Morningstar | Cigna Appears on Track to Meet Long-Term Projections Despite Anthem's Early Contract Termination
Cigna reported fourth-quarter and full-year results that largely met our expectations. The company appears on-track to meet its longer-term post-integration earnings targets despite an earlier-than-expected termination of Anthem's contract with Express Scripts. This transition will now occur throughout 2019 rather than maintaining the relationship through the end of the year. While this will likely create some volatility in the firm's PBM profits over the near term, we expect the integrated firm to achieve its goals over a multiyear period. As we update our model and reflect on the changing competitive dynamics in a consolidating managed-care and pharmacy benefits industry, we'll likely raise our fair value estimate for the combined firm. For now, however, we're leaving our no-moat and negative trend ratings in place.Cigna's managed-care franchise saw another impressive year in 2018, with total medical enrollment growth of roughly 4%. Strength in the firm's commercial risk and government books of business accounted for the bulk of reported membership adds. Costs were also reasonably well contained, allowing its integrated medical segment to show roughly 60 basis points of pretax adjusted margin expansion for the full year. Management again cited an industry-leading cost trend, clocking in at 3.6% for the full year within its U.S. commercial book. For 2019, the firm again appears well positioned with cost trend guidance of 3.5%-4.5%. It will likely take some time to fully transition clients onto the firm's integrated medical and pharmacy benefits offering, but we forecast continued enrollment gains as a result.
Finally, we're encouraged by management's capital discipline following the close of the firm's merger with Express. Out of $6.2 billion in capital expected to be available during 2019, $4.2 billion is earmarked for debt reduction as the company moves toward its target debt/capital ratio in the high 30%s, from just over 50% today.
Cigna is a holding company. The company is a global health services organization. Through its subsidiaries, the company provides a set of medical, dental, disability, life and accident insurance and related products and services. The majority of which are provides through employers and other groups such as governmental and non-governmental organizations, unions and associations. The company also provides commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the U.S. and selected international markets. The company's segments include: Global Health Care; Global Supplemental Benefits; Group Disability and Life; and Other Operations.
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