The Cigna Group

Ladies and gentlemen, thank you for standing by for Cigna's third quarter 2019 results review. At this time, all callers are in a listen-only mode. We will conduct a question and answer session later during the conference and review procedures on how to enter queue to ask questions at that time. If you should require assistance during the call, please press star zero on your touchstone zone. As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. We'll begin by turning the conference over to Mr. Will McDowell. Please go ahead, Mr. McDowell.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. With me this morning are David Cordani, our President and Chief Executive Officer, and Eric Palmer, Cigna's Chief Financial Officer. In our remarks today, David and Eric will cover a number of topics, including Cigna's third quarter 2019 financial results, as well as an update on our financial outlook for 2019. As noted in our earnings release, when describing our financial results, Cigna uses certain financial measures, adjusted income from operations, and adjusted revenues, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders net income and total revenues respectively, is contained in today's earnings release, which is posted in the investor relations section of Cigna.com. We use the term labeled adjusted income from operations and earnings per share on the same basis as our principal measures of financial performance. I would remind you that, as previously disclosed, we exclude contributions from transitioning clients from adjusted income from operations and adjusted revenues. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2019 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC. Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Regarding our results... In the third quarter, we recorded an after-tax special item charge of $88 million, or 24 cents per share, for integration and transaction-related costs. We also recorded a special item benefit of $23 million after-tax, or 6 cents per share, for the favorable resolution of a litigation matter. As described in today's earnings release, special items are excluded from adjusted income from operations in our discussion of financial results. Please note that, consistent with past practice, when we make prospective comments regarding financial performance, including our full year 2019 outlook, we will do so on a basis that excludes the impact of any future share repurchases or additional prior development of medical costs. With that, I will turn the call over to David. Thanks, Will.

Good morning, everyone, and thank you for joining our call. Today, I'll highlight Cigna's strong third quarter financial results, which reflect continued momentum across our businesses and including strong earnings growth in our health services business. I'll highlight how our diverse business portfolio and unique capabilities position us to deliver sustained growth in 2019 and over the long term as we continue to serve the needs of employers, health plans, government clients, and individual customers. I will also share initial thoughts on how we will drive strong growth in 2020 as we remain on track to deliver our 2021 EPS target of $20 to $21 per share and cash flow from operations of at least $8.5 billion. Turning to our third quarter results, we again delivered strong performance across our businesses, led by health services and integrated medical. Cigna's consolidated adjusted revenue for the quarter was $35.8 billion, and we grew earnings to $1.7 billion. These results reflect strong retention and continued expansion of our customer relationships and significant ongoing operating cash flow generation, which fueled our strategic capital deployment. In our health services segment, we again delivered significant customer and revenue growth and, as expected, attractive year-over-year earnings growth for the quarter. Our performance in integrated medical was highlighted by customer growth, the expansion of relationships, and ongoing differentiated medical cost management. Our third quarter results give us confidence that we will achieve our increased 2019 outlook for revenue, earnings, and EPS, with expected EPS growth of 18 to 20% over Cigna's strong 2018 performance. As our results continue to demonstrate, our unique configuration of assets enables us to meet the diverse needs of the marketplace, which in turn, positioned us to deliver strong, sustained financial performance for our shareholders. When you consider today's marketplace needs, we continue to confront an affordability challenge in a healthcare environment where, far too often, outcomes are suboptimal. Too frequently, individuals experience issues such as overdiagnosis, inconsistent care coordination, and avoidable hospital readmissions, just to name a few examples. All of this results in higher costs, and missed opportunities for health improvement. At Cigna, we have broad capabilities needed to address these issues and to make the overall healthcare experience a better and more seamless one for those we serve. Our combination of assets brings together the best in medical, pharmacy, and behavioral health to ensure high-quality coordinated care is delivered when and where our customers need it, whether at work, at home, or on the go. Through our capabilities and actions, we're able to keep healthy people healthy, we address risk factors for the healthy at risk, and we coordinate the needed care for chronically ill individuals. All of this positions us to drive affordability and better predictability, one customer and one patient at a time. Because our approach resonates so well in the marketplace, we're able to generate attractive, sustained, long-term performance, including attractive operating cash flows, This results in significant financial flexibility, which is a key strategic asset that supports continued strong performance and long-term growth in a highly disrupted environment. Our sustained financial performance is also fueled by our four growth platforms, health services, commercial employer, government, and international. We're able to drive attractive growth across each of these businesses by effectively leveraging our collective capabilities in coordinating our service offerings to meet the needs of those we serve around the world. For example, in health services, we consistently demonstrate deep expertise in coordinated pharmacy services and unique innovations in clinical programs resulting in leading pharmacy trend performance for the benefit of our employer, health plan, and government clients. Collectively, these continue to drive exceptional customer and client satisfaction, resulting in a projected retention rate of 97% for 2020 and the addition of new business, resulting in, for example, organic prescription growth, which we project will be between $25 and $35 million in 2020. In our commercial employer business, we continue to drive organic customer growth for the 10th consecutive year, best amongst our peers. This includes capitalizing on the meaningful headroom for growth in our select and middle market segments, which comprise approximately 65% of the addressable U.S. commercial employer market. We continue to increase our focus on delivering innovative commercial solutions that address whole-person health needs for employers in the United States and abroad, with medical, pharmacy, and behavioral solutions that we deliver in a fully integrated way. We are also very well positioned for accelerated growth in our U.S. government business. We are excited with the outstanding value proposition we have in Medicare Advantage today and how we are positioned going into 2020, including excellent STARS ratings, with 77% of our customers in four star plus plans next year, and that will increase to 85% in 2021. Leading MPS measures, averaging approximately 70 across all of our markets, and our ability to leverage aligned value-based physician arrangements to provide a well-coordinated care experience for our customers. Together, all this fuels our geographic and product expansion plans for 2020, and gives us confidence we will deliver Medicare Advantage customer growth of at least 10% in 2020. Now, relative to our combination with Express Scripts, we continue to make very good progress here. In 2019, this includes the effective integration of our medical clients into our Credo specialty pharmacy capability, which is largely complete and will be finalized by the end of 2019, and the addition of Express Scripts high-performing home delivery pharmacy to our Cigna network. We've also made Safeguard Rx, RationalMed, and HealthConnect 360 capabilities available to our medical customers, further positioning us to increase choice and access, reduce costs, and help to further avoid gaps in care, and ensure customers get the clinical support they need when and how they want it. As we previously discussed, we also launched several new innovative capabilities available to our commercial and health plan clients. These include our patient assurance program, where our coordinated capabilities enabled us to re-engineer the supply chain, giving our customers access to insulin for a flat $25 copay per month. And our Embark benefit protection program, which brings together the best of our combined capabilities to build a pathway to better affordable care for potentially life-changing gene therapies. As we brought together our businesses, we've continued to deliver strong results, accelerated by the synergies of our combination. Reflecting this performance, we've now increased our revenue and earnings outlook for the third consecutive quarter this year. Now turning our attention briefly to our initial outlook for 2020. We expect attractive EPS growth next year and remain on track to deliver on our 2021 EPS goal of $20 to $21 per share. Our 2019 outlook represents 18% to 20% EPS growth with a midpoint of $16.90 per share. As we step into 2020, I call out a few headwinds from non-recurring items, including first, the absence of prior year reserve development, second, the absence of a tax matter that we favorably settled in the second quarter of 2019, and finally, the return of the health insurance tax. These three items represent a 50-cent headwind as we step into 2020, giving us an adjusted jump-off point of $16.40 at the midpoint. For 2020, we expect to grow earnings per share 10 to 13% over this amount, in line with our long-term EPS growth expectation. This growth will be driven by sustained organic growth across our well-positioned growth platforms, favorable impacts of deleveraging, and further administrative expense synergies. All in, we are positioned for sustained attractive earnings growth for 2020, and remain on track to achieve our strategic goal of $20 to $21 of EPS in 2021. In addition, our strong operating momentum and Capital Light framework will continue to drive attractive cash flow and enhance our strategic and financial flexibility over the intermediate and long term. Now to wrap up, Cigna delivered strong third quarter financial results with continued momentum across our businesses, including earnings growth for health services and integrated medical business, strong retention and expansion of customer relationships, and significant ongoing operating cash flow generation and capital deployment. Collectively, our third quarter results give us confidence we will achieve our increased 2019 revenue and earnings outlook, representing an 18 to 20% EPS growth rate over strong 2018 performance. Our integration of Express Scripts is tracking well, and we are delivering a number of meaningful benefits for our customers, patients, clients, and shareholders. For 2021, we remain on track to deliver $20 to $21 of EPS and cash flow from operations of at least $8.5 billion. We remain committed to delivering 10% to 13% average annual EPS growth over the long term. And with that, I'll turn the call over to Eric.