Cigna Corp. And Subsidiaries Downgraded As Express Scripts Holdings Co. Acquisition Nears Completion

  • U.S. health insurer Cigna Corp. has received all state regulatory approvals to complete its acquisition of pharmacy benefit manager (PBM) Express Scripts Holding Co. (ESI).
  • We are lowering our ratings on Cigna Corp. and its subsidiaries and removing them from CreditWatch with negative implications, where we placed them on March 8, 2018.
  • The negative outlooks reflect the potential for additional downgrades if Cigna encounters business and/or integration setbacks and cannot reduce adjusted leverage in 2019-2020.
NEW YORK (S&P Global Ratings) Dec. 19, 2018--S&P Global Ratings said today it 
lowered its issuer credit rating (ICR) on Cigna Corp. to 'A-/A-2' from 
'A/A-1', and its ratings on Cigna's senior unsecured debt to 'A-' from 'A'. We 
also lowered our financial strength and ICRs on Cigna Corp.'s operating 
subsidiaries, Connecticut General Life Insurance Co. (CGLIC) and Cigna Health 
and Life Insurance Co. (CHL) to 'A' from 'AA-'. We removed all ratings from 
CreditWatch with negative implications, where we placed them initially on 
March 8, 2018. The outlooks on Cigna, CGLIC, and CHL are negative. 

The rating on Cigna's subsidiary Halfmoon Parent Inc., which will become the 
new ultimate holding company of the group once the deal formally closes, is 
unaffected.

The rating actions reflect our opinion that Cigna's acquisition of ESI 
(effectuated through Halfmoon Parent Inc.) will result in a stronger business 
than Cigna and ESI on their own, but with integration/client-retention risks 
and elevated financial leverage (49% post-close) in 2019-2020. In addition, 
holding company debt will place more pressure (via excess double leverage) on 
the group's insurance capitalization.

Cigna already has a captive PBM but outsources some services to OptumRx. 
However, Cigna is gaining a top-three PBM with significant scale and 
purchasing power, clinical capabilities, and specialty managed-care products 
(sold through its subsidiary eviCore). If the merger is successful, Cigna 
should be able to improve its long-term competitiveness through a better 
medical/pharmacy cost structure and expanded product portfolio.

However, Cigna's ESI deal comes with significant risks. The PBM industry is 
facing growing political/regulatory pressure and remains highly competitive. 
Cigna's scale, even with ESI, will be smaller than peers' such as UnitedHealth 
Group Inc., CVS Health/Aetna and Anthem Inc./IngenioRx. Moreover, ESI is 
facing the loss of its largest contract (Anthem) starting midway through 2019. 
Client retention will be a key integration priority.

We believe the merger may affect the retention of certain ESI clients, 
particularly health plans. However, we believe this risk will be mitigated 
somewhat by the overall reshaping of the PBM industry. All of the top-three 
PBMs will be attached to managed-care organizations. We believe total cost of 
care savings and service levels will prevail as key retention issues in most 
cases. And price competition among PBMs will only intensify.

Even with ESI's Anthem contract loss, we expect Cigna to generate more than 
sufficient free cash flow to reduce leverage at a good pace. We expect the 
group to generate free cash flow of $6 billion-$7 billion in 2019 and $5 
billion-$6 billion in 2020. If Cigna utilizes roughly half of these cash flows 
toward debt repayment, it could reduce financial leverage to 35%-40% from 49% 
(post-close) as early as mid-2020.

The increased debt load also weakens Cigna's insurance capitalization, a key 
credit strength at the prior rating level. We expect Cigna to manage its 
regulatory risk-based capital consistent with historical levels. However, we 
believe the additional debt load represents an ongoing implicit call on 
regulated capital, particularly if any part of the business were to experience 
operating issues.

The negative outlooks reflect the potential for one-notch downgrades in 
2019-2020 if Cigna encounters business and/or integration setbacks and cannot 
reduce leverage to below 40%. In addition, we may lower the ratings if its 
consolidated insurance capital adequacy falls below 'BBB' on a sustained 
basis.

We expect Cigna to generate pro-forma revenue of $145 billion-$155 billion in 
2019, and $140 billion-$150 billion in 2020 (with the drop-off in 2020 largely 
due to the loss of the Anthem contract). In addition, we expect pro-forma 
adjusted EBITDA of $13 billion-$13.5 billion in 2019 and $11.5 billion-$12.5 
billion in 2020. We expect pro-forma adjusted EBIT of $10.5 billion-$11.5 
billion in 2019 and $9.5 billion-$10.5 billion in 2020. We expect Cigna's 
pro-forma adjusted EBIT return on revenue to be about 6%-7% on a run-rate 
basis.

We expect Cigna to utilize at least half of its free cash flows (after capital 
expenditures) of $6 billion-$7 billion in 2019 and $5 billion-$6 billion in 
2020 toward debt repayment. We expect financial leverage of 49% (post-close as 
of year-end 2018), 40%-50% as of year-end 2019, and 35%-40% as of year-end 
2020, and debt-to-EBITDA of 2x-3x during the same period. We expect adjusted 
EBITDA interest coverage of 6x-8x in 2019-2020, which is adequate for the 
rating.

We may lower our ratings on Cigna by one notch based on its business 
performance, leverage, and capital adequacy in 2019-2020.

We may affirm the current ratings based on Cigna's business performance, 
leverage, and capital adequacy in 2019-2020.

Other Credit Considerations
We are assessing Cigna as an insurance group with corporate risks incorporated 
into the credit profile. We believe insurance risks dominate Cigna's risk 
profile because Cigna is the acquirer and driver of the long-term strategy. In 
addition, we expect Cigna to grow faster than ESI during the next several 
years, leading to Cigna/ESI's reported EBITDA split (currently about 40/60) 
moving closer to 60/40 in 2019-2022.

We are rating ultimate parent Halfmoon and the intermediate holding companies, 
Cigna Corp. and ESI (and subsidiaries), one notch below the group credit 
profile (GCP) score of 'a'. The one-notch differential between our rating on 
these companies and the GCP reflects structural subordination, slightly offset 
by the relatively high level of noninsurance earnings (between 33% and roughly 
half) in the group.

Issue Ratings
We are rating Halfmoon, Cigna, and ESI's (and subsidiaries) senior unsecured 
debt at the same level as our ICRs ('A-'). Halfmoon, Cigna, and ESI 
cross-guarantee each other's debt, while ESI guarantees its subsidiaries' 
debt.
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