecting higher debt levels, primarily related to acquisitions and opportunistic pre-funding of near-term debt maturities.
Fitch's expectation is that monitored health insurer and managed care companies' aggregate debt levels relative to EBITDA and to total capital will be 1.5x to 1.7x and 30 percent to 35 percent, respectively, at year-end 2012. These expected leverage ratios represent moderate increases compared to current ratios, primarily due to acquisition-related financing. In the report, Fitch states that it does not anticipate significant increases beyond these levels, since most issuers are generating cash flow that is sufficient to meet ongoing business needs and make moderately sized acquisitions.
Fitch believes that health insurers and managed care companies will continue to manage share repurchases in such a way that their financial leverage ratios remain consistent with current rating categories. From 2009 through the first-half 2012, annualized cash flow used to repurchase shares averaged 10.3 percent of the sector's beginning of the year shareholder equity.
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