As a part of its yearly review process, the rating agency A.M.
Best affirmed its issuer credit ratings ("ICR") of 'bbb+' for
). The ratings of all of its subsidiaries were reviewed as well.
The revision resulted in affirmation of financial strength rating
("FSR") of 'A' and an ICR of 'a+' for 16 of its subsidiaries. An
FSR of 'A' and ICR of 'a' were affirmed on Aetna Insurance Company
of Connecticut, Continental Life Insurance Company of Brentwood and
American Continental Insurance Company. The ratings are of
investment grade and carry a stable outlook.
A.M. Best's rating affirmation of Aetna's chief operating
subsidiary Aetna Life Insurance Company ("ALIC") and its insurance
and Health Maintenance Organization acknowledges their strong
operational and financial performance over the recent years. The
earnings of these units have benefited from lower-than-average
utilization by members. But the rating agency also cautions that
the trend may not continue for long and that utilization levels may
revert to normal levels soon. This may adversely affect bottom line
earnings. Another concern for the rating agency is that ALIC's
medical cost ratio has increased in the recently reported earnings
and its membership may suffer in the near term given an uncertain
and competitive market environment.
A.M. Best views Aetna's strong financial position
favorably. As of March 31, the company had a debt-to-total
capitalization ratio of approximately 29%. A.M. Best expects that
the company's leverage ratio may go northwards in case the company
makes acquisitions and raises debt for funding purpose. The rating
agency expects the company to maintain a leverage ratio of around
30%. It continues to target a risk-based capital ratio of
approximately 300%. The capital level at the holding company is
fully cushioned with subsidiary dividends of approximately $1.7
billion expected for the full year 2012.
The rating agency is also concerned about a decline in
membership enrollment witnessed during the recent earnings release.
At the end of the first quarter, Aetna had 17.9 million medical
members, a decline of 544,000 members from year end 2011.
The rating agency has a favorable view of Aetna's growth
momentum in the Medicare business where significant growth is
expected over the coming years. The company has made a number of
acquisitions to expand its Medicare line of business and this
positions it well for long-term growth. Though the company
has made significant efforts to secure contracts for the National
Accounts business, it has had its share of setbacks. Recently the
company lost its Ohio contract to Centene. The pressure on
Government business will, however, not have an adverse effect on
earnings since it forms a very small part of the company's
Though unlikely, the possibility of a negative rating action
cannot be ruled out if Aetna's operating profitability and
risk-based capital ratio decline significantly. A high leverage
ratio can also increase the chances of a rating
Financial strength and credit ratings, which are intended to
measure a company's ability to meet policyholder obligations, are
important factors affecting public confidence, and hence a
company's competitiveness. Securing an investment grade debt rating
with a stable outlook reflects optimism about Aetna's future
Aetna also scores strongly with other rating agencies. In April,
Standard and Poor's raised the financial strength ratings of the
company's subsidiaries by one notch to 'A+' from 'A' while
affirming the A-/A-2 counterparty credit rating on the parent
company. All these ratings are of investment grade and carry a
) also carries an ICR of 'bbb' and a financial strength rating of
'A', with a stable outlook from A.M. Best.
Aetna currently retains a Zacks # 3 Rank, which translates into
a short-term 'Hold' rating. Considering its better-than-average
fundamentals, we are maintaining our long-term "Outperform"
recommendation on the shares.
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