We reiterate our Neutral recommendation on the shares of
CIGNA Corp
. (
CI
). Though the company is strongly poised to record earnings growth,
given a number of strategic investments undertaken for future
growth, volatility associated with its discontinued guaranteed
minimum income benefit (GMIB) business and its pension burden keeps
us on the sidelines.
Acquiring HealthSpring Inc. has instantly made Cigna a big
player in Medicare Advantage, the U.S. health plan for the elderly
and disabled, a market where it was virtually non existent. Cigna
was unenthusiastic about entering the segment since it lacked the
expertise and did not see a clear path to winning customers.
However, the HealthSpring model lends itself to focus on the
elderly population and makes targeting the ABD (aged blind and
disabled) population more feasible.
The acquisition is expected to triple the number of Medicare
customers it serves to 1.75 million. Medicare is the most sought
after market as 75% of the seniors in U.S are covered directly by
Medicare. The segment holds immense potential as the first tranche
of baby boomers (people born between 1946 and 1964) enter their
retirement years, making 7 million Americans eligible for Medicare
in the next five years.
Cigna has witnessed a membership growth of 2%. For the past one
and a half years, the company has registered a continued uptick in
demand for its administrative services only (ASO) products
(contributing 80% of total membership) as well as incentive and
engagement-based programs. We expect the uptrend to continue in
2012 as the growth in medical premium taxes influences more
employers to consider self funding. Management expects to witness
significant customer growth in 2012. It anticipates full year 2012
membership growth of approximately 900,000, driven by organic
growth and the addition of customers through the HealthSpring
acquisition.
Cigna is aggressively expanding its international business
(contributes approx 10% of the revenues), which has historically
delivered double-digit revenue growth and double digit earnings
growth, with very attractive margins and capital efficiency.
The company also boasts of a solid balance sheet, which
continues to grow with its strong operating earnings and cash flow
generation. The company ended fiscal year 2011 with $3.8 billion in
cash and investments available to the parent company and expects to
have a total of $900 million to deploy in 2012. Management wants to
deploy excess capital for selective acquisitions, reinvestment in
core businesses and share repurchases.
Despite the positives, Cigna will continue to see earnings
volatility related to its discontinued GMIB business. An above
average concentration of commercial mortgage loans and real estate
loans, to the tune of approximately 15%, in its total investment
portfolio also remains a cause of concern.
Cigna also has considerable under funded pension liability on
its balance sheet compared to its peers
Aetna Inc
. (
AET
), and
UnitedHealth Group Inc.
(
UNH
). If interest rates remain low for a prolonged period, pension
expense will continue to dampen earnings per share.
Cigna currently retains a Zacks # 3 Rank, which translates into
a short-term 'Hold' rating.
AETNA INC-NEW (
AET
): Free Stock Analysis Report
CIGNA CORP (
CI
): Free Stock Analysis Report
UNITEDHEALTH GP (
UNH
): Free Stock Analysis Report
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