Press Release - AUGUST 22, 2018
A.M. Best Removes From Under Review With Negative Implications and Affirms Credit Ratings of Aetna Inc. and Its Subsidiaries
FOR IMMEDIATE RELEASE
OLDWICK - AUGUST 22, 2018
The majority of Aetna’s operating entities, along with Coventry HC of FL, are part of the core subsidiaries of Aetna Inc. (Aetna Health & Life Group). The ratings of Aetna Health & Life Group reflect its balance sheet strength, which A.M. Best categorizes as strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).
Aetna Health & Life Group’s strong risk-adjusted capitalization is supported through a steady stream of positive earnings. The sale of the group life and disability business to Hartford Life and Accident Insurance Company (Hartford) in late 2017 lowered the organization’s exposure to longer-term liabilities and reduced the need to carry higher risk assets on the balance sheet. The insurance entities’ liquidity and financial flexibility are further supported by access to approximately $700 million of Federal Home Loan Bank borrowing at ALIC and Aetna’s $2 billion revolving credit facility with no current balance outstanding on either facility. However, the capital and surplus at ALIC declined in 2017, driven by a higher dividend to the parent, reduced value of deferred tax asset and the transfer of assets related to the Hartford transaction. As a result, year-end 2017 risk-adjusted capitalization at ALIC was at its lowest level in five years.
While Aetna’s current financial leverage and interest coverage are in line with industry peers, the potential merger with CVS Health Corporation (CVS) may put additional pressure on the organization, as it is expected that financial leverage at the new parent will be approximately 60% with a very high level of goodwill and intangible assets at the combined organization. In addition, there is a significant integration risk related to the Aetna-CVS merger given the vertical nature of the transaction and potential complexity to achieve meaningful synergies. However, CVS stated its intention to maintain the current capitalization level at Aetna’s insurance entities and accelerate de-leveraging through robust cash flow and reduced share repurchases. Following the announcement of the transaction, Aetna stopped share repurchases. Aetna’s share repurchases totaled $3.85 billion in 2017.
The operating performance of Aetna’s insurance subsidiaries remains strong, with 2017 earnings supported by positive results in all lines of business and margins exceeding targets. Earnings in the commercial segment strengthened in 2017 following the exit from the majority of individual exchange markets where the organization experienced losses in 2015 and 2016. Medicare Advantage gains expanded, owing in part to a growing share of members enrolled in plans with higher Star ratings. However, the exit from individual business, combined with a loss of Medicaid contracts in several states, resulted in a material premium decline. Aetna is focused on maintaining stability of commercial group earnings while profitably expanding in government programs: Medicare Advantage and Medicaid.
Aetna maintains a strong market presence throughout the United States in commercial and government segments. In line with industry trends, the Medicare Advantage line of business primarily has generated recent growth, while the commercial group business has experienced modest fluctuations. Aetna’s strategy of building effective partnerships with providers to deliver high quality and cost-effective care is supported by the build-out of an information technology platform to facilitate data-driven impacts on members’ behavior and life style in order to control chronic health conditions. The merger with CVS, if consummated, will provide further opportunities for vertical integration and outreach to members through increased local presence.
The rating upgrades of Coventry HC of FL reflect closer integration with Aetna operations. The withdrawal of Aetna IC of CT ratings is due to lack of activity at the entity.
The ratings of AICL reflect its balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and appropriate ERM. Furthermore, the ratings of AICL factor in rating enhancement from the Aetna organization. AICL is Aetna’s European underwriting platform, which in recent years has benefited from capital injections and the transfer of international business from the wider group.
For a complete list of Aetna Inc.’s subsidiaries’ FSRs, Long-Term ICRs and Long- and Short-Term IRs, please visit Aetna Inc.
This press release relates to Credit Ratings 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 see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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