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On Mar 19, we issued an updated research report on U.S. health insurer Cigna Corp. (CI - Analyst Report).

In the fourth quarter of 2013, Cigna reported top-line growth evidenced with revenues increasing about 7% to $8.2 billion. On the other hand, the bottom line missed expectations as expenses outgrew revenue increase. The company’s net operating earnings of $1.39 per share missed the Zacks Consensus Estimate by 6.1% and were also down 11.5% year over year.

Cigna boasts of superior operating performance along with a diversified business profile. The company has forayed into the much sought-after business of serving the senior population with the acquisition of HealthSpring.

Moreover, Cigna has improved its business profile by entering into a reinsurance transaction with Berkshire Hathaway, Inc. (BRK.A - Snapshot Report), (BRK.B - Analyst Report).

Cigna has also made a move forward by improving its debt profile. It has brought down its leverage ratio that traditionally stayed around 45%, to about 33% as of Dec 31, 2013. Steps taken by the company such as freezing of pension plans and making higher contribution to reduce the unfunded liability has helped improve the company’s leverage ratio.

Cigna also remains more reform-resistant than its peers, primarily because 85% of its U.S. healthcare business comprises administrative services only (ASO). This limits the company’s exposure to unanticipated increase in medical utilization.

Other positives like limited exposure to risk associated with health insurance exchanges, a well-diversified product profile, and a growing membership base along with niche market presence in the U.S. augur well for the company.

However, management expects medical cost trend in the range of 5-6% for 2014 which is higher compared to less than 5% in 2013. The company’s medical cost trend is likely to increase due to augmented medical utilization, which in turn, will eat into margins.

Continued pressure in Medicare Advantage persists. Exposure to commercial mortgage loans and real estate loans also poses threat for Cigna going forward.

Other Stocks to Consider

While Cigna carries a Zacks Rank #3 (Hold), other better-ranked insurance stocks worth considering are Old Republic International Inc. (ORI - Snapshot Report) with a Zacks Rank #1 (Strong Buy) and American International Group Inc. (AIG - Analyst Report) with a Zacks Rank # 2 (Buy).

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