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Rating Action:

Moody's downgrades Aetna (sr debt to Baa2) and upgrades Coventry (sr debt to Baa2) following acquisition; stable outlook

Global Credit Research - 07 May 2013

Approximately $8.8 billion of debt affected

New York, May 07, 2013 -- Moody's Investors Service has downgraded Aetna Inc.'s (Aetna; NYSE: AET) senior unsecured debt rating to Baa2 from Baa1 following the announcement that it had completed its acquisition of Coventry Health Care, Inc. (Coventry; NYSE:CVH). In addition, as a result of Aetna's assumption of Coventry's senior notes, Coventry's senior debt rating has been upgraded to Baa2 from Baa3. In the same rating action the insurance financial strength (IFS) rating of Aetna Life Insurance Company (ALIC) has been downgraded to A2 from A1, while the IFS ratings on Coventry's operating subsidiaries have been upgraded to A2 from A3 (see complete ratings list below). The outlook on all the ratings is stable.

RATINGS RATIONALE

Moody's stated that the rating action completes the review initiated on August 20, 2012 after Aetna announced it had entered into a definitive agreement to acquire Coventry. Moody's Senior Vice President, Steve Zaharuk said, "The downgrade of Aetna's ratings reflects the adverse financial impact of the transaction, which included the issuance of $2.0 billion of long term debt (issued by Aetna in November 2012), approximately $500 million of short term debt, and the assumption of Coventry's approximate $1.6 billion of outstanding senior notes. Aetna's financial profile is weakened as a result of the increased outstanding debt and the company's lower targeted NAIC risk-based capital (RBC) ratio." The rating agency added that at the close of the transaction, Aetna's financial leverage (adjusted debt to capital, where debt includes unfunded pension liabilities and operating leases) is expected to be approximately 44% and remain near 40% at the end of 2015. In addition, Aetna's targeted RBC ratio is expected to be lowered going forward to 275% of company action level (CAL) compared to the current 300% target.

Moody's commented that the ratings upgrade for Coventry reflects the alignment of its ratings with Aetna's ratings based on the assumption of Coventry's outstanding debt by Aetna and Aetna's plans to integrate Coventry's operations and businesses, providing for the potential of increased diversification and improved market positioning. The rating agency noted an enhanced business profile for the combined entity reflecting approximately 22 million medical members as well as increased product diversity as a result of the merger. However, Moody's noted that these benefits are contingent on the company successfully integrating the two companies and achieving significant planned expense synergies.

The rating agency commented that Aetna's ratings and stable outlook reflect its strong business profile, supported by its national presence, solid brand name, and its product diversity, which includes employer group health, life and disability benefits, Medicaid and Medicare Advantage. The rating agency added that Aetna is well positioned to meet the challenges posed by the Affordable Care Act as a result of the company's geographic and product diversity as well as several strategic acquisitions that involved small non-risk businesses that employ technology to develop and promote cost effective health care solutions.

The rating agency stated that Aetna's and Coventry's ratings could be upgraded if adjusted debt to capital is lowered below 40%, EBITDA interest coverage increases to at least 12 times, and average annual membership growth is at least 2%. However, if there are significant integration issues with Coventry, if EBITDA margins fall below 5%, or if there is a decrease in the consolidated risk-based capital ratio below 250%, Moody's said that the ratings may be downgraded.

The following ratings were downgraded with a stable outlook:

Aetna Inc. -- senior unsecured debt rating to Baa2 from Baa1; senior unsecured debt shelf rating to (P)Baa2 from (P)Baa1; subordinated debt shelf rating (P)Baa3 from (P)Baa2; preferred stock debt shelf rating to (P)Ba1 from (P)Baa3;

Aetna Life Insurance Company -- insurance financial strength rating to A2 from A1; long-term issuer rating to A3 from A2.

The following ratings were upgraded with a stable outlook:

Coventry Health Care, Inc.: senior unsecured debt rating to Baa2 from Baa3; senior unsecured credit facility to Baa2 from Baa3.

HealthAssurance Pennsylvania, Inc: insurance financial strength rating to A2 from A3;

HealthAmerica Pennsylvania, Inc.: insurance financial strength rating to A2 from A3;

Coventry Health Care of MO, Inc.: insurance financial strength rating to A2 from A3.

The following rating was affirmed with a stable outlook:

Aetna Inc. - short-term debt rating for commercial paper at Prime-2.

Aetna Inc. is based in Hartford, CT, and through its subsidiaries provides health and life insurance products primarily to group customers. For calendar year 2012, the company reported consolidated GAAP revenues of approximately $35.7 billion. As of December 31, 2012 shareholders' equity was approximately $10.4 billion, with medical enrollment of 18.2 million members (excluding standalone Medicare Part D members).

Coventry Health Care, Inc., headquartered in Bethesda, Maryland reported medical membership of 3.8 million and Part D Medicare membership of approximately 1.6 million as of December 31, 2012. The company reported net income of $487 million on revenues (including investment income) of approximately $14.1 billion for the full year 2012.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations.

The principal methodology used in this rating was Moody's Rating Methodology for U.S. Health Insurance Companies published in May 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stephen Zaharuk
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Aetna (sr debt to Baa2) and upgrades Coventry (sr debt to Baa2) following acquisition; stable outlook
No Related Data.

 

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