CIGNA Beats Estimates, Ups Outlook - Analyst Blog

CIGNA Corp.'s (CI) third quarter earnings of $1.10 per share were ahead of the Zacks Consensus Estimate of $1.06. The insurer earned $1.13 per share last year. Better-than-expected results came in due to improved contribution from Health Care, Disability & Life and International segments.

CIGNA's net income declined 6.7% year over year to $307 million, due to $44 million of losses incurred on its run-off business operations – Guaranteed Minimum Death Benefits and Guaranteed Minimum Income Benefits.

The fourth-largest commercial health insurer reported total revenue of $5.3 billion, ahead of the Zacks Consensus Estimate of $5.2 billion. It was also up 18% from $4.5 billion in the prior-year quarter, driven by higher business retention coupled with new account sales.

Consolidated premiums and fees increased 15% to $4.6 billion, led by an increase in premiums from all business segments – Health Care and International segments as well as Life and Disability. Net investment income increased 6.5% to $280 million, primarily due to higher invested assets and partially offset by lower yields.

CIGNA spent $77 million in buying back 2.5 million shares. Cash and cash equivalents increased 34% from the end of the 2009 to $635 million.

Segment Results

Premiums and fees in the Health Care segment increased 19% year over year to $3.4 billion, largely due to solid business retention and addition of new customers in Middle Market and Select customer segments. There was a net membership growth of 339,000, which included a higher mix of commercial and Medicare related risk businesses. However, the change in business mix also led to an increase in medical claims expense to $1.1 billion an increase of 54% from $715 million at the year end 2009.

Premiums and fees in the Disability and Life segment increased modestly by 1.4% year over year to $663 million, reflecting an increase in premiums from disability business, partially offset by lower business from the Life segment.

Premiums and fees in the International segment increased 19% year over year to $574 million, mainly attributable to new sales growth in the Life segment, supplemental health insurance and membership growth in the expatriate employee benefits business. CIGNA's International business growth augurs well and we view it as a catalyst for future growth.

2010 Outlook

Management expects full year operating earnings to lie between $4.35 and $4.50 per share, up from $4.10−$4.40 in the previous guidance.

Consolidated operating income is expected to come around $1.20 billion to $1.25 billion ($1.13 to $1.21 billion previously), out of which $825 to $855 million ($765 million to $825 million previously) will come from Health Care segment, while $510 million to $530 million (unchanged relative to previous guidance) is expected to come from Group Disability and Life & International segments. Medical membership is expected to grow by approximately 3.5%, up from 3.0% previously.

Peer UnitedHealth Group (UNH), which was the first to kick off the earnings season for the sector, fared better than the Zacks Consensus Estimate due to lower medical utilization. Others such as Aetna Inc. (AET), Coventry Health Care Inc. (CVH), WellPoint Inc. (WLP) and Humana Inc. (HUM) are yet to report their third quarter results.

CIGNA had put a nice streak of earnings with an average positive surprise of 16.78% for the past four quarters.

CIGNA has reported favorable results for the first nine months of 2010. However, concerns regarding the state of the global economy and the impact of the US Health Care Reform Act remains. But we note that CIGNA is more "reform resistant" than other health insurers due to its relatively low enrollment in Medicare Advantage and individual or small group insurance products, two product lines that are perceived as vulnerable to an overhaul push.

Also, a strong capital position, diverse revenue operations and continual share repurchases bode well for the company. We maintain an Outperform rating on the shares, which carry a Zacks #2 Rank, translating into a Buy recommendation over the near term (1−3 months) and indicating a slight upward directional pressure in the near term.

Shares were down 0.50% to $35.66 in before-market trading on NYSE.