MOODY'S DOWNGRADES LONG AND SHORT-TERM DEBT RATINGS OF AETNA SERVICES, INC. (SENIOR TO A3 FROM A2 AND SHORT-TERM RATING TO PRIME-2 FROM PRIME-1); ALSO LOWERS PREFERRED STOCK RATING OF AETNA INC. TO "a3" FROM "a2"; CONFIRMS INSURANCE FINANCIAL STRENGTH RAT
New York, 07-02-98 -- Moody's Investors Service downgraded the credit ratings of Aetna Services, Inc. one notch (long-term senior debt rating to A3 from A2 and short-term rating for commercial paper to Prime-2 from Prime-1); in addition, the rating agency lowered the preferred stock rating of Aetna Inc. to "a3" from "a2". Moody's also lowered the insurance financial strength rating of Aetna Life Insurance Company of Canada to Baa1 from A3. The rating agency confirmed the ratings of Aetna Life Insurance Company at A1, Aetna Life Insurance and Annuity Company at Aa3 and Aetna Insurance Company of America at Aa3.
These rating actions complete a review for possible downgrade of the credit ratings of Aetna Inc. and its subsidiaries that began on March 16, 1998 following Aetna Inc.'s announcement that it had entered into a definitive agreement to acquire the business of NYLCare Health Plans (NYLCare)--the health care business of New York Life Insurance Company--for $1.05 billion in cash and potential additional payments contingent upon future performance. The transaction is expected to be initially financed with funds made available due to the sale of commercial paper. Moody's anticipates that a portion of commercial paper will be refinanced with long-term securities in the near term. The transaction is expected to close shortly pending certain regulatory approvals.
The rating agency stated that the downgrade of Aetna Inc. and Aetna Services, Inc. is based primarily on the expectation that heightened competition, rising medical costs, increased regulatory and legislative challenges and thorny negotiations with providers have raised the level of business risk for Aetna since the consummation of the U.S. Healthcare merger in July 1996. These challenges are expected to exert pressure on the company's operating margins and, hence, the growth of dividend flows from certain operating subsidiaries to their respective holding companies over the near to medium term. Moody's believes that rapid consolidation activity among health insurers and managed care operators will continue over the medium term. The rating agency believes that such activity carries with it increased operating challenges. Moreover, such activity will raise pressure on Aetna to consider acquisition opportunities as a means to develop or maintain enrollment growth and market share. Also, Moody's anticipates that the benefits to Aetna of a consolidating marketplace will only emerge slowly in light of certain difficult relations with providers and a challenging regulatory and legislative climate.
Notwithstanding these challenges, Moody's continues to believe that Aetna is one of the premier companies providing health care benefits in the United States and is one of the highest rated companies in Moody's rated universe of health insurers and managed care operators. The addition of NYLCare will increase Aetna U.S. HealthCare's position in three major markets--Houston, Dallas and Washington, D.C. Moreover, Moody's anticipates that Aetna will reduce NYLCare's medical loss ratio in line with its own, albeit gradually. Moreover, the speed of the company's integration plans for the proposed investment appear conservative and are expected to be less disruptive to operations than those experienced with the integration of U.S. Healthcare.
The confirmation of Aetna Life Insurance and Annuity Company (ALIAC) and its wholly owned subsidiary, Aetna Insurance Company of America (AICA), as well as Aetna Life Insurance Company (ALIC) is based on the view that these operating subsidiaries continue to enjoy established market positions, adequate capital and stable earnings power. Moody's believes that ALIAC's considerable stand-alone strengths support a rating level higher than its affiliate US life insurers and provides Aetna Services, Inc. with some diversification of earnings.
Aetna recently announced the sale of its domestic individual life insurance line of business to Lincoln National for approximately $1.0 billion. The net proceeds of about $850 million are anticipated to be paid to Aetna Services, Inc. principally from ALIAC in the Fall of 1998. Moody's does not believe the dividend of the net proceeds will materially reduce ALIAC's statutory risk-adjusted capital.
The rating of Aetna Life Insurance Company of Canada has been adjusted downward primarily to reflect the change in its parent's rating.
The following ratings were downgraded:
Aetna Services, Inc. -- senior debt rating downgraded to A3 from A2; prospective senior debt shelf rating downgraded to (P)A3 from (P)A2; prospective subordinated debt shelf rating downgraded to (P) Baa1 from (P)A3; prospective preferred stock shelf rating downgraded to (P)"a3" from (P)"a2"; issuer rating downgraded to A3 from A2; and short-term rating for commercial paper downgraded to Prime-2 from Prime-1.
Aetna Inc. -- preferred stock rating downgraded to "a3" from "a2".
Aetna Capital L.L.C. -- preferred stock rating downgraded to "a3" from "a2" and prospective preferred stock shelf rating downgraded to (P)"a3" from (P)"a2".
Aetna Life Insurance Company of Canada -- insurance financial strength rating downgraded to Baa1 from A3.
The following ratings were confirmed:
Aetna Life Insurance Company -- insurance financial strength rating of A1; issuer rating of A2.
Aetna Life Insurance and Annuity Company -- insurance financial strength rating of Aa3; issuer rating of A1.
Aetna Insurance Company of America -- insurance financial strength rating of Aa3.
Moody's also assigned the following new ratings:
Aetna Services, Inc. -- prospective senior debt shelf rating of (P)A3; prospective subordinated debt shelf rating of (P)Baa1; prospective junior subordinated debt shelf rating of (P)Baa2.
Aetna Capital Trusts I through IV -- prospective preferred stock shelf rating of (P)"a3".
Aetna Inc. is headquartered in Hartford, Connecticut. The company reported consolidated assets of $103 billion and shareholders' equity of $11.4 billion as of March 31, 1998.
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