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Morningstar | Cigna Reports a Decent Quarter as Membership Expands, Express Deal Expected to Close by Year End

Cigna was able to grow its membership book at a solid clip while keeping its medical costs in check. The firm reported 2% growth in total membership, which was driven largely by its commercial business. Cigna’s Medicare business was mainly flat, but we think the insurer did a great job managing this cohort, as the group’s medical loss ratio fell 330 basis points year over year. Despite these positives, the firm did report a moderate uptick in its operating cost ratio. The reinstatement of the insure tax is a slight headwind, but we would like to see this metric kept in check--especially with our expectations for increasing medical costs over the coming years. There were no major updates related to the Express Scripts acquisition, as this deal recently received Department of Justice approval with no pushback. These developments largely fall within our expectations, and we are reiterating our $160 fair value estimate and no-moat rating.

We expect the Express acquisition to close within the next few months. From an operational standpoint, we believe the new entity will be a formidable force within the healthcare space that will be able to wield significant pricing power and leverage top-tier scale advantages. Based upon the need of payers to control their health benefit plan costs, the efficient management of pharmaceutical expenses will be just as critical as managing medical expenses, such as doctor’s visits and surgeries. As the largest PBM, Express has the scale and expertise to manage drug benefit plans more efficiently than most health plan sponsors. Thus, we believe Cigna will acquire a strong wide-moat asset at a fair price. This dynamic should add significantly to the MCO’s competitive advantages over the coming years without any major dilution to its valuation. Given the recent Department of Justice approval, we are now in the process of more fully formulating our long-term analysis for the new entity, and we expect there to be some updates to our analysis for the combined entity.