Cigna on Raters' Radar After Express Scripts Bid, Stock Down

Following Cigna Corp.’s CI announcement to buy the pharmacy benefit manager Express Scripts Holding Co. ESRX, rating agencies A.M.Best and Moody’s has sprung into action.

Under the terms of the deal, Cigna will pay $48.75 in cash and 0.2434 shares of stock of the newly combined company. Upon closure, Express Scripts’ shareholders will own approximately 36% of the combined company.

A.M. Best has placed under review with negative implications the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a” of the key life/health subsidiaries, health maintenance organizations, New Zealand and European insurance companies of Cigna.

The FSR of A- and Long-Term ICRs of “a-” of Cigna Supplemental Benefit Companies, as well as the Cigna HealthSpring companies have also received the same treatment.

A.M. Best has placed under review with negative implications the Long-Term ICR of “bbb” and the Long- and Short-Term Issue Credit Ratings (Long-Term IR; Short-Term IR) of Cigna.

The move sent the shares down, declining 1.75% to close at $164.39 in last trading session.

Since the announcement of the deal, the stock has lost 13% against the industry’s growth of 2.1%.

The rating agency's concerns stem from Cigna’s higher leverage ratio due to the use of $22.5 billion of new debt to finance the Express Scripts transaction. The funding will expectedly cause the leverage ratio to go up to 49%, while its goodwill plus intangibles to equity ratio will likely exceed 125%. Though the company’s capacity to service its debt, as measured by interest coverage ratio, will fall under 10x, the level is still considered as strong.

The deal, being one of the biggest in Cigna’s history, might pose significant execution risks.  There is also a fear of customer losses from Express Scripts, which might dent the combined entity’s growth to some extent.

Last week, another rating agency, Moody's Investors Service placed Cigna’s debt ratings on review for downgrade (senior at Baa1) as well as the A1 insurance financial strength ratings of some of its operating subsidiaries.

Despite initial skepticism from the rating agencies, we believe that Cigna will be able to secure back its favorable rating after it utilizes the synergies from the acquisition to pay back debt.

The transaction is expected to result in total cost synergies of $650 million and double-digit accretion to earnings in the first year after its closure. As a result, Cigna expects the deal to increase earnings per share from $18 to $20-$21 in 2021.

Cigna carries a Zacks Rank #2 (Buy). Other stocks worth considering in the same space are Centene Corp. CNC and UnitedHealth Group Inc. UNH. While Centene sports a Zacks Rank #1 (Strong Buy), UnitedHealth holds the same rank as Cigna. You can see the complete list of today’s Zacks #1 Rank stocks here.

Centene beat earnings estimates in each of the four reported quarters with an average positive surprise of 9.8%.

UnitedHealth surpassed earnings estimates in each of the trailing four quarters with an average positive surprise of 4.8%.

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Cigna Corporation (CI) : Free Stock Analysis Report
 
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