Cigna's Proposed Restructuring Raises Industry Concerns

A.M. Best Company, a leading insurance industry analyst, has issued a report on Cigna Corp.'s proposed "good bank/bad bank" restructuring, which has sparked industry debate over the precedent it may set for the insurance industry. According to the report, "Good Bank/Bad Bank": A Dangerous Precedent?, while Cigna's plan is not unprecedented, it does not completely insulate the healthy business from the troubled business. The report concludes that good bank/bad bank structures in the insurance industry have been tried before, but typically don't completely separate the healthy business from the troubled business.

Key Takeaways:

• The concept of good bank/bad bank restructuring is not new in the insurance industry, with several prominent examples including ITT Hartford, Talegen, and Home.
• A.M. Best notes that good bank/bad bank structures in the insurance industry have limitations, as the "good bank" remains susceptible to rating downgrades if the "bad bank" entity stumbles.
• The study's authors emphasize that a poorly conceived and funded bad bank will result in a "Vulnerable" Best's Rating (B or lower) for the run-off entity, and may limit the rating level of the good bank.
• The report highlights the need for managements to ensure the orderly run-off and prudent funding levels of bad banks, as a good bank's rating is affected by the performance of the bad bank.
• A.M. Best disagrees that a rash of poorly conceived future structural separations will follow, citing major hurdles that must be overcome before such a formation can occur.

Statistics:

• Since 1994, A.M. Best has expanded its rating coverage to provide critical rating information and assessment of whether a bad bank's financial resources are sufficient to fund run-off obligations.
• The maximum bad bank rating is limited to "B++" (Very Good), regardless of how well the entity is reserved and capitalized.
• A good bank's rating is affected and may be limited from achieving higher rating levels for many years depending on the size, strength, design, and legal/marketing recourse associated with the bad bank.
• As of 1995, A.M. Best has monitored and rated four recently formed bad banks, with varying Best's Ratings due to their balance sheet strengths and linkage with their related good banks.

Sources:

• PR Newswire, "A.M. Best Issues Report on Cigna's Proposed Good Bank/Bad Bank Restructuring" (December 27, 1995)
• A.M. Best Company, "Good Bank/Bad Bank": A Dangerous Precedent? (December 1995)
• A.M. Best Company, "Rating Implications of Good Bank/Bad Bank Restructuring" (1994)
• A.M. Best Company, "Review of Domestic Restructures" (1995)