Deal, 4Q Earnings, Give Cigna A Boost

February 08, 2013

Cigna Corp. saw its shares take a healthy bump as the Connecticut insurance firm released strong fourth quarter earnings and announced an attractive reinsurance deal, according to media reports. The company’s shares started February trading at $58.13 and have risen steadily, to as much as $62 in midday trading on Feb. 8.

Cigna reported a 49 percent gain in earnings in the fourth quarter of 2012, fueled in part by earnings from its acquisitions last year, buying Medicare insurer HealthSpring Inc. and American Financial Group Medicare supplement and critical-illness businesses last year.

On Feb. 4, Cigna announced a deal worth as much as $4 billion, to sell its variable annuity death benefit business to Berkshire Hathaway Life Insurance. Berkshire Hathaway will assume 100 percent of the businesses’ future exposure and will take over Cigna’s guaranteed minimum benefits, worth up to $4 billion. Berkshire will receive $100 million in cash, $1.8 billion in assets, and $300 million in tax benefits, according to a report.

In a statement, Cigna’s president and chief executive officer David M. Cordani said the deal is a “definitive strategic step to further reduce risk and continue to improve our financial flexibility.” Cigna discontinued the variable annuity death benefit business, which was part of its reinsurance unit, in 2000. Cigna will take an after-tax charge of $500 million in its first-quarter earnings to cover the gap between the payment to Berkshire and its recorded reserves.

Cigna cited higher membership gains due to its acquisition of the two health care businesses and “favorable medical costs for its strong performance.

Cigna reported a fourth-quarter profit of $406 million, or $1.41 a share, up from $273 million, or 98 cents a share, in the same quarter a year earlier. Excluding items such as litigation, realignment and acquisition costs, adjusted per-share earnings rose to $1.57 from $1.05. Revenue rose an impressive 38 percent to $7.62 billion.

2013 is expected to be something of a transition year for health insurers as they prepare for major changes under President Obama’s health care overhaul law, which will create a mix of new costs and market opportunities, the Wall Street Journal reported. State-based exchanges – essentially shopping marts for health care plans — and a broadened Medicaid program are expected to expand health coverage to millions more Americans starting next year.

Berkshire Hathaway Life Insurance is a subsidiary of Warren Buffet’s Berkshire Hathaway Inc., which owns several insurance and reinsurance firms.

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