Credit rating giant Moody’s Investors Service has assigned a Prime-2 (“P-2”) short-term rating to the commercial paper program of Cigna Corporation’s (CI - Free Report) wholly owned unit, Halfmoon Parent, Inc. This is in line with the agency’s rating of Cigna's short-term commercial paper. Halfmoon is Cigna’s merger subsidiary, associated with the pending acquisition of Express Scripts Holding Company (“ESRX”). The buyout is expected to be completed later this year, subject to closing conditions.
On Sep 4, 2018, the agency assigned a Baa1 senior unsecured rating to Halfmoon's issuance of $20 billion to pre-fund part of the cash consideration for purchasing ESRX on review for downgrade.
The P-2 ratings show the subsidiary’s investment grade long-term rating as well as the parent company’s impressive liquidity level. The decline in Halfmoon's ratings also reflects the sudden increase in Cigna’s financial leverage along with decreased financial flexibility that would result from the acquisition. The ratings also depend on the company’s solid national presence, a wide membership base and its array of group benefits products. Notably, the ratings also represent a comparatively low risk and high profitability of the company.
The credit rating agency expects the company’s goodwill and intangibles to increase as a percentage of shareholder's equity. This in turn, will also leave a positive impact on the quality of capital.
Factors Driving the Ratings
Moody’s can downgrade ratings, provided there is deterioration in Halfmoon's long-term, senior unsecured debt ratings by a notch or maximum, a couple of notches. The transaction’s effect on the company’s debt rating will totally be dependent on the agency’s assessment of credit profile of the underlying operations. Notably, it will also depend on the improvement in debt and holding company cash fund, relative to the better unregulated cash flows. Moreover, regulatory changes that could impact pharmacy benefit managers will also be taken into consideration. Currently, the parent company and its subsidiary’s senior debt is rated three notches below the IFS, typical of those highly rated health insurers.
Apart from the integration deal, other factors that can lead to a ratings upgrade include the company’s above 10% EBITDA margins with a consolidated RBC ratio of or above 325% company action level (CAL), adjusted financial leverage falling below 35% and annual membership growth of 2%.
Meanwhile, the agency can downgrade ratings if the company’s consolidated risk-based capital ratio lies below 250% RBC, adjusted financial leverage increases above 40% and a membership loss of 5% or more is incurred over the next few years.
Shares of this Zacks Rank #2 (Buy) company have rallied 20.5% in the past six months, outperforming its industry’s growth of 1.6%.
Other Stocks to Consider
Investors interested in the insurance sector might also take a look at a few other top-ranked stocks like The Navigators Group, Inc. (NAVG - Free Report) , Alleghany Corporation (Y - Free Report) and First American Financial Corporation (FAF - Free Report) .
Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company sports a Zacks Rank #1 (Strong Buy) and managed to deliver positive results in three of the trailing four quarters with an average four-quarter positive surprise of 19.54%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Operating in the Reinsurance and Insurance segments, Alleghany Corporation offers related services in the United States as well as internationally. The company has a Zacks Rank of 1 and came up with an average three-quarter earnings surprise of 17.61%.
First American Financial and its subsidiaries provide financial services to its customers. The stock carries a Zacks Rank of 2 and pulled off an average four-quarter beat of 8.22%.
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