CIGNA Corp.
(
CI
) is strongly poised to record earnings growth, given a number of
strategic investments. The company is well positioned with its
differentiated portfolio of businesses to deliver attractive growth
prospects. This includes its U.S. commercial business, which is
expected to deliver strong organic growth; its International
business, with strong top line and bottom line growth, and the
Seniors and Medicare business, where the acquisition of
HealthSpring is expected to drive growth in 2012 and be highly
accretive on a cash basis.
However, the volatility associated with its discontinued
guaranteed minimum income benefit (GMIB) business and its pension
burden keeps us on the sidelines. Thus we retain our Neutral
recommendation on the U.S. health insurer.
Cigna made its foray into the Medicare Advantage market with the
acquisition of HealthSpring Inc. This acquisition instantly made
the company a big player in the Medicare Advantage space, the U.S.
health plan for the elderly and disabled, a market where it was
virtually non existent.
Medicare is the most sought-after market as 75% of the seniors
in U.S are covered directly by the program. There is a huge
potential in the segment as the first tranche of baby boomers (born
between 1946 and 1964) turn 65 this year, making 7 million
Americans eligible for Medicare in the next five years.
Cigna has also made accelerated investments in technology
infrastructure, which is expected to yield efficiency gains in the
second half of 2012, in 2013 and beyond.
Cigna has witnessed year-to-date membership growth of 2%. For
the past one and a half years, the company saw
a continued uptick in demand for Administrative Services Only
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 and makes them
consider self funding. Management expects to post 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,
which has historically delivered double-digit revenue growth, with
very attractive margins and capital efficiency. Over the past five
years, International revenue has increased by 50%. Management has
specifically highlighted the importance of this segment as the road
to long-term growth. For 2012, management expects International
earnings growth of 19% - 28% from 2011 level.
Cigna's balance sheet continues to grow with its strong
operating earnings and cash flow generation. CIGNA ended the year
with $3.8 billion in cash and investments available at the parent
company and expects to have a total of $1 billion to deploy in
2012. Management wants to deploy excess capital for selective
acquisitions, reinvesting in core businesses and share
repurchases.
Cigna also scores strongly with rating agencies. Recently
Standard & Poor's undertook a favorable rating action on the
credit worthiness of the company by affirming its 'BBB/A-2"
counterparty credit rating and upgrading the outlook to positive
from stable.
However, some of the factors that keep us on the sidelines
include the company's above average exposure to commercial mortgage
loans and real estate loans. Moreover its run-off reinsurance
business, which houses VADBe products, requires additional amounts
of contribution to reserves in case interest rates are low.
Anticipating a persistent low interest rate environment, additional
reserve strength may be required in future to offset earnings
uncertainty.
CIGNA has a sizable under funded pension liability on its
balance sheet. If interest rates remain low for a prolonged period,
pension expense will continue to dampen earnings per
share.
Cigna retains a Zacks # 2 Rank which translates into a
short-term Buy rating.
UnitedHealth Corp.
(
UNH
), which competes with Cigna, retains a Zacks #3 Rank, which
translates into a short-term Hold rating along with a long-term
Neutral recommendation.
CIGNA CORP (CI): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis
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