Cigna Corp's quarterly profit fell 15 percent because the third-largest US health insurer's investment losses doubled.
Net income for the second quarter fell to US$214 million, or US$1.50 a share, from US$252 million, or US$1.66, a year earlier, the company said in a statement. Revenue rose 6.6 percent to US$4.97 billion from US$4.66 billion.
Investment losses rose to US$67 million from US$32 million a year earlier, and Cigna said it may have to boost reserves by at least US$250 million to cover guaranteed annuity benefits. Cigna's health-care business has lagged after it lost some customers at large employers to rivals such as UnitedHealth Group Inc.
"The membership numbers can't be a surprise to anybody," said Al Copersino, an analyst at Columbia Management Group, which oversees about US$160 billion in assets and owns Cigna shares. The increase in reserves "is a real issue. I'm hopeful it won't impact the company too much."
Medical costs consumed US$0.846 of each premium dollar in the second quarter, down from US$0.857 a year earlier as the company raised prices.
Cigna expects to determine sometime during the third quarter whether additional reserves are needed for its variable annuity business, Chief Financial Officer James Stewart said. Cigna has to make up any difference between the market value and a guaranteed death benefit under the contracts.
Standard & Poor's Rating Services cut its outlook on Cigna debt to "negative" from "stable" after the disclosure.
"I think Cigna's earnings are fine. They're talking about reserves, but that's a one-time hit and it's not an earnings issue," said Basu Mullick, who manages about US$3 billion for Neuberger Berman, which owned about 3.1 million Cigna shares as of March 31.
Cigna reported net income excluding investment income of US$279 million, or US$1.95 a share, in the second quarter, compared with US$262 million, or US$1.73, a year earlier. It was expected to earn US$1.96 a share, the average estimate of analysts surveyed by Thomson/First Call.
"Our results were consistent with expectations, but below our potential," said H. Edward Hanway, Cigna's chairman and CEO, in the statement. "We are not satisfied with aggregate earnings levels."
The company's bottom line was helped this year by elimination of some acquisition expenses under an accounting change. The year-ago net income figure was reduced by US$12 million because of expenses for amortizing goodwill, the difference between the net value of assets acquired in takeovers and the prices paid.
Cigna said it still expects to earn US$7.85 to US$8.15 a share this year. Some on Wall Street expected the company to cut its earnings forecast because of membership declines, Credit Suisse First Boston Inc analyst Joseph France said in a note to investors.
Profit in Cigna's health-care business improved to US$228 million from US$204 million in the year-ago quarter, led by gains in health maintenance organizations.
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