Managed care companies enjoyed a healthy bounce on Monday.

Cigna ( CI) surged to a 52-week high after promising robust first-quarter profits. Oxford ( OHP) also hit a fresh peak after The Wall Street Journal reported that the company is in play. WellChoice ( WC), named as Oxford's suitor, stood out as a rare decliner among the health insurance group.

Cigna posted the biggest gain in the sector, jumping 12% to $67.84 after the company raised its first-quarter guidance far above current Wall Street estimates. The company said it expects to deliver first-quarter earnings of $1.75 to $1.95 per share, which would topple the consensus estimate of $1.33 per share. It also raised the bar for full-year earnings, although it gave no specific EPS target because share repurchases will have an unknown impact on the final number.

Cigna credited its big health insurance division for the upside surprise.

"Our increased earnings expectations are a strong indicator of our success in managing medical costs and improving our overall operating efficiency," stated Cigna CEO Edward Hanway. "The first quarter of 2004 marks the third consecutive quarter of fundamental improvements in Cigna HealthCare."

The division benefited from lower medical costs, driven by reduced utilization as well as expense cutbacks and a "significant" prior-period development.

Merrill Lynch analyst Doug Simpson quickly raised his projections for the company to the middle of management's new guidance. He also took a more optimistic stand on the industry in general.

"This announcement should bode well for first-quarter medical cost trends in the industry and specifically for other large-cap names such as Anthem ( ATH) and United ( UNH)," wrote Simpson, who maintained his neutral rating on Cigna.

Goldman Sachs analyst Matthew Borsch had already grown more upbeat about Cigna even before this week's news. Early Monday, Borsch reinstated his coverage of Cigna with an in-line rating -- up from the underperform rating he suspended last summer -- after growing more confident in the company following recent meetings with management. He cited improvements in the company's medical trends and expenses as reasons for his more favorable outlook.

Still, he stopped short of recommending Cigna's shares and pointed to Aetna ( AET) and UnitedHealth as better buys.

"We have increasing confidence that Cigna will perform well relative to low investor expectations," Borsch wrote. But "we still see significant risks in Cigna's turnaround."

Meanwhile, Oxford bounced on takeover rumors and an analyst upgrade. The regional health insurer jumped 9.5% to $55.10 on expectations that it will soon join forces with WellChoice to become a powerhouse in the northeastern United States. According to The Wall Street Journal, WellChoice "is in advanced talks" with Oxford about an all-stock buyout priced 25% above where Oxford shares closed last week. The combined company would control nearly half of the New York City market that already represents a stronghold for both parties involved.

Citigroup analyst Charles Boorady promptly upgraded Oxford to buy because he believes the company has a 40% chance of being acquired by WellChoice or another bidder. But he also warned that Oxford shares could suffer if the transaction unravels.

"If the deal with WellChoice to acquire OHP falls through," he explained, "it may raise concern that something may be wrong at OHP."

But Advest analyst Robert Mains points to the acquisition as a real possibility that may finally give Oxford shareholders a strong return on their money.

"Oxford has long been subject to takeover rumors," stated Mains, who has a neutral rating on the stock. "It is the leading HMO in an attractive but limited market ... that delivers strong performance and lots of cash but trades at a below-peer multiple. ... This could be a positive for Oxford shareholders."

The merger would strengthen WellChoice also. Right now, WellChoice depends on huge government contracts that, if canceled, could significantly hurt earnings. Oxford would bring to the table more of the smaller contracts that WellChoice is seeking in an effort to diversify its client base.

WellChoice, which slid 3% to $36.30 early Monday, recovered most of that lost ground as the day wore on.

Still, the company could face hurdles. Specifically, it must gain regulatory approval to move ahead with any Oxford buyout. And it may fail if government officials worry about one company controlling 40% of the New York City market.

But Mains, for one, believes WellChoice may have a feather in its cap already. He pointed out that the company was deemed the most compliant in a recent undercover study conducted by the office of New York Attorney General Eliot Spitzer. In that study, WellChoice scored a B -- the highest grade given -- for providing information to potential customers with specific health problems. The vast majority of insurers surveyed scored D's or F's on the same test.

"New York State will likely be concerned about market concentration issues," Mains admitted. But "WellChoice may have a 'halo' to help it through the acquisition process."

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