A.M. Best has taken a rating action on U.S. health insurer Aetna Inc. (AET). The rating agency has upped the issuer credit rating (:ICR) of Aetna Health and Life Insurance Company (:AHLIC) to “a+” from “a” and affirmed the financial strength ratings (:FSR) of A.
A.M. Best also reiterated the ICR of “bbb+” and debt ratings of Aetna as well as the $250 million 6.125% senior unsecured notes of Coventry Health Care Inc. due Jan 2015. Coventry, which was acquired by Aetna in 2013, also saw the ratings of its entities upgraded. While the FSR was moved to A from A- the ICRs went up to “a” from “a-”. These entities included Altius Health Plans, Inc.; Cambridge Life Insurance Company; Coventry Health Care of Nebraska, Inc.; Coventry Health Care of Virginia, Inc.; Coventry Health Care of the Carolinas, Inc.; CoventryCares of Michigan, Inc.; and HealthCare USA of Missouri, LLC.
The rating action of all the entities is driven by their strong operating performance which has made the generation of cash flows consistent and in turn fortified their capital position. Broadly grouped under Aetna Life Insurance Company (:ALIC), these are the company’s primary operating entities and have generated strong returns over several years. A consistent generation of cash flow from these entities has also enabled them to increase the dividend to the parent company which has utilized the cash for share buyback.
The rating agency notes that the company’s health business has largely benefitted from benign medial utilization over past many quarters. It also views the acquisition of Coventry as adding one more feather to the company’s diversified business portfolio. Moreover, the buyout places Aetna firmly in the fast growing Medicare Advantage and Medicaid business.
However, according to the rating agency, Aetna faces headwinds in terms of membership growth. The company will find it difficult to increase its Commercial membership which faces tough competition and dampened demand due to economic woes. The agency, however, feels that the company may get higher enrolments in the Mediare Advantage and Medicaid segment of business, which is expected to witness a surge in demand with a huge number of American population in their retirement age.
Though the rating agency points out increased financial leverage of around 40% at the parent company level driven by the buyout of Coventry, it is hopeful that gradually the percentage will come down to 35%. Maintenance of a strong interest coverage ratio and huge financial flexibility with $2.0 billion in unused credit facility arrangement reinforces the strength of Aetna’s capital position.
The rating upgrade of Aetna’s health entities grouped under AHLIC reflects their earnings contribution to the consolidated group. This group has generated ROE of more than 10% and remits considerable dividend to the parent.
The rating action on Coventry acknowledges the revenue and product diversification it has brought along. The rating action on Coventry’s debt signifies its ability to service timely interest payment and capacity to repay dues on maturity.
A positive rating action may trigger if the membership increases, financial leverage comes down and risk-adjusted capital position improves further. A negative rating action will not be ruled out if the operating profitability diminishes causing deterioration in risk-adjusted capitalization and increase in financial leverage.
Financial strength and credit ratings, which intend to measure a company’s ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence its competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism on the company.
Aetna carries a Zacks Rank #3 (Hold). Better-ranked players from the same industry include Select Medical Holdings Corporation (SEM), Triple-S Management Corporation (GTS) and WellCare Health Plans, Inc. (WCG). All these stocks sport a Zacks Rank #1 (Strong Buy).