Feb 4 - Following Cigna's announcement of a reinsurance transaction
involving its variable annuity exposure, Fitch Ratings has affirmed Cigna Corp's
(Cigna) 'BBB+' Issuer Default Rating (IDR) and 'BBB' unsecured senior
debt ratings. In addition, Fitch affirmed the Insurer Financial Strength (IFS)
ratings of various Cigna subsidiaries at 'A'. The Rating Outlooks are Stable. A
complete list of rating actions follows below.
Overall, Fitch has a favorable view of this transaction because it effectively
eliminates a source of potential volatility from Cigna's earnings and capital.
Partially offsetting this are Fitch's expectations that Cigna will record a loss
of approximately $500 million and a short-term modest increase in financial
leverage related to the transaction.
Terms of the transaction call for Cigna to pay $2.2 billion in premium to
Berkshire Hathaway Life Insurance Co. of Nebraska (BHL) in exchange for $4
billion of reinsurance coverage. In order to guarantee performance under the
reinsurance contract, National Indemnity Co., a subsidiary of Berkshire Hathaway
Corp., which carries an IFS rating of 'AA+' from Fitch, issued a surety policy
to Cigna subsidiary, Connecticut General Life Insurance Co.
Cigna's variable-annuity reinsurance business has been in runoff since 2000 and
added volatility to the company's results. These liabilities are long-term in
nature and include both guaranteed minimum death benefit (GMDB) and guaranteed
minimum income benefit (GMIB) exposure.
GMDB reserves totaled $1.1 billion at Sept. 30, 2012 compared with a net amount
at risk of $5.4 billion for approximately 480,000 contract holders with an
average age of 71 years. Net amount at risk is calculated by assuming all death
benefits were paid as of year-end given at then current market conditions.
GMIB reserves amounted to $1.2 billion at Sep. 30, 2012 before the effect of
retrocessional reinsurance contracts with Liberty Mutual and Sun Life. The
retrocessional reinsurance covered 55% of the liability, or $625 million, and
will not be part of the Berkshire reinsurance transaction.
Cigna paid one-third of the $2.2 billion reinsurance premium on Feb. 4, 2013 and
will pay the balance of the premium with interest by April 30, 2013. The balance
will be repaid from the sale of $1.8 billion in assets previously backing the
variable annuity reserves and short term borrowing. The $1.8 billion in assets
consisted mostly of publicly traded bonds and private bonds as well as some
Debt-to-total capital will likely increase during the first quarter of 2013
related to short term borrowing in support of the transaction. The higher
financial leverage will not meet the median guideline for the current rating
category; however, Fitch expects debt-to-total capital to improve to 34% by
In general, Cigna's ratings reflect its sizeable position and scale in the
health insurance and managed care industry as well as a diversified product
offering. The company's profitability is a key component offsetting high
financial leverage. During the first nine months of 2012, Cigna reported
profitability measured by earnings before interest, tax, depreciation and
amortization (EBITDA)/revenues and annualized return on capital of 11.4% and
The key rating triggers that could result in an upgrade include:
--Financial leverage ratios consistent with Fitch's median guidelines for the
'A' rating category, specifically debt-to-total capital near 30% and debt-EBITDA
--A reduction in earnings and capital volatility.
The key rating triggers that could lead to a downgrade include:
--Failure to make meaningful progress in reducing debt-to-total capital
following the variable annuity reinsurance transaction;
--A material increase in pension funding requirements;
--Deterioration in capitalization, measured by an NAIC RBC ratio below 250% of
Fitch affirmed the following rating:
--IDR at 'BBB+';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper '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 ratings at 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', Jan. 11, 2013;
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors', Jan. 29,
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
Health Insurance and Managed Care (U.S.)