A.M. Best has placed under review with negative implications the financial strength ratings, issuer credit ratings and debt ratings of Anthem and its insurance subsidiaries.
The rating actions follow the announcement that Anthem has made a proposal to acquire Cigna Corporation for approximately $184 per share in cash and stock.
In addition to issuing Anthem shares to Cigna shareholders, Anthem is expected to finance approximately $34 billion through a combination of parent company cash, debt and new equity.
Additionally, it is anticipated that if an agreement is reached, Anthem would assume Cigna's outstanding debt. Currently, the two parties are not in agreement on all aspects of the potential transaction.
The proposed acquisition is subject to the approval by shareholders, as well as Indiana state insurance departments and other regulators, which could extend the closing to late 2016.
A.M. Best has stated that the under review status reflects its concerns regarding the projected reduced financial flexibility of Anthem due to heightened financial leverage, estimated to increase to approximately 50 percent at closing; the significant increase in “goodwill and intangibles” to nearly 1.5 times equity; and the “execution and integration risk related to the acquisition”.
The agency said: “Post-close, Anthem's financial leverage and goodwill and intangibles-to-equity ratio would be materially higher than similarly rated peers and forecasted interest coverage would decline in the near to medium term.”
“Additionally, while dividend capacity of Anthem's subsidiaries has been strong, narrowing of operating margins can affect future dividends and pressure subsidiary risk-adjusted capital.”
A.M. Best has stated that it recognises that Anthem's current level of liquidity is sound and its 2015 operating results are trending favourably relative to expectations.
The agency has also acknowledged that this potential acquisition would provide Anthem with business diversification and strengthen its commercial, government and specialty business.
The ratings will remain under review pending resolution of an agreement between Anthem and Cigna on any potential transaction, as well as all necessary approvals.
A.M. Best has confirmed that it will continue discussions with Anthem's management and monitor its operating performance, risk-adjusted capital at the operating companies and its capital structure.
