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A.M. Best Assigns Debt Rating to Anthem, Inc.’s New Equity Units

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A.M. Best has assigned a debt rating of “bbb” to $1.175 billion ($1.25 billion if the greenshoe option is exercised) of equity units recently issued by Anthem, Inc. (Anthem) (Indianapolis, IN) [NYSE:ANTM]. The assigned rating outlook is stable. The ratings of Anthem, its existing debt securities and insurance subsidiaries remain unchanged.

Each equity unit is composed of a three-year forward contract and beneficial interest in a remarketable subordinated note with a stated maturity of 2028. Payments on the equity units will be at the rate of 5.25% per annum, consisting of a 1.90% coupon on the subordinated notes and a contract fee under the related stock purchase contracts of 3.35% per annum. The interest on the notes and the contract payments are deferrable at the issuer’s option and would accrue on a cumulative basis. Roughly 33 months from the equity units’ issue date, the notes are remarketed from which the proceeds are to be used by the contractholders to satisfy their obligation under the stock purchase contract. The new bond investors will receive subordinated notes with a then current market rate and a 10-year maturity, consistent with the stated maturity of the original note.

Anthem intends to utilize the net proceeds for general corporate purposes, including the repurchase of a portion of the company’s outstanding 2.75% senior convertible debentures due 2042. A.M. Best believes that the issuance of the equity units is a proactive measure by Anthem to enhance liquidity given that the convertible debentures are substantially “in the money.” If the debentures had been converted at year-end 2014, when Anthem’s stock price was about $126 per share, the company would have had to pay the principal of the debentures plus an amount in cash or shares in excess of 1.0 billion. At the close of business May 7, 2015, Anthem’s share price was about $156.

A.M. Best notes that Anthem’s pro forma financial leverage-as well as its goodwill and intangibles to equity ratio-is somewhat higher than similarly-rated peers. Incorporating some equity credit for the new securities, Anthem’s adjusted debt-to-capital ratio ticks up to slightly over 40%. Absent an acquisition, A.M. Best expects Anthem to manage its financial leverage down below 40% in the medium term. Additionally, Anthem’s interest coverage is solid in the 7-9 times range.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

  • Analyzing Insurance Holding Company Liquidity
  • Equity Credit for Hybrid Securities
  • Insurance Holding Company and Debt Ratings

This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright (c) 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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