Health insurer mergers could affect credit ratings

In addition to carrying significant regulatory risks, pending health insurer mega-mergers could affect the credit ratings of the involved companies, according to a new report from Standard & Poor's.

The three health insurers planning to acquire another insurer--Anthem, Aetna and Centene--have each raised a large amount of debt in order to finance their deals with Cigna, Humana and HealthNet, respectively, analyst James Sung notes in the report. So S&P analyzed the timeline of each company's debt-repayment plan as well as post-transaction leverage and coverage metrics, business and integration risk, statutory capitalization, and projected business fundamentals to determine how the deals will affect credit ratings.

Based on this analysis, S&P could lower Anthem-Cigna's ratings by up to two notches, and it could lower Aetna's ratings by one notch. S&P could raise its ratings on Humana by up to two notches--capped by its rating on Aetna--and does not plan any ratings actions on HealthNet or Centene related to their pending merger. The financial services company will take ratings actions on Anthem-Cigna and Aetna-Humana once regulators either approve or deny the deals and finalize financing structures.

The Department of Justice has not outright blocked any health insurer mergers in recent years, but the Aetna-Humana and Anthem-Cigna deals are larger and more complex than those in the past, and the DOJ's regulatory approach is constantly evolving, Sung writes in the report. Political pressure also could influence regulators' view of the deals.

The drawn-out approval process will also make the merging companies more vulnerable to sudden business shocks, the report says, and even if the deals are approved the companies will still face steep challenges such as integrating their businesses. Failing to do so successfully could result in lost customers or revenue. The Aetna-Coventry merger in 2013, however, is one example of a well-executed insurance merger, Sung notes.

Despite the risks, though, "outside of these mega-deals, we expect the industry to remain active in M&A," the report concludes, especially among provider-sponsored health plans.

To learn more:
- here's the report (subscription required)

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