|[October 08, 2013]
Fitch Affirms Cigna's IDR at 'BBB+'; Outlook Revised to Positive
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed Cigna Corporation's (Cigna) Issuer Default
Rating (IDR) at 'BBB+' and unsecured senior debt ratings at 'BBB'. In
addition, the Insurer Financial Strength (IFS) ratings of various Cigna
subsidiaries were affirmed at 'A'. The rating Outlooks have been revised
to Positive from Stable. A complete list of rating actions is listed
The Positive Outlooks reflect Cigna's improved credit profile following
the company's first-quarter 2013 (1Q'13) variable-annuity reinsurance
transaction and reduction in the company's unfunded pension plan
obligation. The ratings continue to reflect a solid market position and
favorable financial results.
Balanced against these strengths is potential for a generally challenged
earnings environment following changes in the healthcare industry from
implementation of the Affordable Care Act (ACA).
Cigna addressed a potential source of earnings and capital volatility by
reinsuring most of its variable-annuity reinsurance business with
Berkshire Hathaway in 1Q'13. Cigna paid a reinsurance premium of $2.2
billion and receives approximately $4 billion in coverage against claims.
A combination of rising interest rates and favorable equity markets
during 2013 increased the funded status of Cigna's pension plan. Fitch
believes this improvement reduces the potential for future mandatory
Cigna offers healthcare products in all 50 states and internationally.
Cigna's 14 million medical members and revenue of $29 billion in 2012
were consistent with Fitch's median guidelines for 'large-sized'
healthcare companies, and based on membership, the company ranked fourth
behind UnitedHealth Group, Inc., WellPoint, Inc., and Aetna Inc.
Cigna's consistent and solid profitability is a key ratings component
partially offsetting high financial leverage. During 1H'13, both
EBITDA/revenues and annualized return on capital were 7.9%. The
company's profitability, measured by five-year average (2008-2012)
EBITDA margin and return on capital (ROC) of 10% and 12.7%,
respectively, was superior to Fitch's median guidelines for the current
Cigna's debt-to-total capital ratio was 36% at June 30, 2013 and remains
elevated relative to Fitch's guideline of 28% for the current rating
category. Fitch expects the debt-to-total-capital ratio to gradually be
reduced through capital retention over the next two years to the low 30%
EBITDA covered interest expense by 8.2x during 1H'13. This level of
interest coverage is consistent with Fitch's median guidelines for the
rating category, but slightly below the company's recent average, which
was in the low double digits.
Fitch's view is that the employer group mrket for health insurance is
likely to see membership dislocation to exchanges with the
implementation of the ACA. In the intermediate term, Fitch believes that
Cigna is likely to be affected by this trend, but to a lesser degree
than small company-focused peers.
The key rating triggers that could result in an upgrade include:
-- Lower financial leverage ratios, specifically debt-to-total capital
near 30% and debt-EBITDA near 1.5x;
-- Maintaining a strong earnings profile in the ACA environment as
evidenced by EBITDA/Revenues and net return on average capital ratios
that consistently approximate 9% and 11% respectively.
The key rating triggers that could lead to a Stable Outlook include:
-- Elevated financial leverage measured by debt-to-total capital
exceeding 35% or debt-EBITDA above 2.0x;
-- Deterioration in capitalization, measured by an NAIC RBC ratio below
250% of the CAL;
-- Disruption in Cigna's earnings profile in the ACA environment as
evidenced by EBITDA/ and net return on average capital ratios below 7%.
Fitch affirmed the following ratings and revised the Outlook to Positive
--IDR at 'BBB+';
--Senior unsecured notes at 'BBB';
--Commercial paper at 'f2';
--Short-term IDR at 'F2'.
Cigna Corp. Subsidiaries:
Connecticut General Life Insurance Company
Life Insurance Company of North America
Cigna Life Insurance Company of New York
Cigna Worldwide Insurance Company
Loyal American Life Insurance Company
Central Reserve Life Insurance Company
--IFS rating at 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', Jan. 11, 2013;
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors', Jan.
Applicable Criteria and Related Research:
Health Insurance and Managed Care (U.S.)
Insurance Rating Methodology
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