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Rating Action:

Moody's downgrades Aetna's long term ratings (sr. debt at Baa2) following acquisition related debt issuance; outlook stable

02 Jun 2016

$13 billion of senior unsecured debt issued

New York, June 02, 2016 -- Moody's Investors Service has downgraded Aetna Inc.'s (Aetna; NYSE: AET) senior unsecured debt rating to Baa2 from Baa1 and the insurance financial strength (IFS) rating of its operating subsidiary, Aetna Life Insurance Company (ALIC) to A2 from A1 following Aetna's issuance of $13 billion of senior unsecured debt in connection with the proposed acquisition of Humana Inc. (NYSE:HUM; senior debt rating at Baa3). The transaction, which is subject to additional regulatory approval and other closing conditions, is expected to close in the second half of 2016. The outlook on Aetna's ratings has been changed to stable.

RATINGS RATIONALE

Moody's stated that the downgrade concludes the review for downgrade which was announced in July 2015 and reflects the anticipated adverse financial impact of the Humana acquisition. This includes the current $13 billion issuance of senior unsecured debt, as well as the anticipated assumption of approximately $3.8 billion of Humana's debt and an additional issuance of $3.2 billion of term loan or commercial paper at the close of the transaction. According to the rating agency, after the close of the transaction Aetna's financial profile would be weakened as a result of the significant projected increase in financial leverage, the large amount of goodwill associated with the purchase and the lower targeted NAIC risk-based capital (RBC) ratio going forward. In particular, at the close of the transaction, adjusted debt-to-capital (where debt includes unfunded pension liabilities and operating leases) is expected to be approximately 48%. Going forward, Aetna's targeted RBC ratio is also expected to be in the range of 250% of company action level (CAL) compared to the current 275% target.

The rating agency noted that somewhat offsetting these credit negatives will be an enhanced business and earnings profile for Aetna from the approximately 9.4 million medical members expected to be added by the acquisition, including 2.8 million commercial members, 3.2 million Medicare Advantage members, and 3.1 million members associated with the TriCare contract. Barring significant divestitures which may be required by some regulators, the combined company would remain the 3rd largest health insurer in the country measured by medical membership with approximately 32.4 million members. The company would also have the leading share in Medicare Advantage members with 4.5 million members. In addition, the combined company would benefit from expanded network and medical management capabilities as a result of the acquisition. However, Moody's noted that these benefits are contingent on the company successfully integrating the two companies and achieving significant planned expense synergies.

Aetna may be required to pay Humana a termination fee of either $1.7 billion or $1 billion if the acquisition is not completed due to certain circumstances. Should the transaction not close, Aetna would be obligated to redeem a portion of the newly issued debt, currently estimated to be approximately $10 billion. The balance of the net proceeds are expected to be used for general corporate purposes, including the possible payment of a termination fee. If this were to occur, Aetna's projected adjusted debt to capital would be near 40%.

WHAT COULD CHANGE THE RATING UP/DOWN

Upon the closing of the transaction Moody's expects the ratings to be affirmed. Additionally, the rating agency stated that the ratings could be upgraded if 1) the proposed acquisition of Humana is not completed and the additional debt is paid down, with financial leverage returning to the 30% to 35% range, and 2) the RBC ratio is maintained at the 275% level (CAL). However, Moody's said, if 1) there are unexpected significant additional costs related to the proposed acquisition, 2) Aetna or Humana are required to make significant divestitures in order to complete the acquisition, or 3) there are significant adverse developments related to the integration of the two companies that threaten the profitability of Aetna, the ratings may be downgraded.

LIST OF AFFECTED RATINGS

The following ratings were downgraded:

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 to (P) Baa3 from (P)Baa2; preferred stock debt shelf rating to (P) Ba1 from (P)Baa3;

Aetna Health Holdings, LLC -- senior unsecured debt rating to Baa2 from Baa1;

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

Coventry Health Care of Missouri, Inc. -- insurance financial strength rating to A2 from A1;

HealthAmerica Pennsylvania, Inc. -- insurance financial strength rating to A2 from A1;

HealthAssurance Pennsylvania, Inc. -- insurance financial strength rating to A2 from A1.

The following rating was affirmed:

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 the first three months of 2016, the company reported consolidated GAAP revenues of approximately $15.7 billion. As of March 31, 2016 shareholders' equity was approximately $16.8 billion, with medical enrollment of approximately 23 million members (excluding standalone Medicare Part D members).

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 these ratings was U.S. Health Insurance Companies published in May 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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

Marc R. Pinto, CFA
MD - Managed Investments
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's long term ratings (sr. debt at Baa2) following acquisition related debt issuance; outlook stable
No Related Data.
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