Fitch Ratings has affirmed the Insurer Financial Strength (FS) ratings of Cigna Corporations' operating subsidiaries at 'A+' (Strong), Cigna's Issuer Default Rating (IDR) at 'BBB+', senior unsecured debt at 'BBB+', and short-term debt and IDR at 'F2'.
The Rating Outlook is Stable.
Key Rating Drivers
Most Favorable Company Profile:
Elevated Financial Leverage: Fitch expects the company to report financial leverage of approximately 40% and debt/EBITDA of 3.0x at YE 2022. This level of leverage is above guidelines for standard notching under Fitch's criteria, resulting in widened notching between the Issuer Default Rating (IDR) of Cigna's operating companies and the IDR of the holding company.
Increased Financial Flexibility: Cigna's debt ratings benefit from the enhanced flexibility provided by sizeable nonregulated cash flows generated by Cigna's Evernorth segment. Specifically, the holding company ratings benefit from a default recovery assumption of average versus below average under Fitch's Insurance Rating Criteria due to Evernorth's sizeable unregulated and segregated cash flows. This results in Cigna's senior unsecured debt rating being equivalent to the holding company IDR.
Inflationary Pressures: Inflation impacts Cigna's two main segments, healthcare and pharmacy, in different ways. The company's healthcare segment benefits from provider contracts that generally have three-year terms, so inflation, especially short-term spikes, is more manageable. For the pharmacy segment, inflation impacts the price for prescription drugs, which can potentially drive higher absolute earnings. However, healthcare and pharmacy inflation impact affordability, which remain longer-term risks for the health insurance sector.
Very Strong Financial Performance: Cigna continues to generate excellent operating results in 2022, reporting consolidated TTM Operating EBITDA of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Sustained operating EBITDA margin of 8.5% or higher;
Sustained Debt/EBITDA ratio and FLR of 1.8x and 38% or lower, respectively
Sustained RBC above 275%;
Holding company ratings could be upgraded if debt/EBITDA is sustained at 2.0x or lower.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained RBC ratios below 235%;
Sustained EBITDA margin below 6.5%;
Cigna's unsecured senior debt ratings could be downgraded if Evernorth segment's operating EBITDA relative to consolidated interest expense is less than approximately 4x or less than 30% of consolidated pretax operating income or if it becomes encumbered by direct ownership of a regulated subsidiary.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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