Aetna placed under review with negative implications by AM Best

Health insurer Aetna's credit ratings have been placed under review with negative implications by rating agency AM Best.

The rating actions follow the recent announcement that CVS Health Corporation has signed a definitive agreement to acquire Aetna for $69 billion in combination of cash and stock, said AM Best. The transaction, subject to approval by federal and state regulators, is expected to close in the second half of 2018.

According to the statement, following the issuance of $44.8 billion of new debt to finance the transaction, CVS Health’s financial leverage is expected to be approximately 60 percent, and its goodwill plus intangibles to equity ratio likely will exceed 200 percent.

The negative implications reflect AM Best’s concern that CVS Health’s increased debt and very limited financial flexibility may place pressure on the capitalization of Aetna’s insurance entities, as the new parent may increase dividends from the insurance subsidiaries to service the debt.

In addition, the combined organization will face significant integration risks and general uncertainty regarding any potential synergies going forward. Furthermore, while Aetna’s core businesses remain profitable, premium revenue recently has declined due to multiple factors, including the exit from the individual exchange business, the loss of several Medicaid contacts and lack of growth in the commercial group segment.

AM Best believes that the acquisition by CVS Health is unlikely to boost revenue expansion in the near term. However, it does acknowledge that the CVS Health partnership is in line with Aetna’s strategy to build a local community presence in order to facilitate more efficient and appropriate care delivery, as well as to influence members’ behavior and life style choices.

Following the assessment of this transaction, AM Best has placed under review with negative implications the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” of Aetna. Concurrently, it has placed under review with negative implications the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICRs of “a” of the lead operating entity, Aetna Life Insurance Company. AM Best also has placed under review with negative implications the FSRs and the Long-Term ICRs of all other Aetna entities. In addition, it has placed under review with negative implications the Long- and Short-Term Issue Credit Ratings (Long-Term IR; Short-Term IR) of Aetna.

The agency noted that the ratings will remain under review pending the completion of the transaction and AM Best conducts discussions with the new parent regarding the plans for Aetna’s insurance subsidiaries.