Standard & Poor’s undertook a favorable rating action on the credit worthiness of health insurer CIGNA Corp. (CI) and its main operating subsidiaries, Connecticut General Life Insurance Co. (“CG Life”) and Cigna Health and Life Insurance Co. (“CHLIC”).
The agency affirmed its 'BBB/A-2’ counterparty credit rating on the parent company, and its long-term counterparty credit and financial strength ratings of ‘A’ on CG Life and CHLIC. The outlook on the company was raised to positive from stable.
These are investment grade ratings and carry a positive outlook.
The financial strength and credit ratings of a company are important metrics to determine its ability to fulfill policyholder obligations. These also affect investor confidence in the company’s potential and its competitiveness.
An investment-grade debt rating with a positive outlook reflects optimism about Cigna’s future performance. A positive outlook implies that the company’s rating may be raised over the following 12-month period.
S&P was particularly impressed with Cigna’s sound balance sheet, favorable operating results, strong cash flow generation, sufficient liquidity and financial flexibility. According to S&P, Cigna is less exposed to the effects of the Health Reform Act compared with its peers as a greater percentage of its business belongs to the non-risk category. It also noted that the gradually improving health insurance marketplace will further strengthen the company’s position.
S&P also acknowledged the strategic investments made by Cigna recently, such as the acquisition of HealthSpring, to diversify its business in the fast growing Medicare Advantage market.
Cigna’s ratings may be raised by a notch, if the company performs in line with the earnings expectations of the rating agency. The rating agency expects total revenue to be more than $26 billion, medical membership of 12.5 million, pretax GAAP operating income in the range of $2.3–$2.5 billion and cash flow in the range of $3.0–$3.2 billion.
Cigna also needs to maintain risk-based capital of approximately 300%, a debt ratio below 45%, an EBITDA coverage of 9x to 12x, and retain holding-company cash and marketable securities of at least $500 million for another favorable rating action.
The rating agency also made it clear that the rating outlook may be revised downward to stable or even negative if the operating margins fall below expectations, making it hard for the company to meet other requirements.
We are confident that the health insurer major will see a favorable rating outcome going forward, given the pace at which it is evolving itself. Looking ahead, Cigna is well positioned with its diverse and balanced portfolio of businesses offering attractive growth prospects.
This includes its U.S. commercial business, which is expected to deliver strong organic growth; its International business, with a strong top line and earnings growth potential in excess of 20%, and its Seniors and Medicare business, where the acquisition of HealthSpring is expected to drive growth in 2012 and be highly accretive on a cash basis.
Recently,S&P has raised its outlook on other health insurers such as WellPoint Inc. (WLP), Aetna Inc. (AET) and Humana Inc. (HUM) from stable to positive.
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CIGNA CORP (CI): Free Stock Analysis Report
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WELLPOINT INC (WLP): Free Stock Analysis Report
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