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Cigna Hurt by CMS Control, Blocked Deal, Yet on Growth Path

Zacks Equity Research

Cigna Corp. CI has been in troubled waters with the restriction imposed by the Centers for Medicare and Medicaid Services (CMS) on the sale of Medicare Advantage-Prescription Drug and Medicare Part D Plans. The company is yet to correct the reasons that led to this restriction in Jan 2016. The sanctions point directly to failure to comply with coverage determinations, appeals and grievances, and Part D administration, which CMS characterized as “systemic” and “longstanding” and unchanged even several years after warning.

Cigna was disbarred from selling Medicare Advantage policies or Part D drug plans to new clients in the open enrollment season that started in Oct 2016. Also, in 2016, the company incurred $100 million in costs associated with its CMS audit response as well as loss ratio pressure in its Medicaid business. Cigna had earlier disclosed that these sanctions will likely cause net membership attrition of 50,000 lives in 2017. This will also cause revenue decline from its Seniors business.

Cigna is also mired in friction with Anthem Inc. ANTM, over their blocked merger. Both companies were involved in a blame game for wrongdoing in relation with the merger. Anthem has filed a countersuit against Cigna seeking a temporary restraining order to prevent it from terminating the merger agreement. This move by Anthem is in retaliation to the suit filed by Cigna against Anthem, seeking a breakup fee of $1.85 billion and other charges amounting to $13 billion on account of premiums that Cigna shareholders did not realize as a result of the failed merger process.

Anthem also charged Cigna for its indifference toward the merger and efforts at sabotaging the deal. We now believe the fight has reached a stage where the focus is on the breakup fee and damages rather than the sealing of the deal. The deal would have helped Cigna to catapult to the number one rank in terms of membership in the U.S. health insurance industry, surpassing UnitedHealth Group Inc. UNH, which currently holds the top position.

Despite these troubles, Cigna has managed to carry on well as reflected by its share price which has gained 14.2% year to date, significantly outperforming the Zacks categorized Insurance - Multi line industry’s decline of 0.3%.

Cigna helped investors to stay calm by disclosing its 2017 growth outlook just after the termination of the merger. The company projected that adjusted income from operations will grow in the range of 12–18% aided by its significant capital available for deployment. Moreover, the company announced that its board of directors has expanded its share repurchase authority to an aggregate of $3.7 billion. The amount of buyback will, however, be capped at $250 million per quarter until there is more clarity with respect to the litigation with Anthem.

On the organic front, the company is expected to strengthen its business position in Global Supplemental Benefits. The segment grew at a CAGR of 17% for revenues and 24% for earnings over the last six years (2011–2016). For 2017, the company expects adjusted income from operations in the range of $295–$315 million, which translates into a year-over-year growth rate of nearly 4% (calculated at the mid-point).

The company’s membership has been growing. It is expected to add 300,000 to 500,000 total medical customers in the Global Health Care segment in 2017.

Cigna carries a Zacks Rank #3 (Hold). A better-ranked player is Radian Group Inc. RDN with a Zacks Rank #2 (Buy). Radian Group beat estimates in three of the last four quarters, with an average positive surprise of 6.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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