Anthem (ANTM), Cigna (CI) Placed on CreditWatch Negative by S&P

Key Points:

• U.S. health insurer Anthem Inc. (Anthem) has submitted a non-binding proposal to acquire Cigna Corp. (Cigna) for $184 per share, valuing it at $53.8 billion on an enterprise basis.
• Cigna's board, however, has rejected this offer at this time.
• We are placing our ratings on Anthem and Cigna on CreditWatch with negative implications, based on the on our assumption that this is an ongoing process and a potential transaction may have a credit impact on the combined entity's business and financial risk profiles.
• We intend to resolve the CreditWatch after we receive additional transaction details, including transaction financing and the integration plan.

Standard & Poor's Ratings Services said today that it has placed its ratings on Anthem Inc. and Cigna Corp. on CreditWatch with negative implications.

The CreditWatch placement follows Anthem Inc.'s (NYSE: ANTM) announcement on June 20, 2015, that it has made a non-binding proposal to acquire Cigna Corp. (NYSE: CI). Anthem's proposal values Cigna at $53.8 billion on an enterprise basis. We expect Anthem to fund its acquisition with a mix of stock and cash/debt. However, on June 21, 2015, Cigna's board rejected the proposal. We are placing the ratings on CreditWatch based on our assumption that this is an ongoing process and a potential transaction may have a credit impact on the combined entity's business and financial risk profiles.

If a similarly priced proposal is accepted, the Anthem/Cigna merger would be the largest in the history of the U.S. health insurance industry. The combined entity would benefit from improved size/scale and diversification. On a combined basis, the company would have total revenues of $110 billion (on a pro-forma basis for the 12 months that ended March 31, 2015) based on $75 billion of revenues from Anthem and $35 billion from Cigna. It would be the largest player in the commercial insurance marketplace, the largest player in the Medicaid market, and the third largest player in the Medicare market. Additionally, geographic diversification would improve, given Cigna's strong global health and supplemental businesses. However, we would expect any such transaction to be complex and lengthy, involving a potentially high degree of integration risk.

A transaction could have a negative impact on the combined entity's financial risk profile. Given the deal size, we expect that a significant amount of the transaction will be financed with debt. The combined entity would likely operate at a higher level of financial leverage and a lower level of fixed charge coverage (at least for the near term) versus our current expectations for both companies. The higher level of financial leverage may also lower our assessment of the combined entity's capital adequacy through a debt-funded double leverage adjustment to the group's total adjusted capital.

"We are placing the ratings of both companies on CreditWatch given the early stage of this potential transaction," said credit analyst Deep Banerjee. "There are several variables that are unknown at this time, including, but not limited to, the final price of such a transaction, management changes if any, financing details, and regulatory hurdles. We will also be discussing with Anthem's management their risk tolerance limits in terms of their financial policy."

"We will resolve the CreditWatch after we receive additional transaction details and evaluate the potential impact on the business and financial profile of the companies. Additionally, if a transaction (in the current or a modified form) does not occur, we would likely remove the ratings of both companies from CreditWatch," said Mr. Banerjee.

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