Mega Insurance deals could have big effect on credit ratings, S&P says

Standard & Poor's has warned Anthem, Cigna, Aetna and Humana that the substantial debt needed to finance the proposed mergers between them may cause their credit ratings to fall.

On the other hand, if the mergers are run well, the result would improve the companies' long-term competitive positions, putting them on a closer footing with industry leader UnitedHealth Group in terms of revenue size and membership, the agency said in its report on the effect the mega mergers would have on the insurers' credit quality.

Also, other players could take advantage of the likely business divestitures resulting from the mergers, S&P said. The largest publicly traded health insurers outside of what would become the big three, and Centene/Health Net, are Molina Healthcare, WellCare Health Plans and Universal American Corp, all government-focused Medicare-Medicaid insurers.

[Also: Aetna, Anthem CEOs defend mergers in Congress]

Blue Cross Blue Shield could make small to mid-size acquisitions, it said.

The ratings service weighed in the proposed mergers among the nation's top insurance plans as they come under intense antitrust scrutiny in 2016: Anthem's $52.5 billion takeover of Cigna; Aetna's $38.5 billion merger with Humana; and to a lesser degree of complexity, Centene's proposed $6.8 billion merger with Health Net.

Anthem, Cigna and Centene have lined up bridge financing of $26.5 billion: $16.2 billion; and $2.7 billion respectively, S&P said in its report.

[Also: Aetna and Humana shareholders approve $37 billion merger]

"Based on our current analysis, we could lower our ratings on Anthem/Cigna by up to two notches and Aetna by up to one notch," S&P said. "Conversely we could raise our rating on Humana by up to two notches."

There is no rating action planned for Centene or Health Net based on the merger, Standard & Poor's said. In May 2015, S&P revised its outlook on Centene from stable to positive prior to the announced deal, based on its improving competitive position.

The biggest risk to the deals is that they fail to get done at all, the ratings service said.

Although the U.S. Department of Justice has not blocked health insurer mergers outright in recent years, its approach to mergers is constantly evolving, Standard & Poor's said.

[Also: Aetna leaves America's Health Insurance Plans, follows UnitedHealth in exiting largest trade group]

"These deals are unprecedented in their size (and) complexity, and (are) simultaneous (in) nature. Therefore we expect the review process to be lengthy as it will involve both the DOJ and multiple state regulators, each with their own local interests," Standard & Poor's said. "Accordingly, Anthem/Cigna and Aetna/Humana are guiding investors toward a relatively conservative second half of 2016 transaction close, and Centene/Health Net, which is a less-complex deal, is guiding toward as early as February 2016."

The insurance companies will find challenges due to political timing, as the Affordable Care Act and the health exchanges come into the national spotlight. Also, unfavorable political attention to recent mergers could influence regulatory review, at least in the background, the report said.

The Department of Justice will make its determination of whether the mergers violate antitrust laws based mainly on how they would affect consumers, S&P said.

Another factor will be whether the DOJ reviews the mergers as a whole or one-by-one, with the first option seen as making the post-merger market concentration issues more glaring. In the past, the most common remedy to competitive concerns has been through business divestitures.

Opponents such as the  American Hospital Association believe divestitures at this scale may be impractical, S&P said.

If the deals are rejected, termination fees would result: Anthem would pay Cigna $1.85 billion; Aetna would pay Humana $1 billion; and Centene would pay HealthNet $250 million, according to the ratings service.

Health insurers had a record-breaking year of mergers and acquisitions in 2015, S&P said.

UnitedHealth Group kicked it off in March 2015 when it announced a $14.2 billion acquisition of Catamaran Corp., a pharmaceutical benefit manager.

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In December, Kaiser Permanente announced its $1.8 billion acquisition of Group Health Cooperative, with the $1.8 billion to go towards the establishment of a nonprofit foundation, S&P said.

"The current deals - particularly Anthem/Cigna and Aetna/Humana -- incorporate more regulatory approval risk than past deals," said S&P credit analyst James Sung.

No rating actions are currently warranted, S&P said. Only a rating committee may determine a rating action.

Twitter: @SusanJMorse