Fitch Affirms Cigna's IDR at 'BBB+'; Outlook Revised to Positive

Tue Oct 8, 2013 1:42pm EDT

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(The following statement was released by the rating agency) CHICAGO, October 08 (Fitch) 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 below. 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 funding requirements. 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 rating category. 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% range. 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 market 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. SENSITIVITY/RATING DRIVERS 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 from Stable: Cigna Corp. --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'. Contact: Primary Analyst Douglas Pawlowski, CFA Senior Director +1-312-368-2054 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Mark Rouck CPA, CFA Senior Director +1-312-368-2085 Committee Chairperson Jim Auden, CFA Managing Director +1-312-368-3146 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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. 29, 2013. Applicable Criteria and Related Research: Health Insurance and Managed Care (U.S.) here Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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