A.M. Best Rates Aetna Securities

Last week, rating agency A.M. Best Co. assigned ratings to Aetna’s ( ( AET - Analyst Report ) ) securities that were recently registered through the universal shelf registration process. The rating agency assigned a “bbb+” rating on the company’s senior unsecured debt, “bbb” on subordinated debt and “bbb-” on preferred stock with a stable outlook.

Shelf registration is a process authorized by the U.S. Securities and Exchange Commission (“SEC”), which allows a single registration document from a company for the issuance of multiple securities.

The proceeds from the securities’ issue are expected to be used for working capital, debt repayment, business development as well as other corporate purposes.

A.M. Best acknowledges Aetna’s strong operational and financial performance over the past years. Its broad product portfolio, with a range of traditional and consumer-directed health insurance products and related services, has helped it to establish the brand name.

Aetna’s position, in terms of its capital investments, is also viewed favorably by the rating agency. It boasts a strong balance sheet with sufficient financial flexibility and a debt-to-total capitalization ratio of 30%. Consistent positive cash flows, which are put to use for acquisitions, share repurchases or other strategic investments, generate value for both the business and the shareholders.

However, some of the factors that offset the positives include – negative pressure on margins and decline in enrollment numbers.

A. M. Best did not change the previously assigned ratings of Aetna and its subsidiaries. In June 2011, the rating agency had assigned “bbb+” debt ratings to the company’s $500 million 4.125% senior unsecured notes, due in 2021. The rating agency had also affirmed the financial strength ratings (“FSR”) of “A” and the issuer credit rating (“ICR”) of “a” for the company.

The financial strength and credit ratings of a company are important metrics to determine its ability to fulfill policyholder obligations. These also affect public confidence in the company’s potential and its competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about Aetna’s future performance.

We also saw a similar rating action by A.M. Best last week when it assigned a “bbb+” rating to WellPoint Inc.’s ( WLP - Analyst Report ) senior unsecured debt, “bbb” to subordinated debt and “bbb-” to preferred stock with a stable outlook.

Aetna currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. Considering the fundamentals, we are also maintaining our long-term Outperform recommendation on the shares.