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 category.
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 states and 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. 18, 2013.
Applicable Criteria and Related Research:
Insurance Rating Methodology
Health Insurance and Managed Care (U.S.) Sector Credit Factors