Cigna Corporation (CI)

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Cigna (CI)

Q4 2011 Earnings Call

February 02, 2012 8:30 am ET

Executives

Edwin J. Detrick - Vice President of Investor Relations

David M. Cordani - Chief Executive Officer, President, Director and Member of Executive Committee

Ralph J. Nicoletti - Chief Financial Officer and Executive Vice President

Herbert A. Fritch - President of Healthspring

Analysts

Scott J. Fidel - Deutsche Bank AG, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

John F. Rex - JP Morgan Chase & Co, Research Division

Justin Lake - UBS Investment Bank, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by for Cigna's Fourth Quarter 2011 Results Review. [Operator Instructions] As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded and we'll begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

Edwin J. Detrick

Good morning, everyone, and thank you for joining today's call. I'm Ted Detrick, Vice President of Investor Relations. And with me this morning are David Cordani, our President and Chief Executive Officer; Ralph Nicoletti, Cigna's Chief Financial Officer; and Herb Fritch, who now leads the Seniors business for Cigna.

In our remarks today, David will begin by commenting on Cigna's full year 2011 results and how our accomplishments in 2010 and 2011, as well as the acquisition of HealthSpring, position us for continued success in 2012 and beyond. Next, Ralph will review the financial results for the quarter and full year of 2011. He will also provide Cigna's financial outlook for 2012. We will then open the lines for your questions. And following our question and answer session, David will provide some brief closing remarks before we end the call.

As noted in our earnings release, Cigna uses certain financial measures which are not determined in accordance with generally accepted accounting principles, or GAAP, when describing its financial results. Specifically, we use the term labeled, adjusted income from operations, as the principal measure of performance for Cigna and our operating segments. And the reconciliation of these measures to the most directly comparable GAAP measure is contained in today's earnings release, which is posted in the Investor Relations section of cigna.com.

In addition, when we discuss our 2011 Health Care financial results and specifically, our results for revenue and membership growth, as well as operating expense ratio, it will be on a basis that adjusts for our exit from non-strategic markets, most notably the Medicare Individual Private Fee for Service business. This adjustment creates a better basis of comparison for explaining our financial results.

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.

Also, please note, that in addition to our earnings release and the quarterly financial supplement, we have made available on our website some additional information to facilitate your understanding of our 2011 results and the specifics of our 2012 financial outlook, which Ralph will discuss in a few moments.

Now before turning the call over to David, I will cover a few items pertaining to our 2011 results and our disclosures for 2012.

Regarding our results, I would note that in the fourth quarter, we recorded an after-tax charge of $31 million or $0.11 per share for transaction costs related to the HealthSpring and FirstAssist acquisition, which we report as a special item. I would remind you that special items are excluded from adjusted income from operations in today's discussion of our 2011 results and our full-year 2012 outlook.

Also as previously discussed, effective January 1 2012, Cigna's adopting new guidance regarding the accounting for the deferral of certain costs related to the acquisition of new or renewal insurance contracts. This accounting change restricts the amount of cost that can be capitalized and accelerates the recognition of certain acquisition costs that previously would have been deferred.

Cigna will adopt this accounting change on a retrospective basis in the first quarter of 2012, recasting prior periods and recording a one-time non-cash charge of approximately $250 million to $300 million directly to shareholders equity.

The impact to recast full year 2011 results for the adoption of this new accounting guidance will be to reduce earnings for our International business by approximately $70 million after tax. We remind you that this accounting change has no impact on the fundamentals of the business. That is, there is no effect on revenues, future cash flows, our statutory capital position or the lifetime profitability of the policy.

Because this accounting change is effective January 1, 2012, the impact of this change is not reflected in our 2011 results that Ralph will discuss in a few moments. However, when David and Ralph provide commentary on our 2012 outlook, it will be on the basis that assumes retrospective adoption of this accounting change with both 2011 and 2012 being recast on a comparable basis.

And one last item, we announced earlier this week that we have completed the acquisition of HealthSpring, effective January 31, 2012. When we discuss our full year 2012 outlook, it will be on a basis which includes the expected results of HealthSpring as of February 1, 2012, excludes any future capital deployment and assumes break-even results for our run-off Guaranteed Minimum Death Benefits business, otherwise known as VADBe. For 2012, we will record HealthSprings' results within our Health Care segment and going forward, we will not report actual HealthSprings-specific earnings or provide an explicit financial outlook for our Seniors business, as we begin to integrate our commercial and Seniors businesses to drive revenue synergies and create improved value for our customers and clients.

With that, I'll turn it over to David.

David M. Cordani

Thanks, Ted, and good morning, everyone. Before Ralph reviews our results and outlook, I'll briefly comment on Cigna's achievements in 2011, and I'll highlight our expectations for the future.

First, we delivered strong revenues and earnings growth for full year 2011. Overall, these results reflect consistent execution of our growth strategy and demonstrate the value we continue to create for our customers, clients and shareholders. Most specifically, our retention, expansion and new business growth in our targeted geographies and customer segments are further evidence of our continued success.

Regarding the fourth quarter, results were consistent with our expectations and reflect continued strong operating fundamentals, as well as considerable investments in our future. These include: Service in clinical staffing for the high levels and growth we are expecting for the first quarter of 2012, and increased spending on branding, technology and product development across all of our emphasized businesses. These investments will continue to support future growth opportunities and strategic positioning. Ralph will describe the financial impact of these investments in a few moments.

Second, 2012 is going to be a significant year for Cigna as we continue to execute our growth strategy. Including the recently announced closing of the HealthSpring acquisition, which will accelerate our expansion into the growing U.S. Senior and Medicare markets. And lastly, we are making ongoing investments into our diversified portfolio to position us to deliver sustainable and attractive earnings growth in 2012 and beyond.

So let's dive in. 2011 was a strong year for Cigna and it marks more than 2 solid years of execution of our Go Deep, Go Global and Go Individual growth strategy. For the full year, we reported the adjusted income from operations of approximately $1.4 billion and delivered earnings and EPS growth of 12%. These results reflect strong organic revenue and earnings contributions from each of our ongoing businesses: Health Care, International and our Group business, demonstrating how our solutions create value for our customers and clients in today's very challenging economic environment.

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