We are upgrading our recommendation on the shares of CIGNA Corporation (CI) to “Buy” as we believe the recent acquisition of Vanbreda International will further boost the company’s thriving international operations, which is crucial to the growth of the company.
CIGNA is keen on expanding its international business. This contributes approximately 10% of the revenues, and has historically delivered double-digit revenue growth, double-digit earnings growth, with very attractive margins and capital efficiency. In sync with its strategy to expand its international operations, on August 30, CIGNA announced the purchase of Belgium-based Vanbreda International, a provider of expatriate benefits. These acquisitions will double the expat enrollment to more than 700K lives. Moreover, since the membership from the acquisition will be non-US, there will be no need for the company to comply with the minimum medical cost ratio requirements (as stipulated by to the health reform act).
Currently, CIGNA’s International segment provides health, life and accident policies to U.S. expatriates and citizens of other countries, with concentrations in Korea, Taiwan, Indonesia and China. The Vanbreda acquisition allows the company to extend its expatriate business in Europe, where it hasn’t had a strong presence. We expect it to be modestly accretive in 2011, with the potential for more significant accretion in 2012 when the integration cost is absorbed.
Moreover, CIGNA has lower exposure to reform risks than other insurers and thus has an edge with respect to the Health Care Reform Act. The year 2010 is recognized as a challenging one, given the state of the global economy and the uncertainty of the US health care 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, it’s Group Disability, Life and International verticals represent about 40% of its year-to-date earnings from operations, and are essentially outside the scope of the Health Care Reform Act.
However, membership enrollment remains a concern, given the weak employment scenario, driving down premiums and fees from its Health Care segment. Above-average financial leverage, high pension liability and investment portfolio volatility are other negatives.
A strong balance sheet and adequate liquidity will, nevertheless, lead to continued share buybacks, contributing to the bottom line. Besides, CIGNA has benefited from an effective execution of growth strategy and strong earnings from diversified businesses, and is poised to attain its full year 2010 financial goals.