Cigna Corp (CI.N) reported higher-than-expected quarterly earnings and sales on Thursday, and the insurer raised its 2012 profit forecast for the second time this year as its takeover of Medicare specialist HealthSpring helped boost premiums and fees.
"Earnings (were) ahead of consensus expectations on solid healthcare results, including stable utilization trends in Medicare Advantage, continued strong international revenue growth and better-than-expected group disability and life earnings," said Leerink Swann analyst Jason Gurda.
The stable use of medical services by individuals insured under Cigna's Medicare Advantage plans contrasts with higher usage of services, or lower government reimbursement, felt during the quarter by rivals Humana Inc (HUM.N) and UnitedHealth Group Inc (UNH.N). Humana and insurer Wellpoint Inc WLP.N cut their 2012 earnings forecasts because of negative overall cost trends.
Gurda said the medical loss ratio for Cigna's Medicare Advantage programs had fallen to 80.4 percent in the second quarter from 88.1 percent a year earlier. The ratio is the percentage of premiums paid for medical expenses -- a closely watched indicator of a managed-care company's financial health.
Cigna, whose shares rose 3.6 percent, reported second-quarter net income of $380 million, or $1.31 per share, compared with $391 million or $1.43 per share a year earlier.
Excluding special items, Cigna earned $1.49 per share, topping analysts' estimates of $1.42, according to Thomson Reuters I/B/E/S.
"Cigna solidly beat earnings and the release contained no indication of cost trend deviations from expectations or other surprises evident in other managed care organization reports in the second quarter," Jefferies & Co analyst David Windley said in a research note.
Revenue rose 35 percent to $7.46 billion, above Wall Street expectations of $7.24 billion. Revenue growth was largely spurred by the HealthSpring acquisition, which led to a 52 percent rise in premiums and fees in the healthcare segment.
Cigna bought HealthSpring for $3.8 billion earlier this year.
The deal gave Cigna a foothold in the business of selling privately administered Medicare plans for older people, allowing it to attract the wave of baby boomers becoming eligible for the federal health program.
Chief Executive David Cordani said Cigna's Medicare Advantage business profited from HealthSpring's longstanding ability to control expenses.
"HealthSpring has a history of being very disciplined," he told analysts in a conference call, citing its pursuit of steady but not overly aggressive growth in Medicare membership over the past decade.
"They've gotten the benefit design in balance with the (insurance) premium," Cordani said.
Before buying HealthSpring in January, Cigna derived less than $1 billion in revenue from Medicare patients. Cordani said the business will mushroom to about $6 billion this year, representing about 20 percent of company revenue.
HealthSpring places nurses and other healthcare managers inside doctors' offices -- typically big practices with scores or hundreds of physicians -- and focuses on preventive care.
"This approach tries to get the right services to the right person at the right time," he said in an interview.
Cordani said Cigna aims to expand HealthSpring beyond its current dozen big markets, which include Houston, Miami, Nashville and Philadelphia.
Asked if the business could expand two- or three-fold to other cities in the coming five years, he said it could because the doctor-based operation leads to lower medical costs.
Morningstar analyst Matthew Coffina said HealthSpring has "an interesting approach" that paid off for Cigna in the second quarter. But he said the Medicare business of Cigna and other insurers could suffer lower profit margins in coming years if the federal government cuts back on reimbursement for medical services.
Cigna raised its 2012 earnings forecast to a range of $5.25 to $5.60 per share, excluding items. In May, the company had increased its outlook to between $5.20 and $5.55 per share, citing strong profit from healthcare, its largest segment.
Earnings rose 19 percent to $332 million in the company's healthcare division and were up 1 percent at $89 million in the disability and life segment.
Earnings rose 14 percent in the international segment, which sells supplemental insurance to individuals overseas, including to employees working abroad.
Cigna shares were up 3.6 percent at $41.67 on Thursday afternoon on the New York Stock Exchange.
(Reporting by Esha Dey in Bangalore; Editing by Viraj Nair, Lisa Von Ahn, Sofina Mirza-Reid and Matthew Lewis)