CIGNA Beats on Lower Utilization - Analyst Blog

CIGNA Corp.'s (CI) fourth quarter core earnings of $1.15 per share were fairly ahead of the Zacks Consensus Estimate of $1.01. Earnings also compared favorably to $1.03 reported in the prior-year quarter.

Better-than-expected results came in due to improved contribution from Health Care, Disability & Life and International segments. Earnings per share were also higher due to the lower number of shares in the quarter compared with year-ago quarter. 

CIGNA's net income increased 40.0% year over year to $461 million driven by $85 million of gains from its run-off business operations––Guaranteed Minimum Death Benefits and Guaranteed Minimum Income Benefits. Also, net realized investment gains of $21 million aided the results. 

CIGNA, the fourth-largest commercial health insurer reported total revenue of $5.4 billion, ahead of the Zacks Consensus Estimate of $5.1 billion. It was also up 17% from $4.6 billion in the prior-year quarter on higher business retention coupled with new account sales.

Consolidated premiums and fees increased 18% to $4.7 billion, led by an increase in premiums from all business segments––Health Care International as well as Life and Disability segments. Net investment income increased 5.3% to $276 million, primarily attributable to higher invested assets, partially offset by lower yields.

Full-year 2010 operating earnings of $4.64 per share surpassed the Zacks Consensus Estimate of $ 4.49 and flew past management's high end of earnings guidance of $4.35–$4.50. Total revenue of $21.3 billion also came in higher than the Zacks Consensus Estimate of $ 20.0 billion.

Segment Results

Premiums and fees in the Health Care segment increased 20% year over year to $3.4 billion, largely attributable to solid business retention and addition of new customers in Middle Market and Select customer segments. There was a net medical membership growth of 397,000, including a higher mix of commercial and Medicare related risk businesses.

Operating earnings were up 7% at $207 million. However, the change in business mix also led to an increase in medical claims expense to $2.1 billion up 26% from $1.7 billion in the prior-year period.

Premiums and fees in the Disability and Life segment increased modestly by 7.1% year over year to $693 million, reflecting an increase in premiums from Disability as well as Life businesses. Operating earnings were $72 million up 9.1%.

Premiums and fees in the International segment increased 24% year over year to $625 million, mainly attributable to new sales growth in the Life segment, supplemental health insurance and membership growth in the expatriate employee benefits business. Margins improved 150 basis points to 8.7%. CIGNA's International business growth augurs well for future growth.

Run-off Reinsurance posted earnings of $1 million compared with a $9 million gain in the year-ago quarter.

Other operations showed a 13% year-over-year decline in operating earnings to $20 million due to lower fee and premium income.  

At the Corporate entity, the result was a loss of $44 million, $1 million lower than the year-ago quarter.

CIGNA ended the quarter with $1.6 billion in cash. It repurchased approximately 6.2 million shares of its stock on the open market for $200 million during 2010. Book value per share increased 24% year over year to $24.44.

2011 Outlook

Taking into account the expectation that medical utilization will return to more normalized level, continued execution of the growth strategy and the impact from the health reform, management provided a conservative earnings guidance range of $4.30 and $4.70 per share.

All the companies in the health insurance sector that have reported fourth quarter earnings so far, including UnitedHealth Corp. (UNH) and Wellpoint Inc. (WLP), have benefited from a decline in health care use. Aetna Inc. (AET) is also expected to report better-than-expected results due to the same factor when it releases its earnings tomorrow.

Going forward, we expect CIGNA to keep up sustain its momentum as it is relatively safe with regard to exposure to minimum medical loss ratio regulations, unreasonable rate reviews and health insurance exchanges.

The recently completed Vanbreda acquisitions should accelerate 2012 international earnings growth. The company has also shown operating momentum and has gained commercial risk membership in four quarters in a row.

CIGNA carries a Zacks #2 Rank, which translates into Buy rating over the short term. However, over the longer term (6+ months), we rate the shares as Neutral.

 
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