We are reiterating our Outperform recommendation on the shares of CIGNA Corp. (CI) following the company's second quarter results. Earnings of $1.53 per share outpaced the Zacks Consensus Estimate of $1.29 as well as earnings of $1.38 per share reported in the comparable period last year.
Better-than-expected results were aided by strong earnings from across the board, along with lower share count compared with the year-ago quarter.
CIGNA has witnessed year-to-date membership growth of 1.3%, adjusting for the planned non-strategic exits. For the past one and a half years, CIGNA has been recording a continued uptick in demand for ASO products as well as incentive and engagement-based programs, and it expects the trend to continue growing in 2012. Management anticipates the medical membership growth for full-year 2011 to be approximately 2%, excluding the planned non-strategic market exits.
CIGNA is aggressively expanding its international business (contributing about 10% of the revenues), which has historically delivered double-digit revenue growth and double-digits earnings growth, with very attractive margins and capital efficiency.
CIGNA is focused on segment and product expansion. With respect to segment expansion, its focus is predominantly on the “Select” (employers with 51–250 employees) and individual segments. As part of its effort to achieve these objectives, the company completed the acquisition of Great-West Healthcare of Denver, Colorado, on April 1, 2008.
This acquisition has enabled CIGNA to broaden its distribution reach and healthcare professional network, particularly in the western regions of the United States, as well as expand the range of health benefits and product offerings. Synergies are also anticipated to be achieved by managing medical costs and growing membership over time.
The year 2010 faced challenges related to the state of the global economy and the uncertainty of the U.S. healthcare reform. However, CIGNA is more "reform resistant" than other health insurers, primarily due to its relatively small enrollment in Medicare Advantage and individual or small group insurance products, wherein two product lines have been adversely affected by the overhaul push.
Moreover, its Group Disability, Life and International operations represent about 40% of its year-to-date earnings from operations, and are essentially outside the scope of the U.S. Healthcare reform.
CIGNA ended the quarter with $720 million in cash and investments available at the parent company and expects to have a total of $800 million to deploy in the remainder of 2011. About $400 million of this capital has already been deployed this year. CIGNA repurchased a modest 1.4 million shares during the quarter, and buybacks for the first half of the year totaled 5.3 million, at a cost of approximately $225 million.
Management is open for acquisitions, and its areas of focus for further M&A include seniors, individual retail capabilities, and additional global expansion opportunities.
However, restrained investment income due to the low interest rate environment and exposure to commercial mortgage loans in the investment portfolio might impart volatility to the results.
CIGNA competes closely with UnitedHealth Group Inc.(UNH), Aetna Inc. (AET), WellPoint Inc. (WLP), and Humana Inc. (HUM).
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