Aetna Faces Rating Action - Analyst Blog

On Wednesday rating agency A.M. Best affirmed its issuer credit ratings (ICR) of “bbb+" for health insurer Aetna Inc. (AET). The ratings of all of its subsidiaries were reviewed as well. The revision resulted in a financial strength rating (FSR) of “A" and an ICR of “a+" for sixteen of its subsidiaries. The ratings are of investment grade.

A.M. Best acknowledges Aetna’s strong operational and financial performance over the past years. Its broad product portfolio, which spans a range of traditional and consumer-directed health insurance products and related services, helps it to maintain a differentiated brand name. Aetna’s offerings include medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities and health care management services for Medicaid plans.

The rating agency also views Aetna’s capital position favorably. Its strong balance sheet had $1.20 billion of cash and cash equivalents at the end of 2009, almost unchanged from 2008. As of March 31, it had a debt-to-total capitalization ratio of 29.3% and $7 billion of adjusted statutory surplus, $5.9 billion in excess of the regulatory requirements. It has also been generating consistent positive cash flows, which are put to use for acquisitions or share repurchases or other strategic investments generating value for the business and for the shareholders in turn.

However, Aetna’s business and profitability has suffered recently due to adverse economic conditions and unanticipated increases in health care costs. The company derives almost 75% of its revenues from the commercial market, which is expected to remain under pressure as employers cut jobs, reducing membership enrollment. Thus, top-line growth will remain restricted in the near term.

Though most of Aetna’s subsidiaries have faced a positive rating action, one of its subsidiaries, Aetna Insurance Company of Connecticut, saw its ICR slashed by one notch to “a" from “a+", though its FSR has been affirmed at “A". The action comes from the concern that the product sold by this particular entity – pet insurance – is distinct from the core health and group insurance products sold by Aetna and its entities.

Besides, A.M. Best has withdrawn its FSR and ICR on some of its other subsidiaries. The rating on these subsidiaries were withdrawn due to a lack of enrollment and premium revenue for two units, while two other units got merged with Aetna Health Inc. (a Pennsylvania corporation) effective Jun 30, 2010, thus leading to a rating withdrawal. The ratings outlook for all the entities is “stable".

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 as a result, a company’s competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about Aetna’s future performance.

Aetna is slated to release its second quarter earnings on July 28, 2010 before the opening bell. The Zacks Consensus Estimate for the second quarter is a profit of 74 cents per share. Last month, the company said that it expects to beat analyst expectations for the second quarter on the back of lower-than-expected medical costs.
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