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Fitch Maintains Cigna's Ratings on Watch Negative
January 18, 2017 / 7:48 PM / 10 months ago

Fitch Maintains Cigna's Ratings on Watch Negative

(The following statement was released by the rating agency) CHICAGO, January 18 (Fitch) Fitch Ratings has maintained the Rating Watch Negative on Cigna Corporation's (Cigna) 'A-' Issuer Default Rating (IDR), 'BBB+' senior unsecured notes and the 'A+' Insurer Financial Strength (IFS) ratings of certain subsidiaries. Today's action follows the completion of a periodic review of Cigna's ratings, which have been on a Negative Watch since July 24, 2015 following the announcement of a definitive agreement to be acquired by Anthem, Inc. (Anthem). Excluding the ratings-negative aspects of that planned acquisition, today's review would have resulted in the affirmation of Cigna's ratings with Stable Outlooks. KEY RATING DRIVERS In an effort to block the merger between Anthem and Cigna, the U.S. Department of Justice filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia in July 2016. A verdict is expected by the end of January 2017 however, appeals could further delay a final resolution to the contested merger. Cigna's ratings reflect capitalization that is better than peers, a 'Strong' business profile, and consistently solid financial performance. Cigna's Negative Watch status reflects Fitch's expectation that Anthem's post-acquisition financial leverage metrics would be meaningfully higher and its interest-coverage ratios would be meaningfully lower than Cigna's have been in recent years. Cigna's current capitalization is considered consistent with the current rating category. Specifically, Cigna reported a debt-to-EBITDA ratio of 1.3x and a financial leverage ratio of 28% at Sept. 30, 2016. Further, Cigna's NAIC Risk-Based Capital ratio is expected to be near 270% of the company action level at year-end 2016. If the merger were to proceed, the primary drivers of Cigna's ratings going forward would be financial leverage and debt service. Anthem is expected to issue an estimated $22 billion of debt and approximately $19 billion of equity to fund its acquisition of Cigna, significantly weakening financial leverage ratios. Fitch estimates that following the close of the merger Anthem's consolidated debt-to-EBITDA and financial leverage ratios will equal 4.0x and 48%, respectively. Cigna's debt service capabilities and financial flexibility continue to be better than the current rating category measured by interest coverage of 15.5x through the first nine months of 2016. If the merger occurs, Fitch estimates interest coverage for the combined Anthem-Cigna to deteriorate to a range of approximately 6x-7x. Fitch would also expect near-term financial flexibility of Anthem-Cigna to be somewhat constrained after funding the merger. Cigna's business profile is currently considered 'Strong', which is consistent with the company's current ratings. If the merger occurs, Anthem's already large and diverse market position would benefit from Cigna's strong position in the market for self-insured midsize and large employer groups in the U.S., and in international markets, including U.S. expatriates. The combined Anthem-Cigna enterprise would create the largest U.S. health insurer with membership exceeding 50 million. Potential disruption from merger activities has not shown up in Cigna's operating results, which continue at a level above the company's current ratings. Specifically, EBITDA margins were strong at 10.2% in the first three quarters of 2016. Similarly, return on capital was solid at 11.2% for the first three quarters of 2016. RATING SENSITIVITIES Fitch plans to resolve the Negative Rating Watch upon the merger's close or termination. If the merger proceeds along the terms announced in the merger agreement, Fitch expects to affirm the IFS ratings with a Negative Rating Outlook and downgrade the IDR and senior debt ratings by one notch to align with Anthem's ratings. Subsequent to the planned acquisition's close, Cigna ratings and Rating Outlook would be most sensitive to Anthem's mid-to-long-term financial leverage metrics, ability to generate consistent earnings in light of its rapid membership growth and efforts to integrate Cigna, and benefits from the combined Cigna-Anthem organization's larger market position and size/scale characteristics. Fitch would likely remove Cigna's ratings from Negative Rating Watch and affirm its ratings if the Cigna-Anthem merger failed to close. This potential action would assume Cigna resumed share repurchase activity, but maintained a Financial Leverage ratio of approximately 30% and debt-to-EBITDA near current levels. Fitch has maintained a Negative Rating Watch on the following ratings: Cigna Corp. --Issuer Default Rating (IDR) 'A-'; --Short-Term IDR 'F2'; --$1.2 billion commercial paper program 'F2'; --$250 million 5.375% senior notes due March 15, 2017 'BBB+' --$131 million 6.35% senior notes due March 15, 2018 'BBB+'; --$300 million 5.125% senior notes due June 15, 2020 'BBB+'; --$250 million 4.375% senior notes due Dec. 15, 2020 'BBB+'; --$300 million 4.500% senior notes due March 15, 2021 'BBB+'; --$78 million 6.370% senior notes due 2021 'BBB+'; --$750 million 4.000% senior notes due Feb. 15, 2022 'BBB+'; --$17 million 8.300% senior notes due Jan. 15, 2023 'BBB+'; --$100 million 7.650% senior notes due March 1, 2023 'BBB+'; --$900 million 3.250% senior notes due April 15, 2025 'BBB+'; --$300 million 7.875% debentures due May 15, 2027 'BBB+'; --$83 million 8.300% senior notes due Jan. 15, 2033 'BBB+'; --$500 million 6.150% senior notes due Nov. 15, 2036 'BBB+'; --$300 million 5.875% senior notes due March 15, 2041 'BBB+'; --$750 million 5.375% senior notes due Feb. 15, 2042 'BBB+'. 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 --Insurer Financial Strength (IFS) ratings 'A+'. Contact: Primary Analyst Doug Pawlowski, CFA Senior Director +1-312-368-2054 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Mark Rouck, CPA, CFA Senior Director +1-312-368-2085 Committee Chairperson James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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