Cigna Stays Neutral (AFG) (CI) (UNH)

However, the volatility associated with its discontinued guaranteed minimum income benefit (GMIB) business and its pension burden keeps us on the sidelines. Moreover, a changing health insurance marketplace is a matter of concern. Thus we retain our Neutral recommendation on the company.

CIGNA forayed into the Medicare Advantage market by the acquisition of 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.

The insurance giant has been witnessing an increase in membership. For the past one and a half years, the company has witnessed a continued improvement in demand for ASO products as well as incentive and engagement-based programs. We expect the uptrend to continue in the near term as the growth in medical premium taxes influences more employers to consider self funding.

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) retains a Zacks #3 Rank, implying a short-term Hold rating, and a long-term Neutral recommendation.