OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has placed under review with negative implications the financial strength ratings (FSR), issuer credit ratings (ICR) and debt ratings of Aetna Inc. (Aetna) (Hartford, CT) [NYSE:AET] and its insurance subsidiaries. (See link below for a detailed listing of the companies and ratings.)
The rating actions follow the announcement that Aetna has entered into a definitive agreement to acquire all outstanding shares of Humana Inc. (Humana) [NYSE:HUM] for approximately $230 per share in cash and stock. In addition to issuing Aetna shares to Humana shareholders, the transaction will entail total incremental debt of approximately $16 billion. Additionally, upon close, Aetna would assume Humana’s $3.8 billion of outstanding senior notes. The pairing brings two major health insurance and health service organizations together with complementary business profiles, strong service capabilities and product diversification. The combination will result in a leading player in the commercial and Medicare Advantage product segments, add greater capabilities and membership in the senior markets, and bring additional diversification in other government-sponsored programs and geographical markets. The proposed acquisition is subject to the approval by shareholders, as well as state insurance departments and other regulators.
The under review status reflects A.M. Best’s concerns regarding the projected reduced financial flexibility of Aetna due to heightened financial leverage, estimated to increase to nearly 46% at closing; the significant increase in goodwill and intangibles to approximately 1.5 times equity; and the execution and integration risk related to the acquisition. As with any combination of large organizations, considerable integration risk is present. A.M. Best believes that the integration will be successful if the stated goals are achieved in a reasonable period of time, including retention of key management, realization of projected synergies, maintenance of leading market positions and limited disruption of systems and operations.
A.M. Best recognizes that Aetna’s current level of liquidity is excellent and recent performance has been favorable with steady operating margins, low medical cost trends and improved operational efficiencies. However, A.M. Best expects risk-adjusted capitalization of the merged entities to be pressured driven by the significant increase in revenue as well as substantial upstreaming of dividends from the operating companies. Moreover, Aetna has historically pursued a considerable share repurchase program and is expected to maintain significant cash dividends on its stock. A.M. Best notes that the organization is committed to deleveraging post-close and intends to suspend its share repurchase program for six months after the close of the acquisition.
The ratings will remain under review pending the transaction’s closing, which is expected to occur in the second half of 2016. A.M. Best will continue discussions with Aetna’s management and monitor the company’s operating performance, risk-adjusted capital at the operating companies and its capital structure.
For a complete listing of FSRs, ICRs and debt ratings for Aetna Inc. and its life/health subsidiaries, please visit Aetna Inc.
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.