Cigna

(CI) - Get Report

no longer looks like the clear-cut underdog in the managed care game.

Instead of disappointing investors -- as competitor

Aetna

(AET)

did last week -- Cigna turned in a solid performance for the second quarter and raised the bar for the entire year. Cigna's latest results, which blew past Wall Street estimates, helped win back some fans who had grown increasingly nervous about the company's aggressive pricing strategy.

Shares of Cigna bounced 11% to $102.98 on the update. The stock fell below $90 earlier this summer, when the company disclosed its low premium prices, and the shares approached those levels again last week after Aetna suffered from some misguiding pricing moves of it own.

But Cigna had a different story to tell. Importantly, the company managed to grow its medical membership base while keeping its expenses -- including its all-important medical costs -- under control.

"Our overall results during the second quarter of 2006 were strong and reflected continued execution of our strategic priorities," CEO Edward Hanway announced on Wednesday. "Adjusted income was ahead of our expectations, and our health care membership remains on track to grow organically this year."

Cigna's third-quarter revenue of $4.1 billion, while down slightly from last year, came in just ahead of the $4.03 billion consensus estimate. Net income spiraled 62% to $273 million due to the absence of profits from discontinued operations. However, adjusted earnings per share of $2.31 easily beat Wall Street's $1.94 target.

Following that recent outperformance, Cigna now expects to post full-year earnings of $8.30 to $8.80 a share. Analysts, on average, were looking for 2006 profits of $8.25 instead.

Healthy Results

Analysts felt that all of Cigna's business units, including its crucial health care division, helped contribute to that upside.

John Rex of Bear Stearns highlighted strengths across the health care division in particular. There, total enrollment inched up slightly to 9.02 million instead of falling as he had expected. Segment earnings, lifted by a favorable reserve adjustment, beat his target as well. But the company's medical costs, a crucial metric for insurers, seemed to please him most of all.

Notably, he pointed out, Cigna's "all-in" medical cost ratio of 80.2% excluding reserve adjustments -- and 78.9% including them -- showed improvement from one quarter ago.

"In the context of a quarter where concerns about cost ratio movements have been heightened, we view

Cigna's results as showing relative stability and believe

this will be somewhat of a relief," Rex wrote on Wednesday. That development, he added, could provide a "potentially favorable read-through for the group."

Rex has an overweight recommendation on Cigna's stock. His firm does and seeks to do business with the companies it covers.

Meanwhile, other health insurers rallied on Cigna's report as well. Aetna, pounded for its rising medical costs just last week, climbed 2.7% to $31.83 on Wednesday morning.

UnitedHealth

(UNH) - Get Report

, dragged down last week as well, also rose 2.7% to hit $49.12.

Bullish Call

Now, at least, a bullish call on Cigna looks a little better.

Deutsche Bank analyst Scott Fidel initiated coverage of Cigna a couple of weeks ago with a buy recommendation and a $120 price target on the company's stock. But Aetna soon followed up with its report of rising medical costs and pulled the whole group down.

Following Wednesday's gain, however, Cigna has regained most of that lost ground and fetches nearly the same price as it did when Fidel first started covering it. In a nutshell, here is why Fidel recommended the stock in the first place.

"Cigna's acknowledgement of using price concessions to retain certain business will likely mean the

price-to-earnings multiple will continue to trade at a discount to peers," wrote Fidel, whose firm provides investment-banking services to Cigna and owns at least 1% of the company's stock itself. "However, we find the shares attractive at current discounted levels since the company could continue to produce EPS growth that meets or exceeds current Street estimates, driven by capital deployment and improving growth prospects."

Indeed, Cigna has since followed through by handily beating analyst expectations with help from aggressive stock repurchases and a growing membership base.

Fidel, for one, sees opportunities for ongoing improvements ahead. Looking forward, Fidel believes that Cigna could increase enrollment by 1% to 2% in 2006 and by another 2% to 3% in 2007. While modest, he admits, this growth would represent a "meaningful directional improvement" over recent years -- when membership plummeted by more than 32% due to poor perception of the company's products and services.

Moreover, Fidel points out, Cigna has made a big push into consumer-driven health plans that could significantly boost enrollment going forward. A relatively latecomer to the consumer movement, Fidel notes, Cigna has recently purchased some consumer-oriented companies -- and even snagged some Definity executives away from UnitedHealth -- in an effort to finally capitalize on this fast-growing market. As a result, Fidel projects, Cigna has emerged as the number-five player in the consumer movement and looks positioned to triple its CDHP customers over the course of this year.

Cigna specifically highlighted its consumer division as an important growth driver when issuing its upbeat second-quarter report on Wednesday.

Banc of America analyst Joseph France clearly expected bad news from the company instead. With some ill timing of his own, France last week downgraded Cigna from neutral to sell after Aetna rattled the entire managed care space.

"Cigna has already acknowledged that it is pricing aggressively to keep its existing book, but still lost 211,000 lives ... in the first quarter," France noted at the time. Now, "we think the developments at Aetna will bolster investors concern about Cigna's pricing issues."

Personally, France expected Cigna to miss -- rather than beat -- second-quarter expectations. He recommends underweighting the group as a whole. His firm owns at least 1% of Cigna's stock and has business ties to the company and to some of its competitors as well.