Fitch Affirms Cigna's Ratings After Reinsurance Deal
CHICAGO -- February 4, 2013
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
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 commercial mortgages.
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 near 2.0;
--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.)
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Douglas Pawlowski, CFA, +1-312-368-2054
70 W. Madison Street
Chicago, IL 60602
Mark Rouck, CPA, CFA, +1-312-368-2085
Jim Auden, CFA, +1-312-368-3146
Brian Bertsch, New York, +1 212-908-0549
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