Fitch Assigns Ratings To Aetna U.S. Healthcare Inc.

Business Editors & Health Writers

CHICAGO--(BUSINESS WIRE)--Nov. 15, 2000

Fitch has assigned to Aetna U.S. Healthcare Inc. (AUSHC) the following ratings: commercial paper rating of `F2' and long-term rating of `A-'. In addition, Fitch has affirmed and removed from Rating Watch Evolving the `AA-' insurer financial strength rating on Aetna Life Insurance Company (ALIC). The Rating Outlook is Stable.

The rating action follows a complete review of AUSHC, which is a wholly owned subsidiary of Aetna Inc. (Aetna) and parent holding company to Aetna's health benefits, group insurance and large case pension operations. The sale of Aetna Inc.'s financial services and international operations to ING is expected to close in December 2000. Immediately prior to the close of the ING transaction, Aetna will spin off AUSHC to existing Aetna shareholders. Following the completion of the spin-off and the ING transaction, AUSHC will be renamed Aetna Inc. ALIC is the lead insurance company and a major provider of AUSHC's indemnity health benefits, group insurance and large case pension business. The large case pension business is in run-off.

The new ratings are based on the underlying strength of AUSHC's subsidiary operations, good balance sheet fundamentals and challenging regulatory and political environment.

AUSHC is strongly positioned as the market leader in the health benefits and group insurance business, with strong competitive positions in several key markets and product lines. The company's large scale and diversified mix of businesses are key competitive advantages that allow the company to leverage its expense structure and achieve competitive reimbursement arrangements with national and local providers of health care products and services.

AUSHC's good balance sheet fundamentals reflect the company's expected modest financial leverage, strong liquidity and a low level of tangible equity given the company's high goodwill balances. Fitch expects AUSHC to maintain financial leverage at or below 20% following the completion of the spin-off. The capital adequacy of AUSHC's primary operating companies is considered good. The high goodwill balances resulting from Aetna's acquisition of U.S. Healthcare, NYLCare and Prudential weakens the quality of AUSHC's capital position.

The ratings also consider the challenges associated with improving AUSHC's overall operating performance. AUSHC has experienced lower-than-expected operating performance in 2000 driven by higher-than-expected medical costs, challenges associated with recent acquisitions and shifting market demand to more open network-type products at a time when AUSHC has been emphasizing its traditional HMO products. AUSHC is in the process of restructuring its health benefits operations in order to improve operational effectiveness and overall financial performance.

Overall business risk for AUSHC, and the health benefits industry in general, has increased in recent years driven by market forces, regulatory/legislative changes and litigation challenges. In recent years, competitive market conditions have limited premium price increases while medical costs have been higher than expected, resulting in lower operating margins. Although the commercial pricing environment has improved, funding levels in the Medicare HMO business continues to be an issue. AUSHC is actively evaluating the Medicare HMO business and it is their intent to exit roughly half of their Medicare markets in 2001. Fitch is concerned about the cost implications of regulation/legislation reforms in the health care benefits business and the industry's ability to adequately price for the additional costs.