Cigna's Anthem Merger On Tenterhooks, Growth In The Cards

On Jul 11, we uploaded our research report on health insurer Cigna Corp. (NYSE:CI) which is due to be acquired by Anthem Inc. (NYSE:ANTM) by the second half of 2016. The companies claim that the combination would be a net positive to both since it will lead to increased membership. A broader member base will also lead to spread costs and expenses, thus bringing down overall cost.

But the mega merger has drawn criticism from regulators. The Department of Justice is closely scrutinizing the merger and might also nix it on concerns that it could stifle competition in the industry. The merger of Anthem and Cigna would mean more power in the hands of the surviving company – Anthem, which will gain in size and scale. It is feared that the company which already has a history of rejecting claims and insufficiently addressing consumer grievances, will bother even less to service its customers, once it gains strength.

It is also being contemplated that the insurer will have lesser incentive to improve the quality of its products and services, since there will be very few and small players to compete with. The company may also hike premium and increase out-of-pocket costs, which will directly come from customers’ pockets.

Whether or not the deal with Anthem goes through, it appears to us that Cigna is one of the few companies that is well positioned to grow over the coming years given its mix of business. The company is exposed to strong growth areas of healthcare, relatively protected from healthcare reform thanks to its international presence and enjoys diversity in products.
The company has lesser exposure to exchanges and has a primarily Administrative Services Only (ASO) book. We believe that ASO exposure will benefit the company in the coming years as the book increasingly takes share from risk insurance.

Also, the company has the largest exposure to the international market, which has been consistently growing. The international business also carries a higher margin than the commercial business.

When it comes to Accountable Care Organizations (ACO), Cigna has one of the most established track records among its peers. On average, these ACOs are able to hit 2% cost savings and 3% quality improvement targets within two years of their inception. The company currently has more than 134 collaborative care relationships spanning 29 states and is expected to continue with ACO growth.

Moreover, Cigna’s CEO Dave Cordani has simplified and refocused its business lines into areas where it has a competitive advantage and has jettisoned segments that no longer fit the company’s business strategy. This included the sale of the Variable Annuity Death Benefit and GMIB segments to Berkshire Hathaway (NYSE:BRKa). This business restructuring has reduced the operational risk for the company.

Nevertheless, stiff competition, rising expenses, foreign exchange fluctuation and exposure to commercial mortgage loans are some of the headwinds faced by the company.

Cigna carries a Zacks Rank #3 (Hold). Some better-ranked players are and Assurant Inc. (NYSE:AIZ) James River Group Holdings, Ltd. (NASDAQ:JRVR) , both carrying a Zacks Rank #2 (Buy).