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A.M. Best affirmed the Issuer Credit Ratings (ICR) and debt ratings of “bbb+” of Aetna Inc. (AET - Analyst Report). It also upgraded the Financial Strength Ratings (FSR) to A from A-.
 
Some of the former subsidiaries of Coventry Health Care, Inc. also witnessed a rating upgrade wherein their ICRs were upped to “a” from “a-,” and FSR to A- from B++. Those units carrying ICR of bbb+ were upped to “a-.”
 
A.M. Best also pulled up FSR to A- from B++ and the ICRs to “a-” from “bbb” and the FSR to A- from B+ and the ICRs to “a-” from “bbb-” of the remaining former subsidiaries of Coventry.
 
Further, A.M. Best upgraded the ICR to “bbb” from “bbb-” and removed it from under review with positive implications for this rating of Coventry.
 
A.M. Best also upgraded some of its debt ratings to “bbb” from “bbb-“ and removed from under review with positive implications.
 
All the above ratings which had been placed under review with negative implication following the Aetna announcement to acquire Coventry, has been removed from the status of ‘under review’. The upgradation of rating outlook comes on the back of rating agency’s increased confidence in the company affairs and clarity about the company operations from management. 
 
A.M. Best acknowledges Aetna’s strong operational and financial performance over recent years. The earnings have benefited from lower-than-average utilization by members and strong margins in the health care segment. 
 
The company’s diversified operations consisting of Health, Life and Disability lines of business provide enough shield to its earnings. Within its Health insurance line of business, Aetna provides commercial, Medicare Advantage, Medicare Supplement and Medicaid managed care insurance. With the acquisition of Coventry the company has been able to increase its Medicare Advantage and Medicaid managed care business. 
 
A.M. Best views Aetna’s strong financial position favorably. Along with Aetna’s strong financial flexibility steady flow of dividend from subsidiaries, and solid operating cash flows the company has gained extra capital support from Coventry’s free cash flows as well as its available credit facility.
 
Though Aetna’s leverage ratio of 40% which increased due to acquisition of Coventry is quite high, A.M. Best is confident that the ratio will moderate over time.  The rating agency is of the view that Aetna remains comfortably positioned with respect to its debt servicing capability and expects the interest coverage ratio to stand at 10x. 
 
The positive rating action on Coventry’s subsidiaries emanated from the rating agency’s increased confidence about their operating results. Though it notes that the company’s businesses remains challenged in some areas, overall it lies in a strong position. The company also maintains a solid capital position. Moreover the benefit of being a part of Aetna provides additional relief to A.M. Best.
 
Though somewhat unlikely, the possibility of a negative rating action cannot be ruled out if Aetna’s operating profitability of its health business is reduced or if risk-based capital ratio declines significantly. A high leverage ratio can also increase the chances of a rating downgrade. 
 
For Coventry positive rating action can come on the back of an improvement in risk-adjusted capitalization, growth in earnings or further integration into the Aetna organization. However, negative rating action can follow from a decline in operating profitability and decline in capital strength.
 
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 provide a company’s competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about Aetna’s future performance.
 
Other players in the same industry, CIGNA Corp. (CI - Analyst Report), UnitedHealth Group Inc. (UNH - Analyst Report) and WellPoint Inc. (WLP - Analyst Report) all carries an investment grade rating from A.M. Best.
 
Aetna currently retains a Zacks Rank # 2 (Buy). 

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