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S&P Affirms Ratings on Cigna Corp. (CI); Notes Strong Q1, FY14 Financial Performance

June 2, 2015 11:55 AM EDT

Standard & Poor's Ratings Services said that it affirmed its 'A/A-1' counterparty credit rating on Cigna Corp. (NYSE: CI) and its 'AA-' long-term counterparty credit and financial strength ratings on Cigna's core subsidiaries, Connecticut General Life Insurance Co. and Cigna Health and Life Insurance Company.

"We affirmed our ratings on Cigna based on its strong financial performance in 2014 and through first-quarter 2015," said Standard & Poor's credit analyst James Sung. The company continues to achieve some of the strongest annual revenue growth rates among publicly traded managed-care companies, and the highest return on revenue (ROR). In addition, its leverage is gradually improving and fixed-charge coverage remains strong.

Cigna has a very strong business risk profile. The company has significant size/scale as the fifth-largest managed-care company in the U.S. (based on 2014 revenues) and it is among the best diversified by geography and business line. Cigna is differentiated from peers by its strong focus on the self-funded employer group insurance market in the U.S. (82% of commercial medical members). This is a high-margin, low capital-intensity business with minimal ACA risks. Cigna is also differentiated by its rapidly growing international business. Cigna sells private health insurance for global employers and local residents, and supplemental health, life, and accident products in 15 countries including Korea, China, Turkey, Taiwan, and the U.K. Cigna also has a well-established group disability/life business with top-five market shares in both segments. In 2014, Cigna’s global healthcare, global supplemental, and group life/disability operating segments contributed 77%, 11%, and 12% of total segment earnings, respectively.

Cigna has a very strong financial risk profile. We revised this from strong based on our reassessment of Cigna’s regulated capital strength. The company’s financial policy has not changed – it continues to target relatively conservative capital levels that typically equate to a risk-based capital (RBC) ratio of 300% (of the company action level). However, we are now providing explicit capital-model credit for holding-company cash ($400 million) and excess regulated cash flows (above what the company needs to maintain 300% RBC). In Cigna’s case, the strength of these two factors is
sufficient to offset our significant double-leverage adjustment, which represents the potential call on regulatory capital to service holding company debt (and weakens capital). Therefore, the effective double-leverage adjustment for Cigna was zero for year-end 2014. This led to our estimated ‘AA’ capital redundancy for Cigna as of year-end 2014 (compared to ‘BBB’ excluding double leverage offsets). We expect Cigna to maintain a ‘AA’ redundancy through 2015-2016.

The stable outlook reflects our view that Cigna will generate healthy revenue and adjusted EBIT growth in 2015 with leverage/coverage metrics that support the ratings.

In our base-case scenario for 2015, we expect total revenues of $37.5 billion-$38.5 billion (up 8%-10%), adjusted EBIT of $3.4-$3.8 billion (up 0%-10%), and a ROR of 9%-10%. We expect full-year global medical membership growth of 2%-4%, including 200,000 members from the acquisition of QualCare Alliance Networks Inc. For 2015, key tailwinds will include revenue and customer growth, operating expense leverage, specialty business penetration, and improved individual business profitability. Key headwinds will be higher medical cost trend (this has yet to materialize), a step-up in health insurance industry fees (which will not be fully passed through in Medicare), and foreign-currency fluctuations that may affect earnings translation.

We would consider a downgrade based on any (or a combination) of the following:

  • Significant and sustained revenue and/or earnings deterioration relative to our base-case forecast;
  • A more-aggressive financial policy resulting in target financial leverage above our 35%-40% expectation and/or fixed-charge coverage of less than 10x;
  • Weaker capital adequacy (below the 'A' level) per our model resulting from weaker statutory earnings, more-aggressive capital management, and/or higher debt leverage (affecting double leverage).

We view an upgrade as unlikely in 2015-2016. However, we would consider an upgrade in the long term if Cigna were to improve its business profile substantially, particularly relative to peers' in terms of size/scale, market position, competitive advantage, and further profitable diversification (among many factors). In addition, an upgrade could be the result of significantly more-conservative financial policies that support lower financial leverage and stronger capital adequacy.



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