AM Best raises concerns over $69bn Aetna acquisition

Ratings agency AM Best has places credit ratings of US health insurer Aetna and its insurance subsidiaries under review with negative implications following its planned acquisition by US drugstore operator CVS Health Corporation.

CVS Health has signed a definitive agreement to acquire Aetna for $69 billion in a combination of cash and stock. The transaction is expected to close in the second half of 2018.

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, AM Best noted.

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, AM Best 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’ behaviour and life style choices.

As a result of its assessment, AM Best has placed under review with negative implications the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” of Aetna. Concurrently, AM Best 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, AM Best has placed under review with negative implications the Long- and Short-Term Issue Credit Ratings (Long-Term IR; Short-Term IR) of Aetna.

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