Fitch Ratings has placed US health insurer Aetna on rating watch negative following Aetna’s agreement to acquire US-headquartered health insurer Humana in a cash and stock transaction valued at $37bn.
Fitch said the rating action reflects its 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 said it expects to downgrade Aetna’s ratings by one notch.
The rating agency said it 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 in 2013, although the company has been progressing in line with expectations.
At close of the acquisition, Fitch noted it expects Aetna’s financial leverage to be approximately 46%, and debt to earnings before interest, taxes, depreciation and amortization (EBITDA) to be in excess of 3x due to the debt being issued to fund the cash portion of the purchase price.
Fitch highlighted it does not anticipate 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%.
Fitch added that the ratings of Humana have also historically reflected its view that Medicare Advantage (MA) enrollment generally supports lower ratings relative to employer group and individual enrollment, due to the US 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, according to Fitch Ratings.
Overall, Fitch said it views the combination of Aetna and Humana as strategically beneficial to both organisations 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.
Aetna Chairman and CEO Mark T. Bertolini has said the acquisition of Humana aligns two great companies and will significantly advance our strategy of more effectively serving members in a rapidly changing health care industry.
Bruce D. Broussard, president and CEO of Humana, said: "Through the use of technology and integrated services to simplify the consumer experience, the combined entity will be even more effective in meeting the health needs of many more people — especially people with chronic conditions, who will benefit from Humana’s home health, pharmacy management, and data analytics programmes."