|[July 09, 2014]
Fitch Upgrades Cigna's IDR to 'A-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has upgraded Cigna Corp's (Cigna) long-term IDR to 'A-'
from 'BBB+' and unsecured senior debt ratings to 'BBB+' from 'BBB'. In
addition, Fitch has upgraded the Insurer Financial Strength (IFS)
ratings of various Cigna subsidiaries to 'A+' from 'A'. The Rating
Outlook is Stable. A complete list of rating actions is listed below.
KEY RATING DRIVERS:
The rating upgrade reflects Cigna's strong operating results relative to
current rating category guidelines that Fitch believes are sufficient to
overcome expectations for margin pressure industry-wide. The upgrade
also reflects Cigna's improved credit profile after addressing variable
annuity and under-funded pension obligation issues.
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).
Consistently solid profitability and interest coverage are key rating
components partially offsetting high financial leverage. During first
quarter-2014 (1Q'14), annualized EBITDA/revenue was 12.6% and annualized
return on capital was 13.8%. Both ratios are better than Fitch's
guidelines for the 'A' rating category. EBITDA covered interest expense
by 15.3 times during 1Q'14. This level of interest coverage is above
Cigna's recent average which was in the low double digits. Interest
coverage exceeded Fitch's median guideline for Cigna's current rating
Fitch's view is that the employer group market for health insurance is
likely to see membership dislocation to the individual market, largely
though the public exchanges with the implementation of the ACA. In the
intermediate term, Fitch believes that Cigna is likely to be impacted by
this trend, but to a lesser degree than peers.
Cigna's debt-to-rolling four-quarter EBITDA was 1.4x at March 31, 2014,
improving due to stronger earnings and exceeding Fitch's median
guideline for the current rating category. Cigna's debt-to-total capital
ratio was 34% at March 31, 2014 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 2 years to the low 30% range.
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. 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 funding requirements.
Cigna offers healthcare products in all 50 statesand internationally,
reporting 14 million medical members and revenue of $32 billion in 2013.
Consequently, Cigna's market position and size/scale are considered
"Large" under Fitch's sector credit factors. Cigna's market position
based on membership ranked fourth behind UnitedHealth Group, Inc.,
WellPoint, Inc., and Aetna Inc.
The key rating triggers that could lead to a downgrade include:
-- Elevated financial leverage measured by debt-to-total capital
exceeding 35% or debt-EBITDA above 1.8x;
-- Deterioration in capitalization, measured by an NAIC RBC ratio below
270% of the CAL;
-- Disruption in Cigna's earnings profile as evidenced by EBITDA/revenue
below 8% and net return on average capital ratios below 10%.
The key rating triggers that could result in an upgrade include:
-- Lower financial leverage ratios, specifically debt-EBITDA better than
1.2x and debt-to-total capital near 25%;
-- Stronger risk-based capitalization measured by a NAIC RBC ratio near
350% of the company action level;
-- Enhanced market position and size/scale comparable to peers rated in
the 'AA' category.
Fitch has taken the following rating actions:
--IDR upgraded to 'A-' from 'BBB+';
--Senior unsecured notes upgraded to 'BBB+' from 'BBB'.
--Short-term IDR affirmed 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
-- IFS upgraded to 'A+' from 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors', Dec.
Applicable Criteria and Related Research:
Insurance Rating Methodology
Health Insurance and Managed Care (U.S.) Sector Credit Factors
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