Cigna Stays Neutral

CIGNA Corp. (CI - Analyst Report) 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 acontinued 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 - Analyst Report), which competes with Cigna, retains a Zacks #3 Rank, which translates into a short-term Hold rating along with a long-term Neutral recommendation.