Health insurers Aetna and Anthem will face credit rating downgrades if state and federal regulators OK their separate acquisitions, according to ratings agency Standard & Poor's.
If both insurers get past the strict regulatory oversight, they will have to manage higher debt levels and a tough road to integration, S&P said in a report. Further, Aetna's and Anthem's deals may hurt their profitability in the short term as they try to balance larger debt payments and shareholder payouts, according to A.M. Best Co., a ratings agency that focuses on the insurance industry.
S&P said it may lower the credit rating of Anthem by as many as two notches, and Aetna could fall by one notch. Aetna and Anthem both have A credit ratings.
State officials and the U.S. Justice Department are reviewing Anthem's purchase of Cigna Corp. and Aetna's transaction for Humana. The pending deals would create a triumvirate of health insurance giants, although Aetna and Anthem would still be smaller by revenue than UnitedHealth Group.
S&P said the biggest risk to the two acquisitions is “that they fail to get done at all.” The DOJ has not halted any health insurance deals in the past several years, but the combination of a presidential election year and the political uncertainty that surrounds the Affordable Care Act make for interesting timing for Aetna and Anthem.
“These deals are unprecedented in their size, complexity and simultaneous nature,” S&P's report reads.
Aetna and Anthem will likely have to sell off some health plans in geographic areas with a lot overlap, which the CEOs of both companies have acknowledged as a possible condition to completing the deals. In addition, each insurer will have significantly higher debt loads. Anthem's debt-to-capital ratio will be 49%, and Aetna's will be 46%, S&P said. However, Aetna reduced its debt burden quickly after it bought Coventry in 2013, as did Anthem with its Amerigroup acquisition in 2012.
Aside from the merger challenges, A.M. Best issued a negative outlook for the entire health insurance sector. The high-cost exchange population, rising drug prices and shift to lower margin products such as Medicaid drove the agency's outlook.