A.M. Best Affirms Ratings of Aetna Inc. and Its Subsidiaries

A.M. Best has affirmed the various financial strength ratings (FSR) and the issuer credit ratings (ICR) for the insurance and health maintenance organization subsidiaries of Aetna Inc. (Aetna) (Hartford, CT) [NYSE:AET]. Concurrently, A.M. Best has affirmed the ICR of “bbb+” and debt ratings of Aetna. All ratings have a stable outlook.

The ratings affirmations for Aetna and its subsidiaries reflect the organization’s favorable long-term operating earnings and premium growth trend, excellent cash flows, its diversified product portfolio and improved financial flexibility at the parent level. The consolidated Aetna branded health and life insurance affiliates, led by Aetna Life Insurance Company, the organization’s flagship operating entity, have generated strong operating and net income results over several years. Aetna’s earnings have been driven by steady operating margins in its health care segment, which have been augmented by low medical cost trends and improved operational efficiencies. These trends were supported by solid operating margins in 2014. Recent growth in premium has been driven by membership growth in its health exchange, Medicare and Medicaid businesses. Aetna’s government business now represents over 40 percent of total health premiums. The company’s strong results were achieved despite one of the largest Medicare Advantage rate cuts in the program’s history.

Aetna’s businesses continued to produce strong cash flows, largely from its core health insurance operations. The health operations consist of commercial medical and dental, Medicare Advantage, Medicare Supplement and Medicaid managed care, which are complemented by Aetna’s disability and life insurance lines of business. Additionally, the 2013 Coventry acquisition has provided Aetna greater scale and a larger geographical footprint. Moreover, A.M. Best believes that recent growth initiatives and investments in technology such as Healthagen and bSwift are integral in helping the organization address provider and consumer needs while enhancing the customer experience.

Following the Coventry acquisition, Aetna’s financial leverage increased to roughly 40%. However, as of March 31, 2015, the company’s financial leverage ratio declined to approximately 35% while interest coverage improved to over 10 times. In addition, A.M. Best acknowledges Aetna’s untapped $2.0 billion credit facility, strong dividend streams from its insurance entities, and sources of regulated and unregulated cash flows that underpin the enterprise’s excellent financial flexibility.

Some offsetting rating factors include commercial membership challenges at the medical HMO entities, exposure to integration risks of acquired Coventry business and headwinds from health care reform. The Aetna branded medical HMO membership has steadily declined over the past few years, which follows a long term trend in the industry of declining membership from the lack of demand for managed care products. Additionally, in 2015, the company entered its final year of a planned three-year phase-in period of integration of the Coventry business into the Aetna organization. Although much of the migration has occurred, the favorable ratings attributes are partially offset by potential integration disruptions.

A positive rating action may occur for Aetna and its subsidiaries should favorable trends in membership and earnings continue, if risk-adjusted capitalization levels increase at the operating companies and if financial flexibility is further enhanced via reduced financial leverage or greater interest coverage. Conversely, a negative rating action may occur if an unfavorable trend in underwriting results or net income persists or if Aetna’s risk-adjusted capitalization deteriorates meaningfully at its insurance subsidiaries.

For a complete listing of Aetna Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit Aetna Inc.

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.

Key insurance criteria reports utilized:

• A.M. Best’s Perspective on Operating Leverage
• Analyzing Insurance Company Holding Liquidity
• Evaluating Country Risk
• Evaluating U.S. Surplus Notes
• Insurance Holding Company and Debt Ratings
• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for U.S. and Canadian Life/Health Insurers
• Understanding BCAR for Property/Casualty Insurers

This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

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 © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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