CHICAGO--(BUSINESS WIRE)--Fitch Ratings has placed the ratings of Aetna Inc. (Aetna) on Rating Watch Negative. The rating action follows Aetna's recent announcement that it has reached an agreement to acquire Humana Inc. (Humana) in a cash and stock transaction valued at approximately $37 billion. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating action reflects Fitch's concern about Aetna's expected financial leverage metrics following the close of the transaction, as well as potential operational and/or earnings disruptions that could arise as these two very large and complex organizations are integrated.
Assuming the acquisition and its financing are completed as currently envisioned, upon close of the acquisition Fitch expects to downgrade Aetna's ratings by one notch. Fitch notes that Aetna's financial leverage has not fully returned to the level at which the company operated prior to its acquisition of Coventry Health Care, Inc. in 2013, although the company has been progressing in line with expectations.
At close of the acquisition, Fitch expects Aetna's financial leverage to be approximately 46%, and debt to EBITDA to be in excess of 3.0x due to the debt being issued to fund the cash portion of the purchase price. Fitch does not anticipate that Aetna's financial leverage metrics will return to a level appropriate for its current rating category within a 12 to 24 month time horizon normally associated with a Rating Outlook. Given Aetna's size and business profile, these metrics at its current rating would be a run-rate debt to EBITDA ratio approximating 1.8x and financial leverage of 30-35%.
The ratings of Humana have also historically reflected Fitch's view that Medicare Advantage (MA) enrollment generally supports lower ratings relative to employer group and individual enrollment due to the U.S. government's large role in the MA market and the suppressive effect this role has in terms of margins and capital formation. As a large portion of Humana's revenue is associated with MA business, Aetna's exposure to this business will increase significantly at close of the transaction.
Fitch views the combination of Aetna and Humana as strategically beneficial to both organizations in terms of the application of Aetna's strong performance in commercial risk business to Humana's commercial block, geographic and business diversification, particularly with regard to Humana, as well as stronger provider networks and pharmacy claims costs.
RATING SENSITIVITIES
At the close of the transaction, Fitch expects to downgrade the ratings of Aetna by one notch, at which time Fitch will establish new rating triggers associated with the combined company's new ratings.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Watch Negative:
Aetna Inc.
--$750 million of 3.50% senior unsecured notes due Nov. 15, 2024 'A-';
--$250 million of 1.75% senior unsecured notes due May 15, 2017 'A-';
--$500 million of 1.5% senior unsecured notes due Nov. 15, 2017 'A-';
--$383 million of 5.95% senior unsecured notes due March 15, 2017 'A-';
--$375 million of 2.2% senior unsecured notes due March 15, 2019 'A-';
--$750 million of 3.95% senior unsecured notes due Sept. 1, 2020 'A-';
--$500 million of 4.125% senior unsecured notes due June 1, 2021 'A-';
--$600 million of 5.450% senior unsecured notes due June 15, 2021 'A-';
--$1 billion of 2.75% senior unsecured notes due Nov. 15, 2022 'A-';
--$771 million of 6.625% senior unsecured notes due June 15, 2036 'A-';
--$534 million of 6.75% senior unsecured notes due Dec. 15, 2037 'A-';
--$500 million of 4.5% senior unsecured notes due May 15, 2042 'A-';
--$500 million of 4.125% senior unsecured notes due Nov. 15, 2042 'A-';
--$375 million of 4.75% senior unsecured notes due March 15, 2044 'A-';
--Short-term IDR 'F1';
--$2 billion commercial paper program 'F1'.
Aetna Inc.
--Long-term IDR 'A'.
Aetna Life Insurance Company
Aetna Health Inc. (a Pennsylvania Corporation)
Aetna Health Inc. (a Florida Corporation)
Aetna Health Inc. (a New Jersey Corporation)
Aetna Health Inc. (a Texas Corporation)
Aetna Health Inc. (a New York Corporation)
Aetna Health of California Inc.
--IFS 'AA-'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes) (pub. 12 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576
Insurance Rating Methodology (pub. 04 Sep 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987519
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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