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Rating Action:

Moody's confirms Anthem's and Cigna's ratings following DOJ lawsuit

27 Jul 2016

Anthem's outlook changed to negative, Cigna's outlook changed to stable

New York, July 27, 2016 -- Moody's Investors Service has confirmed the Baa2 senior debt rating of Anthem, Inc. (Anthem; NYSE: ANTM) and the Baa1 senior debt rating of Cigna Corporation (Cigna; NYSE: CI) following the filing of a lawsuit by the Department of Justice (DOJ) seeking to block Anthem's planned acquisition of Cigna. The insurance financial strength (IFS) ratings of Anthem's and Cigna's operating subsidiaries (see list below) have also been confirmed. The outlook on Anthem's ratings has been changed to negative while the outlook on Cigna's ratings has been changed to stable.

RATINGS RATIONALE

Moody's stated that the confirmations conclude the reviews for downgrade which were announced in July 2015. The confirmations reflect Moody's opinion that in the light of recent developments, it is fairly unlikely that the merger will be completed despite a time consuming and costly challenge to the DOJ lawsuit that Anthem has indicated it plans to pursue with a somewhat reluctant partner in Cigna.

Anthem stated it was fully committed to challenging the DOJ's decision in court but will remain receptive to any efforts to reach a settlement with the DOJ that will allow them to complete the transaction. Cigna stated that it was evaluating its options consistent with its obligations under the agreement and that in light of the DOJ's decision, they do not believe the transaction will close in 2016 and the earliest it could close is 2017, if at all.

The rating agency said that the negative outlook on Anthem's ratings reflect additional uncertainties with developing a new long term strategy without a national health insurer, such as Cigna, along with the potential payment of the $1.85 billion break-up fee that company would owe Cigna.

Cigna's stable outlook reflects its solid franchise and financial metrics consistent with its Baa1 senior debt rating. We see receipt of the potential $1.85 billion break-up fee as credit positive, but anticipating use of these funds for further investment in the company and/or return to shareholders, it is not likely to result in a rating upgrade.

While we consider it unlikely, should the merger ultimately be approved, Moody's anticipates a one notch downgrade to Anthem's long term ratings. The rating agency also expects that Cigna's operating companies' IFS and holding company debt ratings will be aligned with the ratings of Anthem's operating and holding companies, respectively.

However, the rating agency noted that the uncertainty created by the current political and economic environment is not likely to abate before a now unknown date for the close of the transaction which would likely stretch well into 2017, and adverse developments over this time period could place additional downward pressure on the ratings. Additionally, Moody's raised concerns about key operational aspects and integration risks associated with the proposed transaction which could create potential service and/or network disruption creating a challenge for the company to retain the existing membership of both companies.

RATINGS DRIVERS

Anthem

Since Anthem's outlook is negative, a ratings upgrade over the next twelve months is unlikely; however, if the transaction is not completed the outlook could be returned to stable based on 1) an evaluation of the company's long term strategy and 2) the financial management and impact of the potential $1.85 billion break-up fee.

Cigna

If the merger with Anthem is not approved, Cigna's ratings will likely be affirmed. Additionally, the following may result in an upgrade: 1) EBITDA margins remaining above 10% with a consolidated RBC ratio at or above 325% of CAL; 2) adjusted financial leverage maintained below 35%; 3) annual membership growth of at least 2%; 4) increased revenue and earnings diversity.

If the merger with Anthem is ultimately approved, Moody's expects that Cigna's IFS and debt ratings will be downgraded and aligned with the ratings of Anthem's operating and holding companies. However, absent the merger with Anthem, the following could lead to Cigna's ratings being downgraded: 1) consolidated risk-based capital ratio below 250% of CAL; 2) adjusted financial leverage increasing above 40%; 3) a significant membership loss

LIST OF AFFECTED RATINGS

The following ratings were confirmed:

Anthem, Inc. -- senior unsecured debt rating at Baa2; subordinated debt rating at Baa3 (hyb); provisional senior unsecured debt shelf rating at (P)Baa2; provisional subordinated debt shelf rating at (P)Baa3; provisional preferred stock shelf rating at (P)Ba1; short-term debt rating for commercial paper of Prime-2 (P-2);

Anthem Insurance Companies, Inc. -- insurance financial strength rating at A2; surplus note rating at Baa1(hyb);

Blue Cross of California -- insurance financial strength rating at A2;

Empire HealthChoice Assurance, Inc. -- insurance financial strength rating at A2;

Anthem Health Plans, Inc. -- insurance financial strength rating at A2;

Anthem Health Plans of Virginia, Inc. -- insurance financial strength rating at A2;

Community Insurance Company -- insurance financial strength rating at A2.

Cigna Corporation -- senior unsecured debt rating at Baa1; senior unsecured MTN program rating at (P)Baa1; short-term debt rating for commercial paper at Prime-2;

Connecticut General Life Insurance Company -- insurance financial strength rating at A1;

The Life Insurance Company of North America -- insurance financial strength rating at A1;

Cigna Health and Life Insurance Company -- insurance financial strength rating at A1.

Anthem, Inc., domiciled in Indiana, offers various group and individual medical products, including indemnity, preferred provider organization (PPO), point of service (POS) and health maintenance organization (HMO) plans. The company reported total revenues and net income of approximately $20.3 billion and $703 million, respectively, through the first quarter of 2016. As of March 31, 2016, shareholders' equity was approximately $23.5 billion and medical membership (excluding BlueCard and Medicare Part D members) was approximately 34 million.

Cigna Corporation, headquartered in Bloomfield, CT provides medical, dental, disability, life and accident insurance and related products and services, the majority of which are offered through employers and other groups (e.g., governmental and non-governmental organizations, unions and associations). Cigna also offers Medicare and Medicaid products and health, life and accident insurance coverages primarily to individuals in the U.S. and selected international markets. For the first three months of 2016, the company reported consolidated GAAP revenues of approximately $9.9 billion, shareholders' equity of approximately $12.7 billion, and total enrollment of 15.1 million medical members (including international but excluding Part D membership).

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations.

The principal methodology used in these ratings was U.S. Health Insurance Companies published in May 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stephen Zaharuk
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Marc R. Pinto, CFA
MD - Managed Investments
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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