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CIGNA Beats Est, Ups Outlook

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U.S health insurer CIGNA Corp.’s (CI - Analyst Report) third quarter core earnings of $1.71 per share significantly outpaced the Zacks Consensus Estimate of $1.37 per share.  Moreover, the results were up 33% year over year.

Net income came in at $466 million or $1.61 per share, compared with net income of $183 million or 67 cents per share in the year-ago quarter.

The company’s consolidated revenue in the quarter under review came in at $7.4 billion, up 31% year over year. The improvement in revenue was the result of higher premiums and fees and mail order pharmacy revenues.

Consolidated premiums and fees surged 40% year over year to $6.6 billion, primarily due to higher premiums in the Health Care, International as well as Disability Life business.

Net investment income was $283 million, down 5% year over year due to compressed investment yields.

Segment Results

Premiums and fees from the Health Care segment increased 51% year over year to $4.9 billion, owing to the positive impact of the HealthSpring acquisition, business growth, higher insurance and increased specialty penetration.  Moreover, operating earnings soared 55% to $384 million. Management forecasts operating income in the range of $1.29–$1.32 billion from its Health Care segment.

Premiums and fees from the Disability and Life segment climbed 11% year over year to $758 million. Operating earnings were $62 million, unchanged year over year.  This segment is expected to post operating income of $265–$275 million in fiscal 2012.

Premiums and fees from the International segment jumped 22% year over year to $930 million led by attractive customer retention and business growth from sales in individual Health, Life and Accident and Global Health Benefits businesses as well as revenues accretion from recent acquisitions. CIGNA’s International business growth is quite impressive, and we view it as a catalyst for future growth.

In the quarter under review, income from operations improved 27% to $79 million. Management expects operating income between $280 million and $290 million for fiscal 2012 from international operations.

2012 Outlook Update

Following the better-than-expected results, Cigna now expects full year 2012 consolidated adjusted income from operations to be in the range of $1.655–$1.705 billion or $5.70–$5.90 per share against the prior outlook of $.53–$1.63 billion or $5.25–$5.60 per share. Moreover, Cigna expects U.S. Health Care medical customer growth of approximately 1.25 million, including medical customers acquired from HealthSpring.

Our take

We remain upbeat about Cigna’s future prospects. The company boasts a diversified portfolio of businesses, backed by attractive organic growth in its U.S. Health Care and International businesses. It is also expanding in the Seniors market through the acquisition of HealthSpring.

We expect these initiatives to deliver growth going forward. With a strong balance sheet and adequate liquidity, the company is expected to continue share buybacks, which will surely contribute to the bottom line.

Peer Comparison

A number of health insurance behemoths have already reported their third quarter 2012 earnings. Earlier this week, Aetna Inc. (AET - Analyst Report) reported its third quarter earnings of $1.34 per share missing the Zacks Consensus Estimate by 6 cents. Earnings also declined 6.3% year over year.

Cigna currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term ‘Neutral’ recommendation on the shares.

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