Fitch Maintains Cigna on Rating Watch Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has maintained the Rating Watch Negative for 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. Fitch had previously placed Cigna's ratings on Watch Negative on July 24, 2015 following the company's announcement that it had entered into a definitive agreement to be acquired by Anthem, Inc. (Anthem). Excluding the ratings-negative aspects of that planned acquisition, Fitch believes that today's review would have resulted in the affirmation of Cigna's ratings with Stable Outlooks.

Cigna's Negative Watch status reflects Fitch's expectation that Anthem's post-acquisition financial leverage metrics will be meaningfully higher and its interest-coverage ratios will be meaningfully lower than Cigna's have been in recent years. The Negative Watch status also reflects potential earnings disruptions that could arise in the short-term subsequent to the acquisition's close as Anthem integrates Cigna from an operational and management perspective.

KEY RATING DRIVERS

An estimated $22 billion of debt will be issued by Anthem to fund the Cigna acquisition, significantly weakening financial leverage ratios. Anthem's acquisition of Cigna is expected to close in the second half of 2016, and consequently, Cigna's ratings will primarily be shaped by Anthem's post-acquisition credit quality. The primary drivers of Cigna's ratings going forward will be financial leverage and debt service.

Fitch estimates that debt-to-EBITDA and debt-to-capital ratios at the close of the acquisition will equal 3.8x and 48%, respectively. Fitch's estimates of financial leverage ratios assume some growth in earnings and stockholders' equity between now and next year's expected close. Financial leverage ratios in this range are materially below Fitch's median guidelines for the current rating category.

Key considerations factored into Cigna's Rating Watch include typical merger-related issues such as the potential operational and earnings disruptions that could arise during the integration of both companies. Other considerations include potential expense synergies as well as post-acquisition plans for managing various branding and operational requirements.

Favorably, the combined Anthem-Cigna would be the largest health insurance company ranked by membership with greater than 50 million medical members. The combined organization would be expected to benefit from enhanced size and scale as profit margins are pressured under the Affordable Care Act.

Cigna continues to perform well, reporting an EBITDA margin of 11.7% and a return on average capital of 13.9% through the first nine months of 2015. Both measures are above Cigna's five-year average and better than Fitch's median guidelines for the current rating category.

RATING SENSITIVITIES

Fitch plans to resolve the Rating Watch upon the close of the acquisition. If the acquisition proceeds along the terms announced in the merger agreement, Fitch expects to downgrade the IFS ratings by one notch or, affirm with a Negative Outlook. The IDR and senior debt ratings would be downgraded by one or two notches to match Anthem's expanded notching.

Subsequent to the planned acquisition's close, Cigna ratings and Rating Outlook will 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 from Rating Watch Negative and affirm Cigna's ratings if the Cigna-Anthem merger failed to close.

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+';

--$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+'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994224

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Fitch Ratings

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Doug Pawlowski, CFA

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Fitch Ratings, Inc.

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Source: Fitch Ratings