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Moody Corp.’s (MCO - Analyst Report) made a rating action on CIGNA Corp. (CI - Analyst Report), wherein it affirmed the Baa2 Senior debt rating of the company. The company’s insurance financial strength (IFS) ratings were also reaffirmed at A2. Concurrently, the rating agency also raised the ratings’ outlook for the company to positive from stable.

The rating agency acknowledges Cigna’s superior operating performance along with a diversified business profile. The company has forayed into the much sought-after business of serving the senior population with the acquisition of HealthSpring.

Moody’s also views Cigna’s recent reinsurance transaction forged with Berkshire Hathaway, Inc. (BRK.A - Snapshot Report), (BRK.B - Analyst Report) as a favorable one. The transaction has unburdened Cigna of significant liabilities, enabling it to focus on more important aspects of its business.

The rating agency also acknowledges Cigna’s acquisition of HealthSpring, which has helped the company enter the growing Medicare Advantage market.

Cigna has also made a move forward by improving its debt profile. This has brought down its leverage ratio that traditionally stayed around 45%, to about 41% as of Sep 30, 2013. Steps taken by the company such as freezing of pension plans and making higher contribution to reduce the unfunded liability has bettered the company’s leverage ratio.

Cigna also remains more reform-resistant compared with its peers, primarily because 85% of its U.S. healthcare business comprises administrative services only (ASO). This limits the company’s exposure to unanticipated increase in medical utilization.

Other positives are limited exposure to risk associated with health insurance exchanges, well-diversified product profile, and a growing membership base along with a niche market presence in the U.S.

Financial strength and credit ratings measure a company’s ability to meet policyholder obligations. These are important factors affecting public confidence and creditworthiness of a company and hence reflect the company’s competitiveness. Securing an investment grade debt rating with a positive outlook reflects optimism about Cigna’s future performance.

The rating agency may pull up its rating on Cigna if it maintains its EBIDTA above 10%; interest coverage of 9x; NAIC RBC ratio equal to or higher than 300% of company action level; grows membership annually by 1% to 2% and debt ratio is lowered to 40%.

A negative rating action may, however, follow if Cigna fails to achieve expectations regarding membership growth, reducing leverage and EBIDTA margin.    

Cigna currently holds a Zacks Rank #2 (Buy).

Aetna Inc. (AET - Analyst Report), another industry major, also carries an investment grade rating from Moody’s.

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