Cigna Corp



| Cigna Corp. |(CI – NYSE) |$3 $177.54* |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Previous Edition: 4Q17 & FY17 Earnings Update, Feb 9, 2018

Brokers’ Recommendations: Positive: 67% (8 firms); Neutral: 33.0% (4); Negative: 0.0% (0) Prev. Ed.: 11; 3; 1

Brokers’ Target Price: $223.39 (↓$12.46 from the last edition; 13 firms) Brokers’ Avg. Expected Return: 25.6%

Note: We do not have access to the report from broker having the Sell recommendation on the stock.

Portfolio Manager Executive Summary

Cigna Corp. (CI), along with its subsidiaries, is one of the largest investor-owned health and related benefits organizations in the United States. Cigna provides employers with benefits, expertise and services for their employees to improve their health, well being and security. The company's operating subsidiaries offer a full portfolio of medical, dental, behavioral-health, pharmacy and vision-care benefits as well as group life, accident and disability insurances.

Of the firms in the Digest group covering the stock, 67% had a positive outlook on Cigna, while 33% rated the stock neutral and none of them rated it negatively. Among these, thirteen firms provided target prices ranging from $175.00 (1.1% downside from current price) to $258.00 (45.3% upside from the current price) per share.

Buy or Equivalent Outlook − (812 firms or 67%): These firms note strong growth in the company’s Medicare Advantage business with the company improving its Government Medical loss ratio by 50 basis points for 2018. Management reiterated its focus on returning Medicare to a growth business. The company expects MA enrollment to grow the remainder of 2018 (albeit being down 2% year over year) and believes it is positioned well for 2019 and beyond, partly due to plans for geographic expansion.

These firms note that Cigna‘s acquisition of Express Scripts will help in lowering pharmacy costs, boasting a more-complete services vertical and having more interaction with potential clients across all its business lines. Nevertheless, concerns will persist around the potential impact on Express Scripts' core business due to the loss of its independence, while the longer-term viability of the pharmacy benefits management (PBM) business model also remains. Per these firms, cross-selling should offer accelerated growth across the combined Cigna and Express Scripts entities, given the financial flexibility afforded by the deal.

Per these firms, though a pause in share buyback in 2018 is a headwind, deal looks solidly double digit accretive in 2019 post close and $20-21 in EPS in 2021 compared to previously guided $18 per share. Free cash flow generation of $6.5 billion annually is expected to drive rapid deleverage to the 30% debt-to-capital range within 18-24 months.

These firms believe that Cigna’s primary Administrative Services Only (ASO) business exposure will help it in the upcoming years. This is because ASO is increasingly taking shares from risk insurance due to rating band’s increased pricing. These firms believe that Cigna is favorably positioned in the event of a rising cost-trend environment. Cigna has a major portion of its revenues (22%) coming from ASO and a minor portion from commercial risk (25%), compared with its peers. Even within its commercial-risk book, the structure of the product insulates Cigna to some degree from the rising cost trends.

Cigna is projecting a 24-25% tax rate for 2018, which will benefit most of its Healthcare and Group D&L segments. This translates to $575 million ($2.30 per share), which, the company believes, is a sustainable benefit going forward. In 2018, Cigna plans to invest $150 million ($0.60 per share) in various areas, including innovation, community-based market initiatives and its employees.

One of the firms notes that the company’s Global Supplemental continues to deliver with year over year margin expansion and outperformance from S. Korea. However, another firm believes that favorable claims in S. Korea may be difficult to sustain.

These firms note that Cigna has made progress in fixing business processes in Group Disability & Life. They note that 2018 net margins (7.7%) are still below 2015's high 8% (adjusted for tax reform). They believe, Cigna can fully restore margins in the next 1-2 years, which represent approximately $50 million of earnings.

These firms view that Global Healthcare continues to drive the top line with solid membership growth and margin expansion. Cigna's unique mix of businesses across fully insured and alternate funding arrangements that have self-insured and stop loss are outpacing peers on membership growth.

Global Supplemental also continues to improve the top line at solid double digits with margin expansion from favorable claims experience in Korea and operating expense leverage. The U.S Medicare Supplement business, Korea and China Joint Venture are all growing nicely.

The firms believe that Cigna’s Medicare Advantage (MA) business remains an attractive area, despite near-term margin pressures. Management remains positive on the outlook for MA, given the secular growth being fueled by aging Baby Boomers, Senior preference for the MA offering and increasing bipartisan support for MA.

The firms believe that Cigna’s balance sheet will continue to be strong with organic cash flow generation. As the underfunded pension liability continues to diminish, the reinsurance agreement on the VaDBe book with Berkshire substantially lowers market risk. These actions will lead to the unlocking of capital, which can be used in the shareholder-friendly strategy of returning cash via buybacks.

Neutral or Equivalent Outlook – (4/12 firms or 33%): Cigna expects a gross benefit from tax reform of $575 million, of which $150 million or 26% would be used for additional investment spending, including enhancing its innovation capabilities to further its market-based initiatives and to invest in its workforce.

Given market exits, Cigna noted that 2018 is a transition year for Medicare and cited membership growth outlook of just 3%, compared with the industry average growth of mid-to-high single-digit. However, Cigna seems confident in returning to Medicare revenue growth in the high single-digit range in the long term, citing opportunities for expansions in adjacent markets.

One of the firms notes that Cigna is less diversified, compared with other companies in the managed care space. The firms also note that Cigna is facing an increased competition for its administrative services only (ASO) business.

Cigna indicated that performance in its public exchange business has been benefiting from product repositioning and medical management initiatives.

Firms note that the company’s segment, Group Life & Disability, is now at mid-single digit margin and growing at low-to-mid single-digits. Disability performance has normalized after the process change in 2016, though it is not expected to show further margin expansion.

Also, the firms believe that Cigna has adequate financial flexibility with enough capital available for deployment, which can be used for debt retirement and pension funding, thereby reducing liability.

Negative or Equivalent Outlook – 0/12 or 0%

May 17, 2018

Overview

Employee benefits organization, Cigna, is based in Philadelphia, PA. Through its subsidiaries, Cigna provides employee benefits via workplace, including healthcare products and services, group life, accident and disability insurance, retirement products and services as well as investment management.

Its healthcare product portfolio includes medical HMOs, POS medical plans, managed dental programs, managed behavioral healthcare services and employee assistance programs, medical cost and utilization management as well as managed pharmacy programs. Cigna's principal subsidiary is Connecticut General Life Insurance Company. The website of Cigna is

Firms identified the following key-factors for evaluating the investment merits of Cigna:

|Key Positive Arguments |Key Negative Arguments |

|Diversification: Cigna's profitability is well- spread across four |Rise in medical cost trend: The company’s medical cost trend is set to |

|segments, providing significant diversification benefits. |increase approximately 100 basis points (bps) due to an increase in medical |

|Strong Cash/Capital Position: Balance sheet remains strong with |utilization from the current levels. |

|substantial parent cash, low debt-to-capital ratios and strong |Increasingly competitive landscape within the ASO market |

|risk-based capital ratios. | |

|Access to Medicare Advantage market: Acquisition of HealthSpring, a | |

|premier fast-growing Medicare Advantage plan, helps long-term growth.| |

|The company has less exposure to exchanges. | |

|CIGNA’s book is primarily ASO: This ASO (Administrative Services | |

|only) exposure will benefit the company over the coming years as ASO | |

|increasingly takes away share from risk insurance due to rating | |

|band’s increasing pricing. | |

Note: Cigna’s fiscal year coincides with the calendar year.

May 17, 2018

Long-Term Growth

The company updated its previously established 2021 EPS target for the benefit of tax reform and the 2017 outperformance. Cigna expects to generate EPS of $20-$21 by 2021, compared to the $18 previously expected.

Firms see potential for upside, driven by its strong performing segments – Global Supplement Business and Global healthcare.

Medical membership in the international sub-segment of Healthcare is expected to rise, driven by the wind-down of the wars in Iraq and Afghanistan as Cigna continues to provide service to the customers, who provide resources and contracts that wrap around these war efforts. As this wind-down is mostly complete, firms expect that removing a notable headwind from the international business could help membership and revenue growth to pick up in 2018.

Global Supplemental also continues to improve the top line at solid double digits with margin expansion from favorable claims experience in Korea and op-ex leverage. The U.S. Medical Supplement business, Korea and China Joint Venture are all growing nicely.

Its Group Life & Disability should contribute to long-term growth, though at a slightly lower degree. The segment is now at mid-single digit margins and growing at low to mid-single digits. Disability performance has normalized after the process change in 2016, though it is not expected to show further margin expansion.

Its Medicare business is expected to resume growth in 2018 but likely to fall below the industry average (Centers for Medicare and Medicaid Services [CMS]). Medicare Advantage enrollment is expected to grow 9% year over year in 2018 as Cigna is just re-entering the market after a few years of CMS sanctions. The company also made some strategic exits while refraining from entering any new market. However, the company expects Medicare growth to be at least in line with the industry for 2019.

The Express Scripts deal significantly broadens and strengthens the company’s growth profile. Meaningful opportunities exist for additional synergies to be realized through integration of complementary platforms over the longer term. The deal appears solidly double-digit accretive in 2019 which is the first full year post close. This deal is expected to generate $600 million in primarily administrative cost synergies from reduction of overhead and duplication. While pause in share buyback in 2018 is a headwind this year, Cigna expects to generate $20-$21 in EPS in 2021, compared to previously guided $18.

May 17, 2018

Target Price/Valuation

|Rating Distribution |

|Positive Ratings |67% |

|Neutral Ratings |33% |

|Negative Ratings | 0% |

|Maximum Target Price |$258.00 |

|Minimum Target Price |$175.00↓ |

|Average Target Price |$223.39↓ |

|Number of Analysts with Target Price/Total |13/12 |

Potential risks to the price target include increases in utilization, commercial margin pressure, medical cost trends that could accelerate faster than expected and a pricing environment that could get more competitive, although Cigna has a below-average exposure to the commercial risk segment. CIGNA has above-average balance sheet exposure than its peers and the run-off books may require future capital infusions as future reserve studies suggest a need for more capital.

Recent Events

On May 3, 2018, Cigna Corp. came up with adjusted earnings per share of $4.11 in first-quarter 2018, beating the Zacks Consensus Estimate of $3.37. Also, earnings grew 48% year over year. Better-than-expected earnings were primarily driven by revenue growth.

Financial Position

Cigna’s cash and marketable investments were of $2.77 billion as of Mar 31, 2018, down from $2.97 billion as of Dec 31, 2017.

Long-term debt was $5.2 billion as of Mar 31, 2018, almost unchanged from the Dec 31, 2017 level.

2018 Guidance Raised

For 2018, the company expects to earn in the range of $12.85 to $13.25, up from the previous outlook range of $12.40 to $12.90, on per share basis. Total revenue growth (kept unchanged) is expected to grow in the range of 7% to 8% and medical customers are projected to grow by 0.4 million to 0.5 million lives, from the previous estimate of 0.3 million to 0.5 million.

Revenues

Cigna posted revenues of $11.4 billion, which surpassed the Zacks Consensus Estimate of $11 billion. Revenues grew 9% year over year, led by strong business growth in Cigna's Commercial Healthcare and Global Supplemental Benefits segments.

Premiums were up 10.4% year over year to $9 billion, while fees increased 8.4% to $1.35 billion.

Guidance

Cigna anticipates total revenue to grow in the range of 7% to 8% and medical customers are projected to grow by 0.3 million to 0.5 million.

Total revenues, as compiled by Zacks Digest, are shown in the table below:

|Revenues ($ million) |1Q17A |

|Copy Editor |Shreya |

|Content Ed. |Tanuka De |

|Lead Analyst |Sapna Bagaria |

|QCA |Tanuka De |

|No. of brokers reported/Total |13/15 |

|brokers | |

|Reason for Update |4Q17 Earnings |

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May 17 2018

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