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Fitch Affirms and Removes Aetna's Ratings from Rating Watch Negative; Outlook Negative
May 7, 2013 / 9:51 PM / 4 years ago

Fitch Affirms and Removes Aetna's Ratings from Rating Watch Negative; Outlook Negative

(The following statement was released by the rating agency) CHICAGO, May 07 (Fitch) Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) of Aetna Inc. (Aetna) and the 'AA-' Insurer Financial Strength (IFS) ratings of various Aetna insurance operating subsidiaries and removed the ratings from Rating Watch Negative. A complete list of ratings is included at the end of this comment. The Rating Outlook is now Negative. Today's rating action follows Aetna's announcement this morning that it has completed its acquisition of Coventry Health Care, Inc. (CVH). The company announced in August 2012 that it had signed a definitive agreement to acquire CVH for cash and stock valued at that point at approximately $5.7 billion. KEY RATING DRIVERS Aetna's ratings reflect the organization's major market position and significant size and scale, strong profitability and interest coverage, and overall solid balance sheet characteristics. The ratings also consider recently elevated financial leverage and what Fitch views as modest deterioration in Aetna's capitalization metrics and ongoing sector-wide operational uncertainty tied to health care reform. Aetna's financial leverage has risen significantly over the past year as a result of its acquisition of CVH, as a substantial portion of the purchase price was funded with debt. At March 31, 2013, the company's financial leverage was approximately 40%, and 12-month rolling debt-to-EBITDA was 2.0x. This is up from 33% and 1.3x, respectively, at June 30, 2012. The company's elevated financial leverage and execution risk related to the CVH transaction are the primary drivers of the Negative Outlook on Aetna's ratings. Fitch expects financial leverage and run-rate debt-to-EBITDA to move below 35% and 1.8x, respectively, by the end of the second quarter of 2015. Fitch considers Aetna a leading health insurance and managed care company due to the company's large membership, significant revenues and earnings bases, and strong competitive position. The breadth of Aetna's provider network and its contracting capabilities are key competitive strengths. Aetna generates consistently strong EBITDA-based profit margins and returns on capital. From 2008 through 2012, the company's ratios of EBITDA margin and net income-based return on equity averaged approximately 9% and 17%, respectively, both of which are moderately higher than median guidelines for Aetna's rating categories. This strong profitability, coupled with reasonable debt levels, has resulted in solid EBITDA-based interest coverage ratios averaging approximately 12.5x over the past five years. Although the company's elevated debt levels are expected to result in a moderate decline in coverage, Fitch anticipates that coverage will remain above 10x, which is within median guidelines for the company's rating category. Fitch views Aetna's statutory capitalization metrics as having deteriorated moderately over the last 12-24 months. The company's year-end 2012 organization-wide Fitch adjusted NAIC risk-based capital (RBC) ratio, which excludes the impact of excess of loss health reinsurance derived capital, declined to 279% at year-end 2012 from 289% at year-end 2011 and 319% at year-end 2010. Fitch expects the company to maintain an adjusted RBC ratio above 275% of the company action level. Fitch's ratings on Aetna continue to reflect the 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. RATING SENSITIVITIES The key rating triggers that could result in a revision of the Outlook to Stable include substantial progress toward a return of financial leverage metrics to levels within guidelines for the company's ratings, specifically a debt-to-EBITDA ratio of 1.8x or below and financial leverage ratio of 35% or lower. The key rating triggers that could lead Fitch to downgrade 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 Fitch adjusted NAIC risk-based capital (RBC) ratios below 275%. The rating actions are as follows: Fitch has affirmedand removed from Rating Watch Negative the following ratings: --$750 million of 6% senior unsecured notes due June 15, 2016 at 'A-'; --$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-'; --$496 million of 6.5% senior unsecured notes due Sept. 15, 2018 at 'A-'; --$750 million of 3.95% senior unsecured notes due Jan. 9, 2020 at 'A-'; --$500 million of 4.125% senior unsecured notes due June 1, 2021 at 'A-'; --$1 billion of 2.75% senior unsecured notes due Nov. 15, 2022 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-'; --Short-term IDR at 'F1'; --$2 billion commercial paper program at 'F1'. Aetna Inc. --Long-term IDR at 'A'; Negative Outlook. Fitch has affirmed at 'AA-', removed from Rating Watch Negative, and assigned a Negative Outlook to following ratings: 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. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Committee Chairperson James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013); --'Health Insurance and Managed Care (U.S.) Sector Credit Factors' (August 21, 2012); --'2013 Outlook Report: U.S. Health Insurance and Managed Care' (Dec. 4, 2012). Applicable Criteria and Related Research 2013 Outlook Report: U.S. Health Insurance and Managed Care here Health Insurance and Managed Care (U.S.) Sector Credit Factors here Insurance Rating Methodology — Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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