CIGNA Q3 2010 Earnings Call Transcript

CIGNA Q3 2010 Earnings Call Transcript
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Q3 2010 Earnings Call

October 29, 2010 8:30 am ET


Thomas McCarthy - Acting Chief Financial Officer

Edwin Detrick - Vice President of Investor Relations

David Cordani - Chief Executive Officer, President, and Director


Ana Gupte - Bernstein Research

Joshua Raskin - Barclays Capital

Justin Lake - UBS Investment Bank

Sarah James - Wedbush Securities Inc.

Carl McDonald - Citigroup Inc

Charles Boorady - Crédit Suisse AG

Matthew Borsch - Goldman Sachs Group Inc.

Joshua Marine

John Rex - JP Morgan Chase & Co

Doug Simpson - Morgan Stanley

Christine Arnold - Cowen and Company, LLC



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Ladies and gentlemen, thank you for standing by for CIGNA's Third Quarter 2010 Results Review. [Operator Instructions] We'll begin by turning the conference over to Mr. Ted Dietrich. Please go ahead, sir.

Edwin Detrick

Good morning, everyone, and thank you for joining today's call. I am Ted Detrick, Vice President of Investor Relations. And with me this morning are David Cordani, our President and Chief Executive Officer ; and Tom McCarthy, CIGNA's acting Chief Financial Officer.

In our remarks today, David will begin by commenting on CIGNA's third quarter results and our continued progress on executing on our growth strategy. He will also provide insights into the approaches that CIGNA has taken to improve engagement of individuals and health care professionals, with the goal of driving better health outcomes while reducing costs.

Tom will provide a review of the financial results for the quarter and will discuss the full year 2010 financial outlook. Then David will make some comments regarding early thoughts on 2011. We will then open the lines for your questions. And then following our question-and-answer session, David will provide some brief closing remarks before we end the call.

Now as noted in our earnings release, CIGNA uses certain non-GAAP measures when describing its financial results. A reconciliation of these measures to the most directly comparable GAAP measure is contained in today’s earnings release, which was filed this morning on Form 8-K with the Securities and Exchange Commission and is posted in the Investor Relations section of

Now in our remarks today, we will be making some forward-looking comments. We would remind you that there are risk factors that could cause actual results to differ materially from our current expectations, and those risk factors are discussed in today’s earnings release.

Now before turning the call over to David, I will cover a couple of items pertaining to our third quarter results. Relative to our Run-off Reinsurance operations, our third quarter shareholders' net income included an after-tax, non-cash loss of $10 million or $0.04 per share related to the Guaranteed Minimum Income Benefits business otherwise known as GMIB.

I would remind you that the financial impact of the Financial Accounting Standards Board's fair value disclosure and measurement accounting guidance on our GMIB results is for GAAP accounting purposes only. We believe that the application of this guidance is not reflective of the underlying economics, as it does not represent management's expectations of the ultimate liability payout.

Because of the application of this accounting guidance, CIGNA's future results for the GMIB business will be volatile as any future change in the exit value of GMIB's assets and liabilities will be recorded in shareholders net income. And CIGNA's 2010 earnings outlook, which we will discuss in a few moments excludes the results of the GMIB business, and therefore, any potential volatility related to the prospective application of this accounting guidance.

Now another component of our Run-off Reinsurance operations is the guaranteed minimum death benefit product, otherwise known as VADBe. Unlike the GMIB business, the financial results for VADBe are included in CIGNA's adjusted income from operations.

Now during our second quarter call, we indicated that if the environment of sustained equity market volatility and low levels of interest rates were to continue, then we would need to strengthen our VADBe reserves, which would result in a charged earnings of up to $50 million after-tax. Because the low level of interest rates did persist during the quarter, we increased our VADBe reserves, which resulted in a recording of a non-cash, after-tax loss of $34 million or $0.12 per share in the third quarter.

And with that, I will turn it over to David.

David Cordani

Thanks, Ted, and good morning, everyone. Before Tom reviews our third quarter results and full year outlook, I'll take a few minutes to cover a couple of topics. I'll briefly comment on our performance in the context of our growth strategy.

Last quarter, I profiled the International business, so this quarter, I'll profile our U.S. businesses. Here, I'll provide insights into the unique approaches we're taking to improve the delivery of care by engaging individuals and health care professionals in our effort to improve health and productivity. So let's get started.

Relative to our third quarter, I'm pleased with our earnings of $1.10 per share and the results of each of our ongoing businesses: International, Group Disability and Life and Health Care. These results demonstrate the strength of our diversified portfolio of products and services and the effective execution of our global growth strategy. This strategy focuses on providing differentiated service in clinical programs, which drives clients and customer retention and attractive new sales in our targeted geographies and customer segments.

Within our Health Care business, results include ongoing superior clinical program outcomes and the continuation of the industry-wide trend of lower-than-expected medical utilization. It's important to remember that approximately 90% of our Medical customers are in self-insured or experienced rate of business arrangements. Therefore, lower utilization directly benefits our corporate clients and their employees in the form of lower total medical costs.

Now I'll dig in a bit further into the success we're having with the execution of our growth strategy and how they connect to these results. As a reminder, the strategy is to Go deep, Go global and Go Individual.

The Go Deep component means we're building a leadership position in targeted markets, product lines and customer segments by focusing on specific groups such as Middle Market, where we have over 8% customer growth; and in the Select segment, where we have approximately 9% customer growth; by targeting markets and geographies in the U.S. and abroad, where we currently have an attractive existing portfolio and our growth outlook is favorable, while leveraging our product strength such as a Disability product, where we have strong new business sales.

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