Cigna (CI, Financial) is having a great year by all macro financial measures.
For those who are not familiar with Cigna, it is a managed health care specialist based in Connecticut and headed by Chairman and CEO David Michael Cordani. Listed in the New York Stock Exchange with an estimated market capitalization of $41.3 billion based on the share price of $161, Cigna is a major health care specialist not only in the U.S. but globally. This article is based on its latest call transcript on May 5;Â the gist of it is extracted in layman's terms.
Understanding the business segment
The health care segment is diverse, and it is useful to define Cigna’s place in it. Cigna does not run hospitals or produce drugs. It provides insurance and managed care to its clients. The insurance part is self-explanatory, and it is mainly limited to the health care sector.
As for managed care, Cigna's main value proposition is to work with doctors, pharmacy and other health care providers to extract the best cost-quality treatment. This is a valuable service, containing soaring health costs, the defining issue of U.S. politics and the driving force behind the attempt to repeal Obamacare.
For instance, Cigna is forcing drug companies to prioritize the efficacy of their treatment by paying for results. Previously, drug companies sought to increase revenue by pushing more drugs to doctors and pharmacies. For the past two years, it has contained costs with seven such arrangements with pharmaceutical companies and was given the Excellence Award from the Pharmacy Benefit Management Institute.
Next, Cigna recognized that the health care market is a highly fragmented market with a full array of different health care solutions that offers different quality and cost. In this crazy market, Cigna has launched Cigna One Guide which has a multichannel approach from phone consultation to mobile app to chat to provide personalized advice with smart algorithms.
Cigna’s challenges
As a commercial entity, it is hit by rising losses in Medicaid claims, and it intends to exit the Illinois market by the end of the year. In addition, it has stopped enrollment to Medicaid. Its margins are negative but improving for the Individual and Commercial segments. As with all companies, it is its ability to contain cost with affordable office spaces.
Besides soaring losses in the Medicaid market, in which it has a small presence, Cigna is facing legal challenges after the aborted merger with Anthem (ANTM, Financial). Cigna agreed to sell to Anthem for $48 billion in July 2015, but it was challenged by the Justice Department in July 2016 and February of this year on antitrust and anti-competition grounds.
Faced with pressure from the government, Cigna canceled its agreement with Anthem in February, and the case is now in the courts. Anthem went all the way to the Supreme Court to enforce the earlier agreement. Over the past two years, Cigna added $1.5 billion of market value ($155 per share in July 2015 or $39.8 billion) which had eluded Anthem due to governmental challenge. Cigna’s CEO has pledged swift near-term resolution to this legal uncertainty.
Strong growth
Cigna has $5 billion in deployable capital at the parent company which would allow it to scale up rapidly if necessary. It is interested in acquiring companies that will complement its existing strengths.
Source: Cigna
Despite market concerns about further losses due to Obamacare, its revenue had been rising for the past eight years. Perhaps it is also a function of market uncertainty; the market is only valuing Cigna at $45 billion when the revenue is at $41 billion.
It has a strong international presence in over 30 countries which should offset the policy uncertainties in the U.S. It has a presence in countries such as Singapore, China and Australia with over 41,000 employees.
When its employees travel overseas with their spouses for work, they can consider listing their language expertise on TUTOROO which provides an online marketplace for native language teachers.
For instance, Chinese workers who wish to engage English tutors in Singapore and Hong Kong, can find them on TUTOROO to prepare for their work in the U.S.
Fragmented medical markets
As long as the health care market remains highly fragmented, there is a role for Cigna to play as the marketplace to design its client’s benefit, leverage on collaboration with other players and get the right funding in place among others.
This brings to mind another marketplace provider that works to serve the benefit of its members, called StudioMatch. It is an online marketplace that serves the users of music, dance, art and yoga studios in Singapore and has the potential to expand overseas in time. The platform provides for easy discovery, booking and rating of such studios.
Businesses exist to solve problems for humanity. Cigna helps consumers solve the problem of finding the right medical attention at reasonable prices with its insurance and managed health care services. Today, the major problem in the U.S. is to provide affordable health coverage without driving insurance companies to bankruptcy.
Cigna is taking on the challenge with a huge war chest. As its CEO said, "One of our M&A capital deployment priorities is to seek opportunities to expand, as we say, our capabilities to serve government-based high-risk programs over time."
Disclosure: I don't own any Cigna stock.
