In a market of rising health-care costs, health-insurance companies are facing an uphill battle in order to keep their medical loss ratios in check. As one of the preeminent leaders in the industry, Philadelphia-based CIGNA
Unfortunately, in the first quarter of 2006, CIGNA's shareholders did not get the news they were looking for. The company reported adjusted income from operations of $258 million for the quarter, representing a 13% decline from the $297 million it saw in the prior-year first quarter. Total medical membership remained relatively flat, and CIGNA ran into some adversity in the form of the loss of a $286 million prescription drug contract and losses in its Medicare Part D program. These results quickly sent the stock price down 15%, where it would close in the $90 range, near its lowest point for the year. The company was able, however, to repurchase 3.4 million shares of its stock at a cost of $419 million during the quarter.
The stability in CIGNA's Q2 earnings provided the platform upon which the stock would steadily appreciate approximately 45% over the rest of the year. In the second quarter of 2006, management reported a 4% increase in adjusted income from operations, with $270 million in earnings (vs. $260 million in the second quarter of 2005). Consolidated revenues came in at $4.1 billion for both the second quarter of 2006 and the second quarter of 2005. Total medical membership also remained stable. Excluding items that were expected to be non-recurring, premiums and fees increased by 7% on a year-over-year basis. "Our overall results during the second quarter of 2006 were strong and reflected continued execution of our strategic priorities," said CIGNA's chairman and CEO, H. Edward Hanway. CIGNA also repurchased an additional 9 million of its shares during the quarter at a total cost of $876 million.
The insurer posted resilient results for its 2006 third quarter. Its adjusted income from operations increased 7% on a year-over-year basis, from $251 million in the third quarter of 2005 to $268 million in the third quarter of 2006. Management reported that medical membership was expected to grow between 1% and 2% in 2006, in addition to the 166,000 members gained via the company's acquisition of Star HRG during the quarter. Management also revised upward its full-year guidance for adjusted income from operations, to a range of $995 million to $1.0 billion from a previous range of $960 million to $1.0 billion. The company once again saw value in its own shares, as it repurchased 8.4 million shares during the third quarter at a cost of $931 million. Mr. Hanway expressed his satisfaction with the company's results in saying, "We are very pleased with our consolidated results for the quarter. Consolidated earnings exceeded our expectations, and membership grew as expected in the quarter."
CIGNA will report its Q4 results in early 2007. In a meeting with analysts during the fourth quarter, the insurer said that it will be targeting earnings growth of 12% to 15% per year for the long term. During the quarter, CIGNA also entered into a long-term agreement with the University of Michigan's Health Management Research Center and settled a 2002 securities class-action suit that will bring a $25 million hit to the company's Q4 bottom line. News of the settlement had no negative impact on the company's stock price.
Overall, CIGNA had a fairly successful year and delivered solid returns to its investors. The company had to overcome a disappointing first quarter in order to stage a sustained rally in the second half of 2006, which eventually put shareholders up 16% year to date. Its overall results were impressive, especially since the tough market conditions faced by the industry as a whole during the first half of the year have left the shareholders of several other large insurers slightly in the red for the year.
Will the company come through in the clutch in 2007? Our Motley Fool CAPS community members have voiced their say. This is where they come out on CIGNA:
CIGNA | |
|---|---|
| CAPS Rating | *** (out of five stars) |
Total Bulls | 37 |
Total Bears | 5 |
Bull Ratio | 7.4:1 |
Bear Ratio | 0.1:1 |
You can see that the majority of CAPS players think that CIGNA will persevere in 2007. In fact, CAPS player dodgelaw sees the company as a true innovator, noting, "I think this is the coolest thing since sliced bread, folks." We can only assume that he was referring to CIGNA and not the side game of Minesweeper he had going on at the time.
While I don't see the stock climbing at the rate it did in the previous two quarters, I am fairly confident that the company can ultimately approach its target double-digit earnings growth range over the long haul. I expect the company to continue to remain proactive in its attempt to lower its costs in the future as it continues to push its consumer-directed health plans (CDHPs). CDHPs typically provide customers with a greater choice of treatment options, but at the same time shift more of the cost of health care away from the insurer and onto enrolled members in the form of higher deductibles and co-payments. CIGNA also stands poised to acquire smaller providers similar to Star HRG in 2007 and beyond. With these factors taken together, CIGNA shareholders can hope for another strong year in 2007.
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
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Fool contributorBilly Fisherdoes not own any of the shares mentioned. UnitedHealth Group is a Stock Advisor and an Inside Value selection. The Fool has adisclosure policy.
