On its investors’ day, held on March 11, 2011, CIGNA Corp. (CI) announced that it expected 2011 earnings from its Health Care and Group Disability and Life segment to be in the range of $800 to $860 million, down from $861 million earned in 2010.
The decline in expectations emanates from accelerated utilization/rebates, adverse claim development, and cost related to strategic investments. Revenue growth rate is anticipated between high single and low double digit range, and membership is likely to grow at 0–3%.
CIGNA’s Group Disability and Life segment is likely to earn between $270 and $290 million in 2011 owing to the segment’s mid-single digit revenue growth rate. A cost ratio of 82–83% is seen for the segment.
According to CIGNA, premiums and fees from its International business would grow in double digit in 2011 compared with $2.3 billion earned in 2010. Earning for the segment is likely to be in the range of $260–$280 million compared with $243 million earned in 2010. HealthCare Membership is expected to be over 1.1 million, with Health, Life and Accident policies crossing 7 million.
In total, CIGNA expects FY11 EPS in the range of $4.30–$4.70 per share, down 3.0% (when calculated at midpoint) from $4.64 per share earned in 2010. As per the Zacks Consensus Estimate, EPS would be $4.72.
CIGNA sees HealthCare operating expense to increase to $4,110–$4,150 million, up from $4,072 million in FY10 due to an increase in premium taxes and commission as well as individual segment expansion.
CIGNA also stated that since 2001 it had decreased approximately 70% policies in its Run-Off Reinsurance business, which housed VADBe and GMIB policies, and ha been in run-off mode since 2000. The nature of these policies requires reserve addition in case of low interest rate environment and has led to volatility in the company’s earnings in the past.
CIGNA is projecting that $1,100 million of cash will be available for deployment for full-year 2011. It will prioritize the using of cash to support ongoing operations growth, pension plan funding and Run-off Reinsurance business. It is also enthusiastic about strategic mergers, acquisitions and spending cash for share buybacks.
Over the longer time horizon (3–5 years), CIGNA is eyeing EPS growth rate of 10% to 13%.
Peer Aetna Inc. (AET) has projected FY11 EPS in the range of $3.70 to $3.80, a modest 2% year-over-year hike (when calculated from the mid point range). Another peer, UnitedHealth Group Inc. (UNH), expects FY11 EPS in the range of$3.50 to $3.70, down from $4.10 earned in FY10, as the insurer anticipates increase in health care utilization and added costs from benefits mandated by the health care overhaul.
CIGNA currently carries a Zacks Rank #3, which translates into a Neutral recommendation over the short term (1-3 months). But we are more optimistic about the longer-term horizon as the company’s continued international business expansion and capital management gets traction. We therefore rate the shares Outperform.
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