UPDATE 3-Cigna's HealthSpring acquisition helps profit rise

Thu Feb 7, 2013 12:20pm EST

By Caroline Humer

Feb 7 (Reuters) - Health insurer Cigna Corp. reported a higher-than-anticipated fourth-quarter profit on Thursday, helped by the acquisition of Medicare provider HealthSpring and medical costs stayed within expectations.

Cigna said fourth-quarter net income rose to $406 million, or $1.41 per share, from $273 million, or 98 cents per share, a year earlier. Profit was helped by favorable medical costs, revenue growth and operating cost controls.

Excluding items, the company reported a profit of $1.57 per share. Analysts on average had expected $1.48, according to Thomson Reuters I/B/E/S.

The items included gains in businesses that Cigna has exited but remain on its books, and the costs of litigation.

Cigna provides health insurance to companies both in the United States and overseas, much of which involves the benefits administration business, and offers Medicare and Medicaid plans. It also sells life, disability and accident insurance.

Cigna said the severe flu season added to costs but its focus on the self-insured market and the use of care coordinators in its HealthSpring business for seniors kept the overall impact down.

Large companies that are self-insured make up 85 percent of Cigna's U.S.-based insurance business and they, not Cigna, pay for the cost of medical services.

U.S. insurers, including UnitedHealth Group Inc, Aetna Inc and Humana Inc, are expected to spend hundreds of millions of dollars on the flu this winter. Flu can add to hospitalizations and doctor visits.

Premiums and fees rose 48 percent to $6.8 billion, primarily due to its 2012 purchase of HealthSpring, a specialized Medicare provider, as well as organic growth and rate increases. Total revenue was $7.62 billion, up from $5.43 billion a year earlier.

The growth of the administrative service-based insurance business, the HealthSpring acquisition and the announcement earlier this week on a deal for its annuity reinsurance businesses is different from past strategy and sets it off from competitors, Wedbush Securities analyst Sarah James said.

"I think it's a much cleaner story for investors to look at now and I think that will bring in more attention," James said.

Cigna's shares were up 1.7 percent, or 99 cents, at $60.66 in midday New York Stock Exchange trading while the Standard & Poor's index was down 0.62 percent.

REFORM UNDERWAY

Thursday's share gains followed a rise Wednesday after news that Cigna had struck a reinsurance deal with Berkshire Hathaway Inc that will take some of the volatility from its net earnings by removing gains and losses related to two closed annuity reinsurance businesses. It will take a $500 million after-tax charge in the first quarter related to the $2.2 billion agreement.

The company raised its 2013 profit outlook 5 cents per share, saying it now expects to earn $5.85 to $6.30 per share, compared with a November forecast of $5.80 to $6.25. The outlook excludes that charge.

Health insurers are facing a dramatic industry shift in 2013 and 2014 as the Affordable Care Act brings reform to the sector. In October, insurers will start offering healthcare policies to individuals and small businesses through online exchanges.

Laws governing when employers must offer insurance to employees will kick in, and insurers say they may lose some of their employer business to these exchanges over time. As a result, many are strengthening their Medicare and Medicaid businesses through acquisitions like that of HealthSpring.

Cigna Chief Executive Officer David Cordani said in an interview that the company is well positioned for the exchanges because it does not have a large number of individuals or small businesses with fewer than 50 employees as customers.

"We don't have a book of business that is going to be disrupted that we need to protect," Cordani said. "We can look at this new marketplace that's forming with a fresh set of eyes and develop a business that works."

Cordani said Cigna has not decided on which exchanges it will sell insurance, but said that it would choose from among the areas in which it has high volume, efficient insurance businesses.

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