AET Aetna Inc. (delisted)

We are upgrading our recommendation on the shares of CIGNA Corp. (CI) to Outperform from Neutral following an upward revision in its guidance post first quarter results.

Philadelphia-based CIGNA’s first quarter consolidated revenues grew to $5.4 billion marking an 8% hike over the first quarter of 2010, after excluding the impact of its planned exit from the individual Medicare Private Fee-for-Service business. The upside reflects solid growth in each of CIGNA’a targeted market segments.

CIGNA’s first quarter consolidated earnings stood at $375 million, representing a 33% improvement from the comparable period last year. Consequently, the quarter recorded earnings per share of $1.37, reflecting a 36% increase compared with the year-ago quarter. The earnings upside mainly resulted from a strong globally diversified portfolio of businesses and solid execution of the company’s growth strategy.

In Health Care, first quarter 2011 premiums and fees grew 6% sequentially, excluding the impact of the exited business. This reflects continued membership growth in the company’s targeted customer segments and increased specialty penetration. The first quarter earnings for Health Care were $246 million, including the impact of favorable prior claim development and sustained growth.

As part of its long-term strategy, CIGNA continues to focus on improving its operating expenses through a combination of expense efficiencies and business growth. For the first quarter of 2011, medical operating expenses were slightly down compared with the year-earlier quarter.

CIGNA’s International segment also continued to deliver attractive growth and strong margins. Premiums and fees grew 32% quarter-over-quarter, driven by strong customer retention and solid new sales within the health, life and accident and expatriate benefits businesses, including contributions from Vanbreda International. This top-line growth drove strong earnings of $77 million during the quarter. Management expects full-year earnings from International in the range of $275 million to $295 million, marking a $15 million increase over its previous guidance.

On the basis of its commendable first quarter results, CIGNA now expects full-year 2011 consolidated adjusted income from operations to range between $1.275 billion and $1.365 billion. This revised range is $75 million to $85 million higher than its previous expectations and reflects an increase in outlook for each of its ongoing businesses. Management now anticipates full-year earnings per share (EPS) in the range of $4.65 to $5.00, which is an improvement of 30 cents to 35 cents per share over its previous EPS forecast.

Further, CIGNA expects Health Care earnings in the range of $860 million to $900 million, which is an improvement of $40 million to $60 million from earlier guidance range. This improvement reflects a favorable prior-year claim development recognized in the first quarter and continued effective execution of its growth strategy. The company remains on track to deliver a full-year total Health Care operating expense ratio of 26.5% to 27% and medical operating expenses of $235 to $240 per member per year, with continuous investments in technology and service capabilities to support ongoing growth.

With respect to medical membership, CIGNA expects full-year 2011 membership growth of 1% to 3%, excluding the planned non-strategic market exits.

CIGNA, which competes with UnitedHealth Corp. (UNH), Wellpoint Inc. (WLP), and Aetna Inc. (AET), continues to have a strong balance sheet and good financial flexibility. Its subsidiaries are generating significant free cash flow, which reflects a strong return on capital in each of its ongoing businesses. CIGNA ended the quarter with cash and short-term investments of $790 million. During the first quarter, the company repurchased 3.9 million shares of CIGNA's common stock and subsequently repurchased an additional 1 million shares through May 4. Till date, CIGNA has repurchased 4.9 million shares of the stock for approximately $210 million.

After considering subsidiary dividends, pension contributions and other sources and uses, CIGNA expects to have about $1.1 billion available for capital deployment in order to deliver sustainable value for the benefit of customers and shareholders in 2011. CIGNA would prioritize its capital mainly in three ways. Firstly, it would deploy the capital in order to grow its ongoing operations, and fund its pension plan and Run-off Reinsurance business. Secondly, it would consider mergers and acquisitions, with the focus on acquiring capabilities in scale; and finally, it would return capital to investors, primarily through share repurchase.

 
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