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 conditions.
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 year-end 2013.
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 11.7%, respectively.
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