3 Reasons Cigna Corporation's Stock Could Rise

Cigna Corporation (NYSE: CI  ) bumped up its guidance for the full year exiting the second quarter, thanks to strong results in its global and commercial insurance business. But with the company expanding to offer healthcare insurance on exchanges in three more states, will Cigna shareholders see higher share prices?

While any number of events could send Cigna's share price higher or lower, let's consider three reasons why investors may want to consider owning the company's shares.

Source: Cigna Corporation.

1. Growing supplemental business

Cigna continues to build its global presence through a suite of supplemental benefit programs that are resonating, particularly in Asia. During the past five years, sales for the company's global supplemental benefit business, which includes health, life, and accident insurance products, has increased by an average of 19% annually, leading to average annual earnings growth of 20%.

Cigna already has 12 million active policies that primarily address Asia's growing middle class and, given that Asian economies are expected to continue growing, Cigna expects it will be able to deliver 15% annual sales growth from those products for the foreseeable future.

2. Increasing participation

Cigna took a measured approach to the healthcare insurance exchanges during the first open enrollment season, offering plans in five states. In the first quarter, membership from those exchanges leaned toward older members with more chronic (and expensive) conditions; however, that mix shifted in the second quarter as younger, healthier people signed up.

That's good news for the company, given that younger members typically chose less comprehensive plans, and visit doctors less. If that holds true, these new members should help normalize first-quarter healthcare utilization, which had been higher than Cigna had initially projected.

Although Cigna's exchange plans aren't yet profitable, the company continues to believe that they'll eventually deliver a margin of between 3% and 5%. To help Cigna get to those levels, the company has increased prices for plans offered during the exchanges second open enrollment season, and is expanding the number of states in which it offers those plans to eight.

3. Strengthening core

Revenue from traditional healthcare plans benefits from the addition of more than 170,000 new members in the first half of 2014. These new members helped sales in Cigna's global healthcare business increase 8%, to $6.1 billion, in the second quarter.

The company continues to see demand grow for its administrative services only, or ASO programs, which target large corporate self-insurance programs and, importantly, its medical costs remain stable despite the headwinds created by the exchange members. Cigna's medical care ratio, or MCR, was 83.1% in the second quarter, and Cigna expects that its MCR for commercial members will be between 81% and 82.5%, and its MCR for its seniors business, which includes Medicare Advantage plans, will run between 84% and 85%.

If Cigna can continue to grow membership, and its healthcare cost levels remain around these levels, then Cigna's core healthcare insurance business will continue to support earnings into year end.

Fool-worthy final thoughts

Cigna is taking a more cautious approach to the exchanges than WellPoint and UnitedHealth; however, Cigna appears to be getting more comfortable with the mix of members coming from the exchanges. As Cigna makes investments necessary to build scale in the exchange business, any headwinds from it will likely be more than offset by growth in its supplemental and core health insurance products.

As a result, Cigna expects to deliver EPS of between $7.20 and $7.40 per share this year, up from prior guidance of between $7.05 and $7.35, and continues to guide investors to expect long-term EPS growth of between 10% and 13% per year. If Cigna can deliver on that forecast, investors betting on Cigna should be rewarded with higher share prices.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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9/2/2015 4:02 PM
CI $139.34 Up +0.34 +0.24%
Cigna Corporation CAPS Rating: ****