A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of the core insurance subsidiaries of Aetna Inc. (Aetna) (Hartford, CT) [NYSE: AET]. Concurrently, A.M. Best has removed from under review with negative implications and affirmed the ICR and debt ratings of “bbb+” of Aetna. Additionally, A.M. Best has upgraded the FSR to A (Excellent) from A- (Excellent) and the ICRs to “a” from “a-”, as well as the FSR to A- (Excellent) from B++ (Good) and ICRs to “a-” from “bbb+” of some of the former subsidiaries of Coventry Health Care, Inc. (Coventry) (formerly headquartered in Bethesda, MD). At the same time, A.M. Best has upgraded the FSR to A- (Excellent) from B++ (Good) and the ICRs to “a-” from “bbb” and the FSR to A- (Excellent) from B+ (Good) and the ICRs to “a-” from “bbb-” of the remaining former subsidiaries of Coventry. In addition, A.M. Best has upgraded the ICR to “bbb” from “bbb-” and removed from under review with positive implications this rating of Coventry. A.M. Best also has upgraded the debt ratings to “bbb” from “bbb-” and removed from under review with positive implications the $400 million 6.3% senior unsecured notes, due 2014; $400 million 5.95% of senior unsecured notes, due 2017; and $600 million 5.95% senior unsecured notes, due 2021 of Coventry. Also, A.M. Best has upgraded the debt rating to “bbb+” from “bbb-” and removed from under review with positive implications the $250 million 6.125% senior unsecured notes, due 2015 of Coventry. The 2015 debt is guaranteed by Aetna for its full and punctual payment. The outlook assigned to the above ratings is stable. (Please see link below for a detailed listing of the companies and ratings.) The ratings of both Aetna and Coventry were placed under review following the August 2012 announcement that Aetna had entered into an agreement to acquire Coventry. That transaction was completed on May 7, 2013. A.M. Best has since had discussions with management regarding the business strategy around the Coventry acquisition and its integration into Aetna, as well as Aetna’s consolidated 2013 outlook for operating results and key financial metrics.
The affirmation of the ratings of Aetna reflects its strong operating and net income results over the past few years. The favorable results are driven by strong gains in the health care segment, which has been favored by lower utilization in the medical lines. Aetna offers a diversified product portfolio, which includes health, disability and life. Health operations consist of commercial, Medicare Advantage, Medicare Supplement and Medicaid managed care. The Coventry acquisition provides the organization with additional geographies as well as a larger Medicare Advantage and Medicaid managed care membership base.The affirmation of the ICR and debt ratings of Aetna acknowledges its good level of financial flexibility through its steady stream of subsidiary dividends, the addition of Coventry’s non-regulated cash flows from its First Health network and Concentra Workers’ Compensation Services, its commercial paper program and its available $2 billion credit facility. Aetna’s debt-to-capital ratio was expected to increase to 40% at the close of the acquisition, which is considered high. The elevation in its leverage is due to the financing of the acquisition of Coventry; however, it is anticipated that this ratio will come down over the medium term. Interest coverage is expected to remain strong at almost 10 times. As a result of the Coventry acquisition, Aetna’s amount of goodwill and other intangible assets on its balance sheet are expected to rise significantly to above 80%, which is considered high, but is still lower than some of its peers. A.M. Best recognizes that parent company financial flexibility remains good due to favorable operating trends, good operating cash flow and strong subsidiary dividends. The upgrading of the ratings of Coventry and its core insurance subsidiaries recognizes its trend of strong operating results. Although some of Coventry’s markets remain challenged, the overall Coventry group provides geographic and product diversification with no significant reliance on one market or product. The ratings also reflect Aetna’s financial strength and the benefits from integrating Coventry’s operations in the near to medium term. In addition, Aetna’s history of maintaining solid capitalization levels at its operating subsidiaries also is factored into the rating actions.
The ratings of Aetna and its core insurance entities are well-positioned at their current rating levels. Negative rating actions could occur if operating earnings from the organization’s health operations weaken considerably, the subsidiaries’ capitalization declines significantly or if leverage metrics increase above current levels.Positive rating actions for Coventry and its core subsidiaries could occur upon sustained improvement in their risk-adjusted capitalization, growth in earnings or further integration into the Aetna organization. Negative rating actions could occur if there is a material deterioration in operating earnings or a decline in risk-adjusted capitalization from company projection. For a complete listing of Aetna Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/061302aetna.pdf. 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. 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 © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.