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CI AT A GLANCE

P/E ► 15.3 VERY HIGH EV/EBITDA ► 15.2 HIGH ROA ► 1.1% AVG ROE ► 10.2% AVG Debt to Equity ► 9.76 VERY HIGH Current Ratio ► 0

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginEbitIncome Before TaxesNet Income from Continuing OpsOperating Expenses

CIGNA Corporation (CI) is a health insurance company - sort of. For one, three-quarters of Cigna's health insurance business isn't really insurance - Cigna manages health plans for companies who self-insure, agreeing to pay employee's health care costs. Employees get Cigna cards and access to Cigna's negotiated rates with doctors, and Cigna handles billing, but the employer bears the risk of paying for care when employees get sick. This arrangement means less risk for Cigna, but also smaller premiums. Over 75% of CIGNA's 2007 enrollment consisted of self-funded administrative-only plans.

Cigna also differs from its competitors in that over 68% of the company's pretax operating income came from investment income in 2007 - 50% higher than its next most-invested competitor, Aetna, and almost four times that of other large national health account providers.^{[1] [2]} This reliance on investment income makes the company much more vulnerable to market conditions than most other health insurance companies. For example, an 18% decrease in investment income from 2005 to 2007 caused the company’s operating income to decrease by 12% over this same period.

The company’s Medicare membership comprises only 0.3% of its total coverage, shielding CIGNA from legislation like the 2006 Deficit Reduction Act, which aims to cut Medicare funding by over $4.8 billion before 2011 and threatens competitors’ profit margins.

[edit] Company Overview

CIGNA operates in five major business segments:

• The Health Care Segment (69% of 2007 revenue) provides health insurance through a variety of forms such as health maintenance organizations (HMOs), point of service (POS) plans, preferred provider (PPO) plans, and more limited voluntary plans primarily to national, regional, and small-business employers. They also offer specialty plans such as dental insurance and prescription drug plans. The division offers three pricing schemes: a guaranteed cost scheme, where CIGNA takes on all medical cost risk in exchange for a monthly premium; a retrospectively experience-rated scheme, where the premium includes a margin that can be adjusted based on each individual or employers medical history; and a self-funded administrative services only (ASO) scheme, in which the customer pays a smaller fee in exchange for CIGNA taking on all administrative costs, but the customer incurs their own medical costs up to a "stop-loss" amount.^[3]

• The Disability and Life Segment (16% of 2007 revenue) provides group life insurance, long and short-term disability insurance, workers’ compensation, and accident insurance to national and regional employers and employees through its subsidiaries. For disability insurance, CIGNA acts for both the employer and employee, providing a fixed level of income to the employee, assisting the employee in his/her return to work, and assisting the employer in managing the cost of employee disability. CIGNA no longer actively markets its life insurance plans, but continues to administer its services to pre-existing contract-holders. All services in this division are contracted under a guaranteed cost scheme.^[4]

• The International Segment (11% of 2007 revenue) includes revenues from life, accident, and health insurance services offered by CIGNA’s foreign subsidiaries. These services are offered to foreign employers, as well as multinational companies.^[5]

• Prior to 2000, the Run-Off Reinsurance Segment (less than 1% of 2007 revenue) offered to reinsure part or all of the risks written off by other insurance companies under life, accident, or health insurance policies. In 2000, CIGNA sold these subsidiaries, but still generates revenue from previously invested income and incurs contractual payments as a “run-off” to these policies. In 2007, the segment incurred an operating loss of $11 million.^[6]

• CIGNA’s Other Operations (4% of 2007 revenue) include the sale of corporate-owned life insurance (COLI) plans, or employers’ life insurance on certain employees; deferred revenue from the 1998 and 2004 sales of their life insurance, annuity, and retirement benefits businesses; and their settlement annuity business, or liability settlements for non-guaranteed payments.^[7]

CIGNA’s revenue stream has increased by approximately 5% from $16.68 billion in 2005 to $17.62 billion in 2007. This is due primarily to a 12% increase in overall membership during this time, which increased total revenue from premium payments by over 6%. This increase was partially offset by a decrease in net investment income.^[10]

Operating income has decreased by over 12% from 2005 to 2007, dropping from $1.276 billion in 2005 to $1.120 billion in 2007. This decrease is largely attributed to an 18% decrease in investment income (which dropped from $1.359 billion in 2005 to $1.114 billion in 2007).^[11] CIGNA's investment income represents the largest proportion of pretax operating income for any health insurance company (75.4% in the first half of 2007, to Aetna’s 49.4%), and is thus unusually susceptible to market volatility.

[edit] Trends and Forces

[edit] High level of investment income makes CIGNA’s operating income and cash flows unusually susceptible to market conditions

CIGNA invests the highest proportion of their pretax income for any comparable health insurance company. In the first half of 2007, the company generated 75.4% of its pretax income in securities including short-term investments, equity, and issuance of short and long-term debt. The next most-invested competitor, Aetna (AET), generated 49.4% of its pretax income from investments, and UnitedHealth Group (UNH) only 16.5% of its income. According to CIGNA’s 2007 10-K, a 100 basis point (bps) (1 percentage point) increase in the market interest rate would result in an $800 million fair value loss for the company’s securities, and a 10% decrease in market equity prices would result in a $60 million loss for the company.^[12] Thus, CIGNA’s operating income is much more dependent on interest rates and the market than other health insurance companies, and their stock price has mirrored this fact. Since 1990 (with only 2 years of exception), the change in growth of CIGNA’s stock price has moved in the opposite direction of the change to the average Fed Funds rate.^[13] Now, with the Fed foreshadowing a stop to rate decreases and the market predicting rate increases over the next year, the value of CIGNA’s investments are threatened in the short term.

[edit] Decline in proportional Medicare membership allows CIGNA to maintain margins in wake of funding cuts

Under Medicare and Medicaid plans, a health insurance company takes on medical cost risk for a customer in exchange for monthly premiums paid by the government. The 2006 Deficit Reduction Act, however, included a plan to cut Medicaid funding by $4.8 billion before 2011.^[14] This bill, along with any additional legislation of this form, would lead to decreased profit margin for any customer under a Medicaid or Medicare plan. As this funding is cut, CIGNA increasingly low exposure to government payments offers it a competitive advantage over competitors providing a large proportion of Medicare plans. In 2007, Medicare customers represented only 0.3% of CIGNA’s coverage, down from only 0.4% in 2005.^[15]

[edit] Heavy reliance on self-funded accounts mediates risks, but dampens revenue growth potential

Under self-funded accounts, customers pay a smaller premium in exchange for administrative services, but incur their own medical costs up to a given "stop-loss" amount. In March 2008, self-funded accounts represented 75% of CIGNA's enrollment, compared to only 14% risk-based "guaranteed cost" enrollment, and 1% experience-rated accounts^[16] While this prevalence of self-funded accounts eliminates some inherent risks of medical costs, it dampens revenue growth by generating smaller premiums per member. For example, Medical Membership in CIGNA's Health Care Segment grew by over 8% in 2007, but the total premiums generated by this segment grew only 7% in this same time period.^[17]

[edit] Competition

CIGNA’s Health Care services face a highly competitive industry that competes on the prices and comprehensiveness of benefits, location and choice of health care providers, quality of customer service, and reputation of financial strength. Its greatest competition comes from other national account companies such as Aetna (AET), UnitedHealth Group (UNH), and WellPoint Health Networks (WLP).

Note: If not explicitly given, MLR is calculated as Medical Cost/Premiums. CIGNA's is unavailable given the way information is presented to their stockholders, largely due to variety and assortment of services that they provide.

[edit] Market Share

As an insurer of national and regional accounts, CIGNA’s market share is best considered as an average of its regional markets. In 2006, CIGNA’s average market share across all 50 states was only 5.3%, and its average market position in those markets was just 6.4. Its market share is better in its larger markets (as would be expected), but it still falls below its 3 major competitors.

[edit] Average Market Share Across CIGNA's 16 Largest Markets, 2006

[edit] References

1. ↑ | CI 2007 10-K, Item 8: Financial Statements and Supplementary Data, pg 67
2. ↑ Stiffel Nicolaus Report, CVH, 8/16/2007
3. ↑ | CI 2007 10-K, Segment Financial Information, pg 97
4. ↑ | CI 2007 10-K, Segment Financial Information, pg 97
5. ↑ | CI 2007 10-K, Segment Financial Information, pg 98
6. ↑ | CI 2007 10-K, Segment Financial Information, pg 98
7. ↑ | CI 2007 10-K, Segment Financial Information, pg 98
8. ↑ | CI 2007 10-K, Financial Highlights, pg 38
9. ↑ | CI 2007 10-K, Segment Financial Information, pg 97-98
10. ↑ | CI 2007 10-K, Financial Highlights, pg 38
11. ↑ | CI 2007 10-K, Financial Highlights, pg 38
12. ↑ | CI 2007 10-K, Market Risk, pg 62
13. ↑ Credit Suisse Report, CI, 11/6/2006
14. ↑ CVH 2007 10-K, Risk Factors, pg 20
15. ↑ | CI 2007 10-K, Membership, pg 51
16. ↑ Morningstar Report, CI, 3/10/2008
17. ↑ | CI 2007 10-K, Membership, pg 49-51
18. ↑ | CI 2007 10-K
19. ↑ AET 2007 Annual Report, Financial Report to Shareholders
20. ↑ | UNH 2007 10-K
21. ↑ | WLP 2007 10-K
22. ↑ Credit Suisse Report, CI, 11/6/2006