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Fitch Affirms Aetna's IFS Ratings at 'AA-'; Outlook Remains Negative
April 14, 2017 / 8:01 PM / 3 months ago

Fitch Affirms Aetna's IFS Ratings at 'AA-'; Outlook Remains Negative

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(The following statement was released by the rating agency) CHICAGO, April 14 (Fitch) Fitch Ratings has affirmed the ratings on Aetna Inc. (Aetna) and its rated subsidiaries. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS Fitch removed Aetna's ratings from Negative Watch and assigned a Negative Rating Outlook on Feb. 14, 2017, upon the termination of Aetna's merger agreement with Humana Inc. (Humana). The Negative Outlook on Aetna's ratings reflects Fitch's expectations that Aetna's near-to-intermediate term financial leverage ratios are likely to be higher than those the company has historically utilized and may exceed levels Fitch views as supportive of the company's current ratings. The affirmation of Aetna's ratings reflects the organization's strong business profile, including its major market position and substantial size and scale, as well as the company's strong, consistent profitability and interest coverage. Fitch considers Aetna to be a leading health insurance and managed care company due to its large membership, significant revenues and earnings base, and strong competitive position. The breadth of Aetna's provider network and its contracting capabilities are key competitive strengths. The ratings also reflect the company's elevated financial leverage metrics, Fitch's view that Aetna's statutory capitalization has deteriorated modestly, and ongoing sector-wide operational uncertainty tied to the future of the Affordable Care Act. In addition, the ratings reflect broader risks derived from government involvement in health insurance and managed care companies' ongoing business activities. Fitch's long-held concern is that government efforts to advance public policy goals could adversely affect health insurance and managed care companies' ability to manage their business and hinder their ability to generate cash flow supporting debt obligations. Aetna has established a track record of consistently strong EBITDA-based profit margins and return on capital. From 2012 to 2016, the company's average EBITDA margin and net income-based return on average equity was 8.4% and 15.6%, respectively, both of which are generally in line with median guidelines for Aetna's rating category. Strong earnings, coupled with somewhat elevated financial leverage, have resulted in average EBITDA-based interest coverage over this period of approximately 12x. Aetna's financial leverage increased significantly in June 2016 when the company issued approximately $13 billion of senior notes as partial funding for its planned acquisition of Humana. Following the Feb. 14, 2017 termination of the merger agreement between Aetna and Humana, Aetna redeemed $10.2 billion of the notes effective March 16, 2017 in accordance with a mandatory redemption clause. Of the $13 billion of notes issued in 2016, $2.8 billion were not redeemed, resulting in an elevated financial leverage ratio that Fitch expects to be approximately 39% to 40% at March 31, 2017 and annualized debt-to-EBITDA of approximately 1.9x. The company's elevated financial leverage is the primary driver of the negative outlook on its ratings. Including debt maturities remaining in 2017, Fitch expects Aetna's year-end 2017 debt-to-total-capital and debt-to-EBITDA ratios to approximate 35% and 1.7x respectively, both of which are near the upper end of Fitch's tolerances for the company's current ratings. RATING SENSITIVITIES The key rating triggers that could lead Fitch to a downgrade of the ratings include run-rate: --Debt-to-EBITDA ratios that exceed 1.8x; --Debt-to-capital ratios that exceed 35%; --EBITDA-to-revenue margins less than 7%; --EBITDA-based interest coverage ratios less than 10x or maximum allowable dividend interest expense coverage below 5x; --Organization-wide run-rate NAIC RBC ratios below 275% excluding the effect of regulatory permitted practices. The key rating triggers that could result in a return to Stable Outlooks include: --Sustained run-rate debt-to-EBITDA ratios of less than 1.8x; --Sustained debt-to-capital ratio of less than 35%; --No significant deterioration in operating performance or other credit metrics. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings. The Rating Outlook is Negative: Aetna Inc. --Long-Term Issuer Default Rating (IDR) at 'A'; --Short-Term IDR at 'F1'; --Commercial paper at 'F1'; --$250 million of 1.75% senior unsecured notes due May 15, 2017 at 'A-'; --$500 million of 1.5% senior unsecured notes due Nov. 15, 2017 at 'A-'; --$500 million of floating rate senior unsecured notes due Dec. 8, 2017 at 'A-'; --$1 billion of 1.7% senior unsecured notes due June 7, 2018 at 'A-'; --$375 million of 2.2% senior unsecured notes due March 15, 2019 at 'A-'; --$500 million of 4.125% senior unsecured notes due June 1, 2021 at 'A-'; --$600 million of 5.450% senior unsecured notes due June 15, 2021 at 'A-'; --$1 billion of 2.75% senior unsecured notes due Nov. 15, 2022 at 'A-'; --$1.3 billion of 2.8% senior unsecured notes due June 15, 2023 at 'A-'; --$750 million of 3.50% senior unsecured notes due Nov. 15, 2024 at 'A-'; --$771 million of 6.625% senior unsecured notes due June 15, 2036 at 'A-'; --$534 million of 6.75% senior unsecured notes due Dec. 15, 2037 at 'A-'; --$500 million of 4.5% senior unsecured notes due May 15, 2042 at 'A-'; --$500 million of 4.125% senior unsecured notes due Nov. 15, 2042 at 'A-'; --$375 million of 4.75% senior unsecured notes due March 15, 2044 at 'A-'. Aetna Life Insurance Company Aetna Health Inc. (a Pennsylvania Corporation) Aetna Health Inc. (a Florida Corporation) Aetna Health Inc. (a New Jersey Corporation) Aetna Health Inc. (a Texas Corporation) Aetna Health Inc. (a New York Corporation) Aetna Health of California Inc. --Insurer Financial Strength (IFS) at 'AA-'. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Committee Chairperson James Auden, CFA Managing Director +1-312-368-3146 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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