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Keith Gulledge Consultant Acumen Learning, LLC February 28, 2014 Cigna Q4 & Full Year 2013 Quarterly Alumni Review Call and Follow-up from Business Acumen.

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Presentation on theme: "Keith Gulledge Consultant Acumen Learning, LLC February 28, 2014 Cigna Q4 & Full Year 2013 Quarterly Alumni Review Call and Follow-up from Business Acumen."— Presentation transcript:

1 Keith Gulledge Consultant Acumen Learning, LLC February 28, 2014 Cigna Q4 & Full Year 2013 Quarterly Alumni Review Call and Follow-up from Business Acumen Learning Class 1

2 4th Quarter 2013 Earnings Call Review The intent of Cigna University is to help us understand the numbers in the context of our overall Business Acumen training and the 5 Business Drivers. My role is not to editorialize or speculate about business decisions, the sufficiency of communications to investors, or other business matters. 2 The focus is to understand the quarterly earnings report, the highlights of the earnings call, and what Cigna’s financial results and 2014 outlook mean as related to the 5 Drivers and how Cigna makes money.

3 In conjunction with Keith Gulledge Q4-2013–Earnings Call Review Preparation we hope you have made: 1.Listen to or read the Transcript of the Q Earnings Call on February 7, Quarterly News Release 3.Quarterly Financial Supplement 4.Conference Call worksheet 5.Navigating the Financials—FY 2013 (end of worksheet file) 3 Thank you for joining us! Call will last approximately one hour.

4 Preparation Worksheets 4

5 5 My Preparation  News Release  Financial Supplement  Transcript

6 Agenda – 1 Hour  Introduction & Review 5 Drivers10 min.  Key Messages & Financial Analysis40 min.  Overview  Performance: Cash, Profit, Asset, Growth, People, other factors  Analyst Questions & Discussion  Outlook and Guidance for 2013  Wrap up – Q&A 10 min. These and other workshop slides and materials available for.PDF or.PPT download at: 6 Q Cigna Earnings Call Summary

7 Earnings Call Participants  David M. Cordani—Cigna President and CEO  Thomas A. McCarthy—Cigna CFO and Executive VP  Edwin J. (“Ted”) Detrick—Cigna VP of Investor Relations  13 analysts from:  Goldman Sachs  JPMorgan Chase  Bank of America Merrill Lynch  Barclays Capital  Cowen and Company  Citigroup Inc.  Morgan Stanley & Co.  Deutsche Bank  Jefferies LLC  Credit Suisse AG  Susquehanna Financial Group  UBS Investment Bank  Leerink Swann & Company 7

8 Importance of Earnings Calls 8 Q Earnings Call—Oct. 31, 2013

9 Importance of Earnings Calls 9 Q Earnings Call—Feb. 7, 2013 Feb % Jan % Q Earnings Call Feb Q3 Earnings Call Oct

10 5 Key Drivers: Review Why is CASH important? Invest back into the business Pay Overhead Costs Acquisitions Capital Expenditures Return value to Shareholders Dividend payments Stock Repurchases Cash Balance and Cash Flow (NOT same as Profit) Profit = Revenue ▬ Expense Indicators: MCR Operating Profit Net Margin EPS Profit is a calculation per GAAP for financial and tax reporting to match Revenue and Expense MEET, EXCEED, then ANTICIPATE Customer Needs Strength Liquidity Equity to Assets Utilization ROA ROE ROI Asset Balance Employees & Customers, Clients Growth is a MEASURE and a STRATEGY 2 Types of Growth : Organic & Inorganic Importance: Investors expect Employees energized Customers attracted Executives measured CEO’s #1 Job: Grow shareholder value “Financial Leverage” 10

11  13 analysts 26 questions plus follow-ups  Dominant questions and discussion: PROFITABLE GROWTH driven by PEOPLE (Customers, Markets) + COST PRESSURES Overview of Q Earnings Call  14 or 54% PROFIT – Costs, Revenue—in context of GROWTH & COST PRESSURES  8 or 31% GROWTH STRATEGY – context of COST PRESSURES, justification for Revenue and Profit assumptions including questions about Segment growth  2 or 7.5% CASH – Capital deployment priorities, dividends, stock buy-backs  2 or 7.5% PEOPLE – Exchanges, Customer segments, Medicare Advantage  No direct questions on ASSETS other than CASH use Analysts’ questions by topics (many questions addressed more than one Driver): 11

12 Initial SEC Disclaimers 1.Non-GAAP financial measures 2.Primary measures of performance:  “adjusted income from operations”  “adjusted earnings per share” 3.Reconciliation with GAAP measures 4.“Forward looking comments”—risk factors. “Guidance” or “outlook” not “forecasts” or “projections” Management is accountable for its outlook Formality: Ted Detrick ― standard financial disclaimers per SEC regulations: 12

13 “Our strong full year 2013 results has been outstanding track record of financial performance and marks Cigna's fourth consecutive year of competitively attractive financial results. All of our business segments contributed meaningfully to our results for the year with each segment delivering earnings and revenue growth.” ─ David Cordani, CEO Q Earnings Call 13 Summary: Cigna’s 2013 Performance Strategic accomplishments: 1.Exit run-off business, Buffett deal improves financial flexibility 2.Catamaran deal, improves PBM capabilities & financial benefits 3.Deepen global footprint, growth markets: Turkey, India, China 4.Advanced capital health, strengthened balance sheet, significant free cash flow

14 Summary: Cigna’s 2013 Performance ─ David Cordani, CEO Q News Release 14 “Cigna's operating performance in 2013 was strong, driven by the continued effective execution of our strategy which resulted in improved health outcomes and productivity for our customers and clients. “In the midst of an environment undergoing rapid change and disruption, our focused strategy and differentiated capabilities will enable us to deliver continued future growth.”

15 Cigna FY 2013 performance  Revenues: UP 11% to $32.4 billion  Adjusted Income from Operations: UP 11% to $1.93 billion  Adjusted Income from Operations per share: UP 13% to $6.79  Premiums and Fees: UP 11% to $28.87 billion  Q4 Revenues: UP 7% to $8.15 billion  Q4 Adj. Inc. from Ops.: DN 14% to $387 million Overview of Q4 & FY 2013 Cigna 2014 Outlook  Revenue—UP 4% to 7% over 2013  Adjusted Income from Operations — $1.9 B to $2.0 B – UP 0% to 3.5%  Adjusted Earnings per Share from Ops.— $6.80 to $7.20 – UP 0% to 6% Primary Q Earnings Call Themes  Profitability in 2013 and Outlook for 2014  Impact of Costs on future Growth  Analysis of assumptions underlying Growth Outlook 15

16 Segment Review: FY Global Health Care: 79.9 % Rev.-On. Ops; 76% Profit a.Premiums and fees UP 9% to $23 billion b.Adj. Income fr. Ops: UP 6% to $1.6 billion— Strong revenue growth in specialty; operating expense efficiencies; good medical costs in Commercial c.GHC Operating Exp. Ratio: 21.7% − DN 90 bps d.US Commercial: Cost trend below 5% f.85% of US Commercial customers are ASO g.US Commercial Risk: Reflects strong pricing; MCR = 81.5% GAAP; 82.32% X-PCD; Q higher than Q4 2012—within normal range h.Seniors business: MCR for MA—84.8% (or 85.2% X-PCD)− revenue pressure, higher medical costs, lower gov’t. reimbursements; claims pressure continues 16

17 Segment Review: FY Global Supplemental Benefits: 8.3% Rev. On. Ops.; 8.7% Profit a.Attractive Growth and Profitability b.Premiums & fees UP 27% to $1.984 B Acquisitions: Great American Supplemental Benefits; Turkey—Finansbank JV; also customer retention and new business growth c.Adj. Inc. fr. Ops: $183 mill. UP 24% d.Continue to fund strategic investments for future Growth 3.Group Disability and Life: 11.8% Rev. On. Ops % Profit a.Premiums & fees UP 10% to $3.425 billion b.Adj. Inc. fr. Ops: UP 11% to $311 million 4.Remaining Operations a.Run-off Reinsurance, Other & Corporate: ($134) M loss after tax 5.Overall: Strong revenue & earnings, significant Free Cash Flow 17

18 CASH Performance GROWTH Consolidated from all Segments 1 Special Item is cash paid to Berkshire Hathaway to effectively exit the Run- off Reinsurance business. 18

19 CASH – Capital Deployment Priorities “Our capital deployment strategies and priorities have not changed.” These priorities are: Growth of our ongoing operations; M&A activity to further grow in our targeted areas of focus; and Return capital to shareholders—primarily through share repurchase. ─ Tom McCarthy, CFO — Q Earnings Call 19

20 CASH: Discussion Points 1.Two questions: dividends, M&A, stock repurchase 2.Pension funding: In 2014 about $100 million funding (DN from $250) 3.No change in capital deployment priorities 4.No change in dividend policy 20

21 CASH: Capital Management Report Capital Deployment: 2013 & 2014 $ 760 M 2013: Year-end Parent Company Cash $ 760 M $ 1.0 B 2013: Repurchased 13.6 mill. shares of stock $ 1.0 B $ 1.6 B 2014: Dividends to Parent from Subsidiaries $ 1.6 B $ 250 M 2014: Set-aside for liquidity needs $ 250 M $ 1.8 B* 2014: Available for Capital deployment* $ 1.8 B* $ 225 M* *Jan-Feb 2014: Repurchased 2.6 mill. Shares of stock $ 225 M* “Overall, we continue to have good financial flexibility. Our subsidiaries remain well capitalized and are generating significant free cash flow to the parent, with strong return on capital in each of our ongoing businesses.” ― Tom McCarthy, CFO Pension Funding 2014—Expect $100 million, down from $250 million 21

22 PROFIT Performance Earnings per Share (EPS) are diluted GROWTH 22

23 PROFIT & GROWTH: Discussion Points 1.Tom McCarthy: Q4 organizational efficiency plan―$40 mill. Special Charge. Annual $45 M after-tax savings, $30 M in Explanation for 2013 margins 3. Guidance explanation for 2014 margins 4. Medicare Advantage MCR or MLR trends 5. MA costs—Different physician engagement models 6. Explanations for margins, medical costs 7. Public and private exchanges—profitability 8. Margins in and costs in each Segment 9. Catamaran effect on PBM profitability 10. ASO / stop-loss / risk-based business—costs and margins 11. CACs—impact on cost-sharing performance 23

24 ASSETS Performance Equity Ratio = Equity ÷ Assets ROE uses Adj. Inc. fr. Operations GROWTH When Analysts talk about Cigna’s Assets, they are usually referring to the business portfolio of products and services, or to the business units, such as HealthSpring. 1 Liabilities adds redeemable non- controlling interests of Finansbank 1 24

25 ASSETS: Questions & Discussion 25  No direct questions about ASSETS except regarding CASH, M&A Strategy, Catamaran  Exec comments re strength of our Balance Sheet  Investment portfolio: $141 M gain; pleased— quality and diversification

26 Overall Long-term Strategy: GROWTH “Cigna's businesses have the strategic direction, focus and core capabilities to anticipate, adapt and win in the global market. Our core strategy of Going Deep, Going Global and Going Individual continues to guide our company around the world. And by executing this strategy in our target markets and in new ones when we see opportunities, our capabilities are delivering differentiated values for our customers, clients and shareholders.” ― David Cordani, Q Earnings Call 26

27 GROWTH & PEOPLE * Adjusted Margin After Tax = Adj. Inc. fr. Ops. After Tax ÷ Segment Revenues Performance by Segments for Full Years: Policies & Lives in 000’s PEOPLE Medical customers up by 172,000 in Favorable prior year reserve development. PEOPLE PEOPLE 27

28 28

29 GROWTH: Discussion Points 1.Growth outlook for Global Supplemental Benefits 2.M&A future strategy—capital deployment 3.Explanation of Cigna’s 2014 Growth Outlook—industry flat 4.Global Health Care as a slow-growth business 5.Regional and Select Segment growth outlook 6.Growth of risk-based vs. ASP/self-insured 7.Need new markets with well-developed physician engagement 29 Almost all questions linked to Growth. Analysts concerned about assumptions sustaining Growth outlook Almost all questions linked to Growth. Analysts concerned about assumptions sustaining Growth outlook

30 PEOPLE: Discussion Points : CAC relationships increased customers by 50% or 400, CACs—up from 52 end of Public exchange business—enrollment experience 4.Private exchange business—early stages of innovation 5.Cigna has launched proprietary private exchange 6.Modest MA membership Growth for

31 EXTERNAL FACTORS 1.Disruptive market forces 2.Changing client & customer needs 3.Aging population 4.Growing middle class 5.Rising chronic illness levels 6.Affordability pressures 7.Uncertain Medicare Advantage reimbursements 8.Cost pressure 9.Reduction in hospital reimbursements—gov’t. cuts 10.Public exchange implementation challenges 11.Changing physician reward structures 31 “Challenging marketplace.”

32 EXTERNAL FACTORS: Global Strategy 1.Customer insights and engagement: a.Identify customer needs b.Determine proper distribution channels 2. Consultative distribution: a.Brokers and consultants for employers b.Affinity partners: banks, financial institutions c.Individual direct: internet, TV, direct response d.Proprietary private exchanges 3. Care delivery and physician engagement: a.Differentiated approach: care extenders, actionable information b.86 CAC initiatives, 1.2 million customers 32 David Cordani: Three KEY AREAS to focus on to succeed in Global Markets:

33 2014 Outlook 2014 Outlook AIO = Adjusted Income from Operations 1.Revenue Growth: UP 4% to 7% over Adjusted Inc. from Operations: $1.9 to $2.0 B (2013 = $1.932 B) UP 0% to 3.5% 3.Adjusted Inc. fr. Ops. EPS: $6.80 to $7.20 (2013 Adj. EPS = $6.79) UP 0% to 6% 4.Global Health Care―AIO: $1.58 B to $1.64 B (2013 = $1.57 B: UP 5%-9% X-PCD)  Medical Customers UP 1% to 2%  Medical Cost trend—US Commercial UP 5% to 6%  MCR—US Commercial guaran: 80% to 81% (2013 = 81.5% GAAP/82.3% X-PCD)  Seniors—Medicare Advantage: MCR—84% to 85% (2013 = 84.8% GAAP/85.2% X-PCD)  Operating Expense Ratio: Same—22.5% to 23.5% (130 bps indus. fee & tax impact―2013 = 21.7%) 4.Global Supp. Benefits―AIO: $195 to $215 M (2013 = $183 M, UP 7% to 17%) 5.Group Disability & Life―AIO: $305-$325 M (2013 = $311 M, DN 2% to UP 5%) 33

34 2013 Summary “Our outstanding performances are made possible by the passion and focus of our 35,000 colleagues who are deployed around the world. And our Go Deep, Go Global, Go Individual strategy has enabled us to grow over the long- term in the midst of environment that continues to undergo considerable change and disruption.” ― David Cordani, CEO Q Earnings Call 34 “By leveraging our flexible and transferable capabilities across the globe which include our ability to have a deep understanding of our customers, use of complicated distribution and physician capabilities, we will continue to compete and win in the global markets for the benefit of our customers, clients and shareholders.”

35 2014 Outlook: David Cordani “…we will successfully execute our focused strategy and leverage our differentiated capabilities…with the objective of delivering differentiated value for our customers and clients. “…we are confident in achieving our full year outlook for And we remain committed to our long-term EPS growth outlook of 10% to 13%.” 35  2014—Grow US and Global Health Care and Global Supplemental businesses  Strengthen Group Disability and Life  Will offset market disruption in US Seniors business  Global markets will continue to be disrupted ― David Cordani, CEO Q Earnings Call


37 Encouragement & Challenge Quarterly review of Cigna’s financial performance  Investor Relations section of website  Financial information each Quarter Listen to quarterly Earnings Call or review transcript Quarterly reviews of competitors, industry, economy Continue to watch stock performance Consider how your decisions impact business Growth Teach your teams QUESTIONS & COMMENTS? 37

38 2014 Business Acumen Events Cigna University A recording will be available after this call.  Block your calendars for Quarterly Alumni Review Calls –May 16 th (Q1 2014) ; August 22 nd (Q2 2014) ; November 20 th (Q3 2014) –Start time either 1 pm or 2 pm EST  Review each month’s e-newsletter: –Published the last week of each month –Use these concepts and ideas to drive team discussions –As of today, you all have subscriptions!  Nominate managers and leaders for the 2-day Business Acumen Learning class (through HRGs) –April 8-9: Phoenix, AZ, Norterra –April 22-23: Bloomfield, CT, Cigna University Training Center –April 24-25: Bloomfield, CT, Cigna University Training Center –September 9-10: Bloomfield, CT, Cigna University Training Center –October 7-8: Nashville, TN, 1000 Corporate Center Drive, Franklin 38

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