Cigna Ends on a High Note

Cigna Corp.’s (CI - Analyst Report) fourth-quarter operating earnings of $1.57 per share outpaced the Zacks Consensus Estimate of $1.49 per share. Moreover, the results surged nearly 50% year over year.

Including income of 2 cents per share related to the Run-off Guaranteed Minimum Income Benefits (GMIB) business and losses of 24 cents per share related to litigation matters, CIGNA reported net income of $1.41 per share, comparing favorably with 98 cents per share in the year-ago quarter.

Quarterly Operational Update

The company’s consolidated revenue came in at $7.6 billion, up 41% year over year. The improvement in revenue was the result of higher premiums and fees (surging 42% year over year), mail order pharmacy revenues (increasing 11% year over year) and a little improvement in Net investment income (up 1.4% year over year). Top line was ahead of the Zacks Consensus Estimate of $7.2 billion.

Full Year Highlights

Operating income of $5.99 per share surpassed the Zacks Consensus Estimate of $5.90 per share, up 21% year over year. Including income of 10 cents per share related to the GMIB business within the Run-off Reinsurance segment and one-time loss of 59 cents per share, net income came in at $5.61 per share, higher than $4.59 per share in 2011.

Revenue in 2012 was $29.1 billion, up 32% year over year. Contributions from the HealthSpring acquisition and continued organic growth drove improvements in premiums and fees. It also surpassed the Zacks Consensus Estimate of $28.2 billion

Quarterly Review by Segment

Effective in the fourth quarter of 2012, Cigna realigned its businesses to better leverage distribution and service capabilities.

Premiums and fees from the Global Health Care segment increased 50% year over year to $4.9 billion, owing to the positive impact of the HealthSpring acquisition, core business growth, rate increases and increased specialty penetration. Operating earnings soared 65% to $397 million on the back of growth in targeted medical and specialty businesses, favorable medical costs and continued operating expense leverage.

Premiums and fees from the Global Supplemental Benefits segment climbed 44% year over year, driven by acquisitions, attractive customer retention and business growth, primarily in Korea. Operating earnings more than doubled to $38 million due to strong customer retention, business growth and favorable claim experience, particularly in the Korean and U.S. operations.

Premiums and fees from the Global Disability and Life segment climbed 15% year over year to $804 million. Operating earnings declined 3.4% to $56 million attributable to unfavorable claims experience in the disability business.

Share Repurchase Update

Cigna spent $210 million to buyback 4.4 million shares in 2012.

Business Highlights

On Feb 4, 2013, Cigna entered into an agreement with Berkshire Hathaway Inc. (BRK.A - Snapshot Report), (BRK.B - Analyst Report) to exit the Run-off Reinsurance businesses.

The transaction will cost Cigna $2.2 billion and will be funded by $100 million in cash and approximately $1.8 billion of investment assets in run-off businesses. Moreover, the company is expected to gain an estimated $300 million in tax benefits from this transaction. Cigna is expected to incur an after-tax charge of $500 million, in the first quarter of 2013, related to this transaction.

Looking Forward

Cigna expects to deliver operating earnings between $1.7–$1.83 billion or $5.85–$6.30 per share in 2013.

By segment, operating income from Global Health Care is projected between $1.43 to $1.52 billion, Global Supplemental Benefits between $160 to $180 million and Group Disability and Life in the range of $270 to $290 million.

Our Take

We remain upbeat about Cigna’s future prospects. We believe that the company is strongly poised to record earnings growth given a number of strategic investments undertaken.

Cigna boasts a diversified portfolio of businesses, backed by attractive organic growth in its U.S. Health Care and expansion in the Seniors market through the acquisition of HealthSpring. It is also shedding the Run-off Reinsurance Segment in an effort to reduce risk and strengthen financial flexibility.

With a strong balance sheet and adequate liquidity, the company is expected to continue share buybacks, which will surely contribute to the bottom line.

Cigna currently carries a Zacks Rank #3 (Hold). Among other multi-line insurers, Assured Guaranty Ltd. (AGO - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), and CNO Financial Group, Inc. (CNO - Analyst Report) carrying Zacks Rank #2 (Buy)are expected to release their results shortly.