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We are reiterating our Neutral recommendation on the shares of CIGNA Corp. (CI - Analyst Report), following the third quarter earnings.

The company performed strongly during the quarter and is poised to record earnings growth since it has undertaken several strategic investments for future growth.

However, the volatility associated with its discontinued guaranteed minimum income benefit ( business and its pension burden keeps us on the sidelines. Moreover,we vremain uncertain as to how the changes taking place in 2013 in the industry as a part of the Health Care reform will impact the company.

CIGNA has gained a significant market presence in the Government market by acquiring HealthSpring Inc.
 
During September 2012, CIGNA Corp. acquired Great American Supplemental Benefits from American Financial Group, Inc. (AFG). The acquisition will expand Cigna’s product offerings and will be immediately accretive to its earnings.  
 
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 is aggressively expanding its international business, which has historically delivered double-digit revenue growth, with very attractive margins and capital efficiency. For 2012, management expects International earnings growth of 19%–28% over the last year.
 
The company’s balance sheet continues to grow with its strong operating earnings and cash flow generation. Management wants to deploy excess capital for selective acquisitions, reinvesting in core businesses and share repurchases.
 
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 the interest rates are low.
 
Given the expectation of persistent low interest rate environment, additional reserve strength may be required in the future to offset uncertainty in earnings. Also, an under-funded pension liability may dampen earnings.
 
Cigna carries a Zacks #2 Rank, which translates into a short-term Buy rating. Peer UnitedHealth Corp. (UNH - Analyst Report) retains a Zacks #3 Rank, implying a short-term Hold rating, and a long-term Neutral recommendation.

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