Fitch Ratings has downgraded a pair of ratings for health insurer CIGNA, citing several factors that have resulted in what it called some “modest tightening” of the insurer’s “financial flexibility.”

CIGNA, headquartered in Philadelphia, had its issuer default rating changed from “A-” to “BBB+” and the insurer financial strength rating of its primary insurance subsidiaries went from “A+” to “A” by Fitch. The ratings service also revised CIGNA’s outlook from negative to stable.

Fitch noted three key factors in its action, including a 24% drop in shareholder’s equity last year caused largely by an $861 million post-retirement benefits liability adjustment, and also – to a lesser extent – the unrealized declines in asset values.

The ratings service also said it felt CIGNA’s exposure to equity markets through its variable annuity business and defined pension plan drove recent volatility within the company’s balance sheet. It also noted the extended period of higher leverage and modestly lower operating company capital levels than targeted.

Fitch said it believes the impact of these issues resulted in “some modest tightening of CIGNA’s financial flexibility,” according to a statement. It added that access to liquidity is not a “near-term concern” for the company, yet ongoing pension funding requirements and the recent reserve requirements related to its run-off reinsurance business have “modestly weakened the company’s financial position.”

“The run-off reinsurance business was a major component in the deterioration in Connecticut General Life Insurance Co.’s statutory net income, which was near break-even in 2008 after averaging over $800 million during the prior four years,” Fitch said.

Regarding the parent company, Fitch said CIGNA fell outside targeted ranges due largely to the acquisition financing of Great-West Healthcare last year, but the insurer anticipates a return to those target areas later this year.

Fitch added that the stable outlook for CIGNA reflect expectations for good earnings in 2009, planned efforts to strengthen capital at the operating subsidiaries and increase parent cash. The outlook also reflects the expectation that further funding needs will be “modest,” Fitch said, as CIGNA’s hedging program should limit further loss within the run-off reinsurance business and that it will be able to reduce financial leverage while maintaining access to liquidity.