Fitch Maintains Anthem's Ratings on Negative Watch

Fitch Ratings maintains the Negative Watch on Anthem Inc.'s (ANTM) 'BBB' ratings including ANTM's senior notes, 'A+' Insurer Financial Strength (IFS) Ratings and certain ANTM subsidiaries.

The rating action follows the completion of a periodic review of ANTM's ratings. Fitch had previously placed ANTM's ratings on Rating Watch Negative on July 24, 2015 following the company's announcement that it had entered into an agreement to acquire Cigna Corp. (CI) in exchange for approximately $26 billion in cash and $18 billion of ANTM's common shares (based on ANTM's current share price).

Should ANTM's planned acquisition of CI proceed as expected, Fitch intends to affirm ANTM's ratings and assign a Negative Rating Outlook. Fitch believes that it will likely be able to make this determination upon ANTM accessing the debt markets to partially fund the planned acquisition, since at that time it should be clear that the acquisition will be completed and the terms of its financing will be known. Fitch also believes that greater clarity around the significance of any potential divestitures needed to obtain regulatory approval should be known at that time.

Underlying the above is Fitch's belief that in the 12-24 months following the close of the planned acquisition, ANTM will reduce its financial leverage and generate interest coverage that is sufficient to support the company's current ratings. The Negative Rating Outlook would reflect ANTM's potential failure to reduce financial leverage and integration risks associated with bringing together the large and complex ANTM and CI organizations.

Scores assigned to key rating drivers underlying ANTM's ratings and the scores' relative influence on the ratings are discussed below under key rating drivers. Scores are denoted by lower case letters and follow the scale Fitch uses for its IFS ratings (i.e. 'aaa' through 'c'). Collectively these scores support ANTM's ratings and Negative Rating Watch status.

KEY RATING DRIVERS

Capitalization and Leverage: Currently scored 'bbb+' with a higher influence on the ratings. Concurrent with ANTM's planned accessing of the credit markets to fund its acquisition of CI, Fitch expects this score to decline to 'bbb-' and then migrate upward over 12 - 24 months as the company grows earnings and reduces debt. Assuming that ANTM issues approximately $22 billion of debt and $18 billion of equity in the second half of 2016 to fund the CI acquisition, Fitch estimates ANTM's year-end 2016 debt-to-EBITDA and financial leverage ratios at 4.0x and 48%, respectively. Fitch projects these ratios declining to 2.7x and 42% respectively by year-end 2018. While there are a variety of ways ANTM could achieve these ratios, Fitch has assumed that ANTM chooses not to refinance maturing debt, ANTM's and CI's 2017 and 2018 earnings grow approximately 5% compared with their respective 2016 earnings guidance and benefit from $500 million of synergy-related expense savings in 2017 and $1 billion in 2018, and that ANTM repurchases $1 billion of its shares in 2016, 2017 and 2018. At year-end 2015, ANTM's debt-to-EBITDA and financial leverage ratios were 2.6x and 41%. Fitch's expectations are that post-acquisition, ANTM's and CI's insurance company subsidiaries will be managed to RBC ratios of approximately 225% to 250% (company-action-level basis). Fitch estimates a combined ANTM-CI organization-wide RBC ratio at year-end 2015 on a pro-forma basis at 252%.

Debt Service Capabilities & Financial Flexibility: Currently scored 'a+' with a higher influence on the ratings. Concurrent with ANTM's planned accessing of the credit markets to fund the CI acquisition, Fitch expects this score to decline to 'bbb+' and then migrate upward over 12 - 24 months as the company grows earnings and reduces debt. Assuming that ANTM issues approximately $22 billion of debt in the second half of 2016 to fund the CI acquisition, Fitch estimates ANTM's 2016 EBITDA-based interest coverage ratio at 6.0x. Fitch projects this ratio increasing to 7.0x to 9.0x by year-end 2018 assuming $1.7 billion of annual interest expense and annual earnings growth of 5% over ANTM's and CI's respective 2016 earnings guidance. These projections also include $500 million of synergy-related expense savings in 2017 and $1 billion in 2018. Also considered in this score is Fitch's expectation that ANTM's near-term financial flexibility will be somewhat constrained after funding the CI acquisition in contrast to the company's historically strong financial flexibility. At year-end 2015, ANTM's cash and invested holding company assets totaled $1.4 billion and the company maintained a $3.5 billion bank credit facility that provides flexibility and supports its $2.5 billion commercial paper program.

Market Position Size/Scale: Currently scored 'aa-' with a moderate influence on ratings. Concurrent with the close of ANTM's planned acquisition of CI, Fitch expects this score to increase to 'aa' reflecting anticipated benefits the CI acquisition would bring to the ANTM organization. In particular, Fitch believes that CI's strong position among mid-sized and large employers for health and specialty lines such as dental, vision and group life insurance will benefit the organization's market position. Fitch also believes that the combined ANTM-CI organization's ability to negotiate effective network provider agreements will be enhanced by the companies' combination. The combined ANTM-CI organization's membership would total approximately 52 million members making the company the largest health insurer in the U.S. The company's membership would consist primarily of employer group members but would also include meaningful Medicaid and individual and Medicare membership and its premium base will be geographically diversified with large portions from California, Virginia, Ohio, Indiana, Georgia, and New York.

Financial Performance and Earnings: Currently scored 'a+' with a moderate influence on ratings. In the 12 - 24 months following the close of ANTM's planned acquisition of CI, Fitch expects this score to increase to 'aa-' reflecting its view that ANTM's post-acquisition EBITDA-to-revenue margins will improve in comparison to the company's historical margins as it benefits from CI's comparatively higher EBITDA-to-revenue margins. Additionally, ANTM has disclosed that it expects to achieve $2 billion of synergy-related expense savings within two years of the acquisition's close. Fitch estimates that the combination of these two factors could add 150 - 180 basis points to ANTM's run-rate ratio of EBITDA-to-revenues. From 2013 through 2015 ANTM generated average EBITDA-to-revenue margins and annualized net income-to-average capital ratios of 7.7% and 6.6%, respectively and average EBITDA of $5.9 billion.

Group Rating Approach: ANTM's insurance company subsidiaries' ratings reflect Fitch's application of a group rating approach. Fitch considers ANTM's rated insurance company subsidiaries to be 'core' ANTM subsidiaries based on their contribution to the group's overall premium and capital bases, shared resources and common management. Fitch's ratings on ANTM's operating subsidiaries reflect the agency's belief that ANTM and its affiliates have the willingness, due in part to the value of the subsidiaries' BCBS brands to ANTM, and the ability to support one another. Additionally, the IFS ratings of several ANTM subsidiaries benefit from a parent-company guaranty. If the planned merger closes as expected, Fitch anticipates using its group rating methodology to assess CI's ratings and believes that CI's ratings and those of its insurance subsidiaries will converge with ANTM's and its insurance subsidiaries' ratings.

RATING SENSITIVITIES

ANTM's ratings are sensitive to the closure of the planned acquisition of CI, final financing terms and terms of regulatory approvals, including the extent of any required divestitures. Materially higher than expected financing costs or adverse divestiture requirements could result in a one-notch downgrade. Cancellation of the acquisition would likely result in an affirmation of the rating, barring any unexpected near-term consequences.

Longer-term, assuming the acquisition proceeds as expected and ratings are affirmed, ANTM's ratings could be downgraded if the company fails to demonstrate progress toward de-leveraging or fails to generate anticipated earnings benefits from the acquisition. Metrics that could lead to a ratings downgrade include:

--Debt-to-EBITDA and financial leverage ratios above 2.7x and 42% 24 months after the close of the planned CI acquisition;

--EBITDA-based interest coverage ratios below 7.0x to 9.0x 24 months after the close of the planned CI acquisition;

--Sustained organization-wide NAIC risk-based capital ratios (company action level basis) below 225% to 250%;

--Ratios of consolidated statutory accounting basis premiums-to-surplus that exceed 7.0x;

--Failure to realize margin expansion and synergy-related expense efficiencies that contribute to EBITDA-to-revenue margins that approximate 9% within 24 months of the close of the planned CI acquisition.

Fitch maintains the following ratings on Negative Watch:

Anthem, Inc.

--Long-Term Issuer Default Rating (IDR) 'BBB+';

--Short-Term IDR 'F2';

--$2.5 billion commercial paper program 'F2'.

The 'BBB' rating assigned to the following:

--2.375% senior notes due 2/15/2017;

--5.875% senior notes due 6/15/2017;

--1.875% senior notes due 1/15/2018;

--2.300% senior notes due 7/15/2018;

--7.000% senior notes due 2/15/2019;

--2.250% senior notes due 8/15/2019:

--4.350% senior notes due 8/15/2020;

--3.700% senior notes due 8/15/2021;

--3.125% senior notes due 5/15/2022;

--3.300% senior notes due 1/15/2023;

--3.500% senior notes due 8/15/2024;

--5.950% senior notes due 12/15/2034;

--5.850% senior notes due 1/15/2036;

--6.375% senior notes due 6/15/2037;

--5.800% senior notes due 8/15/2040;

--4.625% senior notes due 5/15/2042;

--2.750% senior convertible debentures due 10/15/2042;

--4.650% senior notes due 1/15/2043;

--4.65% senior notes due 8/15/2044;

--5.100% senior notes due 1/15/2044;

--4.850% senior notes due 8/15/2054.

The 'BBB-' rating assigned to:

--1.900% subordinated notes due 5/1/2028.

Anthem Holding Corp.

--Long-Term IDR 'BBB+'.

Anthem Insurance Companies, Inc.

--Long-Term IDR 'A';

--9.000% surplus notes due 4/1/2027 'A-';

--IFS 'A+'.

The 'A+' IFS ratings of the following ANTM subsidiaries:

Anthem Blue Cross Life & Health Insurance Company

Anthem Health Plans, Inc.

Anthem Health Plans of Kentucky, Inc.

Anthem Health Plans of Maine, Inc.

Anthem Health Plans of New Hampshire, Inc.

Anthem Health Plans of Virginia, Inc.

Blue Cross of California

Blue Cross and Blue Shield of Georgia, Inc.

Blue Cross Blue Shield Healthcare Plan of Georgia, Inc.

Community Insurance Company, Inc.

Empire HealthChoice HMO, Inc.

Empire HealthChoice Assurance, Inc.

HealthKeepers, Inc.

Healthy Alliance Life Insurance Company

HMO Missouri, Inc.

Matthew Thornton Health Plan, Inc.

Rocky Mountain Hospital & Medical Service, Inc.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

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