Fool.com: Cigna Rains on the HMO Earnings Parade (News) August 3, 1999

Cigna Rains on the HMO Earnings Parade

August 3, 1999

Philadelphia-based life and health insurer Cigna Corp. (NYSE: CI) turned in second quarter operating earnings of $1.22 per share this morning, up from $1.03 per share a year ago and safely ahead of the First Call mean estimate of $1.12 per share. The upside earnings surprise can be mostly attributed to a 21% year-over-year rise in operating income from the company's core HMO and indemnity operations, which accounted for 69% of total operating income in the period. A 12% rise in operating profits from Cigna's defined contribution, defined benefit, and corporate life insurance business also didn't hurt. However, the company reportedly said on its conference call that the industry's bogeyman -- rising medical costs -- has reappeared, which spooked investors and led to stock declines throughout the HMO sector.

The second quarter results excluded Cigna's property and casualty business, which was considered a discounted operation after being sold to ACE Ltd. (NYSE: ACL) for $3.45 billion in cash last month. The money from the sale ($1.2 billion of which will show up in the Q3 statements as an after-tax gain) will be ploughed into efforts "to strengthen shareholder value," according to CEO Wilson Taylor.

While that could mean any of a number of things, Cigna's goal is to become the group health benefits leader in the U.S. So allocating a large percentage of that money for a purchase of another insurer in order to scale its large group benefits operation is one sensible option. As with any other type of insurance operation, spreading the risk over a larger base is economically beneficial, all else being equal. Alternatively, Cigna could floor the share buyback gas pedal, building off of the 4.7 million shares repurchased in the most recent quarter.

Prior to today's rising costs fears, the consensus was that the HMO business was in good shape. Judging from the upbeat Q2 results from the likes of Aetna (NYSE: AET), PacfiCare (Nasdaq: PHSY), WellPoint (NYSE: WLP), and Oxford Health (Nasdaq: OXHP), many healthcare providers appeared to be doing a good job of staying ahead of the medical cost curve, which has wrecked their share prices in the past. With Cigna now expecting its medical costs to rise by 6.5% to 7% this year instead of the earlier forecast of 5% to 6%, uncertainty about future performance is setting in. Still, many of the HMOs have been successful in pushing through premium increases in the first half of this year, which means there continues to be a good chance that the top firms in the sector could meet their estimates for the rest of the year so long as costs do not get too far out of whack.

By Brian Graney (TMF Panic) (TMF Panic)

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