OREANDA-NEWS. An agreement between Anthem Inc. (ANTM) and Cigna Corp. (CI) that broadly follows terms outlined in ANTMS's non-binding offer dated June 20, 2015 would result in the ratings for both companies' being placed on Rating Watch Negative, according to Fitch Ratings.

While ANTM's offer has been rejected by CI's board, Fitch expects ongoing discussions between the companies. The agency would expect to take the noted action if in its view the transaction is likely to be consummated. Fitch rates the insurer financial strength of various ANTM and CI insurance subsidiaries 'A+', ANTM's senior notes 'BBB' and CI's senior notes 'BBB+'.

Fitch believes that ANTM's financial leverage metrics would deteriorate relative to expectations for the company's current ratings if the acquisition is completed under the financing terms outlined in ANTM's proposal. ANTM had assumed an immediate post-close pro-forma debt-to-capital ratio of approximately 50% in its proposal, a level that is outside Fitch's median guidelines for 'BBB' category ratings, although ANTM's publicly-available documents indicate that the company would plan to reduce this ratio in the two years post close. Additionally, Fitch believes that ANTM's post-close debt-to-EBITDA ratio would likely be outside 'BBB' category guidelines.

Fitch expects that if CI were to be acquired by ANTM, then it is likely Fitch's ratings for CI would ultimately be aligned with those of ANTM. Thus, downward pressure on ANTM's ratings resulting from heightened financial leverage would also pressure CI's ratings, especially recognizing that CI's debt rating is currently higher than that of ANTM.

ANTM's proposal calls for 68.6%, or roughly \$33 billion, of the consideration to be paid to CI's shareholders in the form of cash. Fitch believes that the majority of this cash would be raised through new debt issuance. At March 31, 2015, ANTM maintained \$2.8 billion of holding company cash and investments and had \$16.5 billion of debt outstanding.

In case of an acquisition, final ratings levels would consider further discussions with ANTM's management regarding specifics around proposed financing terms, how the proposed transaction could impact ANTM's license agreements with the Blue Cross and Blue Shield Association (BCBSA), expense synergies expected to be achieved, and pro-forma financial projections of the combined entity.

Fitch believes ANTM's and CI's market positions and size/scale characteristics would be enhanced if the companies are combined. This enhancement, balanced against the previously mentioned negative financial leverage implications of the proposed transaction, would be a key factor in determining the final ratings.

ANTM through its BCBS licensed subsidiaries maintains strong competitive positons and leading market shares in the employer group and individual markets. Additionally ANTM has strong positons in the employer group market and individual markets while its Amerigroup subsidiaries are well positioned in the Medicaid market. CI maintains strong positions in the employer group market, particularly among larger employers that self-insure, and has a comparatively strong and growing international business.

Fitch believes the increasing role of the federal government in health insurance is making size/scale and market positioning even more critical to the future success of health insurance organizations. Fitch also believes that there is a high likelihood that the competitive landscape across the industry will be changing in the near-term related to a number of transactions among the top five players that are reportedly in advanced stages of discussion. Further, while Fitch believes UnitedHealth Group, Inc. would still be well positioned without further participation in industry consolidation, any of the remaining top four players, including ANTM, CI, Aetna, Inc. and Humana, Inc. could be compromised competitively if others participate, and they are excluded.