Rating Action on Aetna - Analyst Blog

Following the rating outlook revision to stable from negative for the U.S. Health Insurance and Managed Care sector, the rating agency Fitch Ratings also took rating actions on Aetna Inc. (AET">AET), one of the major companies in the space.

The rating actions included the affirmation of Aetna's long-term issuer default rating (IDR) at “A”. Moreover the agency reiterated its “AA-“ issuer financial strength rating for the company's subsidiaries – Aetna Life Insurance Company, Aetna Health Inc. (a Pennsylvania Corporation); Aetna Health Inc. (a Florida Corporation); Aetna Health Inc. (a New Jersey Corporation); Aetna Health Inc. (a Texas Corporation); Aetna Health Inc. (a New York Corporation); and Aetna Health of California Inc.

Fitch's upward revision of the rating outlook acknowledges that the impact of the Patient Protection and Affordable Care Act (PPACA) on Aetna will be manageable.

Earlier in November 2010, Fitch placed a negative outlook on the company reflecting uncertainty related to the reform.

Other players - UnitedHealth Group Inc. (UNH), WellPoint Inc. (WLP),  Cigna Corp. (CI), Humana Inc. (HUM), and Coventry Health Care Inc. (CVH) - also witnessed rating affirmations.

The PPACA, enacted as a result of the health care reform, has been a cause of uncertainty for the players in the industry. The act carries a number of regulations, which will come into effect gradually.

The mandate regarding the compliance of the minimum medical loss ratio for individual plans that has come into effect this year is not expected to cause much of a downside risk as the company has a lower exposure to these polices compared to its peers. Its substantial Large Group segment is also relatively insulated from the health care reform risk. 

Aetna is slated to release its fourth quarter earnings on February 4, 2011, before the opening bell. The Zacks Consensus Estimate for the fourth quarter is 60 cents per share. For full fiscal 2010, the Zacks Consensus Estimate is $3.62, two cents ahead of the management's guidance of $3.60 earnings per share.

Aetna carries a Zacks #3 Rank, which implies a Hold recommendation over the short term. Also, over the longer term we rate the shares as Neutral.