Moreover, A.M. Best views favorably Cigna's reinsurance agreement with Berkshire Hathaway Life Insurance Company of Nebraska, as it eliminates potential earnings volatility related to run-off variable annuities business and allows Cigna to focus resources on its core segments.Partially offsetting these strengths are the declining margins in Cigna’s health care and disability segments. Cigna’s earnings and revenues remain strong with significant growth year over year largely due to the HealthSpring acquisition. However, overall margins have declined due in part to the added volume of Medicare Advantage business, which typically has a higher loss ratio than commercial business. In addition, the increased financial leverage at the holding company, which declined slightly in 2012 to approximately 34% from 37% a year earlier, might place pressure on the operating companies’ capital levels. The ratings of the HealthSpring subsidiaries reflect its trend in membership growth, strong earnings and the strategic role of the Medicare Advantage product and HealthSpring business model for the Cigna organization. The consolidated HealthSpring subsidiaries have had consistent membership growth in both Medicare Advantage and Medicare Prescription Drug Coverage, Part D, over the past few years. Earnings have been solid with return on revenues in the 3%-4% range. Additionally, the HealthSpring subsidiaries provide Cigna with an entrance into the Medicare Advantage segment as well as the HealthSpring organization’s knowledge and experience with collaborative care provider relationships. Key rating drivers that may lead to positive rating actions on the ratings of Cigna and its subsidiaries include stability of earnings, enhanced risk-adjusted capital at the operating subsidiaries and a reduction in financial leverage. Key rating drivers that may lead to negative rating actions include a further increase in financial leverage beyond A.M. Best's expectation; deterioration in interest coverage; a decline in risk-adjusted capital at Cigna's lead operating entity, CGLIC; a significant weakening of operating performance; or material impairments within the investment portfolio.
For a complete list of Cigna Corporation and its subsidiaries’ FSRs, ICRs and debt ratings, please see www.ambest.com/press/021404CIGNA.pdf.The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.