CIGNA Faces Rating Action – Analyst Blog

Yesterday, health insurance company CIGNA Corp. (CI) received a rating affirmation from Fitch Ratings. Fitch affirmed CIGNA’s financial strength rating of “A” and debt rating of “BBB”. However, Fitch has conferred a negative outlook on the ratings.

 

A financial strength rating of “A” by Fitch signifies an intermediate investment grade and a possibility that the company’s finance can be affected by the economic situation. The “BBB” debt rating reflects the company’s vulnerability to an adverse change in financial and economic condition that could affect its debt commitment.

 

Fitch acknowledges CIGNA’s stable operating performance despite the difficult economic environment. The buoyancy is partially attributable to its diverse operations which include health care, disability, life and international business.

 

Fitch sees Cigna’s solid balance sheet favorably. It also feels that the company’s earnings have gained a positive trajectory with stable inputs from Health Care and Life & Disability businesses and favorable earnings from the company’s growing international business. Besides, its Run-off Reinsurance Segment has improved materially due to a recovery in financial markets

 

The rating agency’s negative outlook foreshadows the potential problems for CIGNA, such as high unfunded pension liability of $1.5 billion at the end of the year 2009, and increased leverage due to the acquisition of Great West’s health care business in 2008. The main risk for CIGNA continues to be its exposure to the commercial real estate market, given the $3.6 billion of investment portfolio exposure to commercial mortgages.

 

Moreover, CIGNA has been hurt by shrinking health insurance enrollment down by approximately 5% in 2009, driving down premiums and fees from its Health Care segment, the largest generator of its revenues. As companies continue to trim jobs and reduce the number of people covered by employer-sponsored health insurance member ship enrollment is will continue to fall. 

 

There also remains a concern of the potential adverse effect from the recently enacted Health Care Reform Act. However, the company is shielded from the reform impact due to its relatively small enrollment in Medicare Advantage and individual or small group compared to its peers.

 

For the remainder of 2010, Fitch expects CIGNA to post stable operating earnings, though earnings growth will remain more or less flat. Besides, the risk-based capital ratio is expected to rest near 300% levels, with leverage ratio heading towards 30% from 27% currently. It expects pension funding in the coming years to be similar to that of 2010 funding and that losses from investment portfolio will be within $75 million. Fitch will bring the company under review if its performance is better or worse than expected.