CIGNA posts $877 million shortfall in third quarter

The insurer pledges to correct the decline in earnings by instituting cost-saving measures, including job cuts.

By Mike Norbut, amednews staff. Nov. 18, 2002.

Blaming its own exuberance and miscalculations, CIGNA Corp. announced a net loss of $877 million in the third quarter, and executives said the company would be subject to an informal inquiry by the Securities and Exchange Commission.

At a time when many health insurers have announced earnings that exceed Wall Street estimates, CIGNA is facing the ire of investors. Several class action lawsuits were filed on behalf of stockholders in late October, accusing the company of issuing false and misleading statements regarding its financial position.

Cig-nificant loss
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Earlier about CIGNA

The company's stock, which traded at more than $100 a share earlier this year, plummeted into the $30 range in late October. Company executives said the SEC inquiry was related to the drop in stock price, which wasn't shocking to them given the rapid sell-off following the company's earnings warnings.

CIGNA's plan to get back on track, including cost-reduction measures such as job cuts, could cause more headaches for participating doctors down the road, physician advocates said.

"Certainly, if they downsize, the administrative hassles which are already frustrating are just going to get worse," said Tim Norbeck, executive director of the Connecticut State Medical Society. "The more hassles they have, the more expense it will be to physicians."

Based on the poor performance of its health care product, CIGNA's third-quarter earnings, before extraordinary write-offs, were $208 million, or $1.49 a share, down from $273 million, or $1.83 per share, a year ago. Original analyst estimates for the quarter were as high as $2 a share.

CIGNA's third quarter HMO earnings were 7% more than in 2001; its indemnity business, 67% less.

But factored into the quarterly statement were more than $1 billion in after-tax charges related to the company's reinsurance losses in the 1990s, resulting in the $877 million loss.

Executives from the Philadelphia-based company lowered 2002 earnings expectations to between $915 million and $950 million, or between $6.50 and $6.75 a share, and 2003 estimates to between $875 million and $925 million, or between $6.25 and $6.50 a share. Wall Street estimates were about $8 a share for 2002 and about $9 a share for 2003.

CIGNA executives pledged to turn the business around with new leadership and a streamlined infrastructure, estimating that the restructuring effort would cost the company about $100 million. Industry analysts, however, were still wary.

"The results are discouraging relative to others in the industry," said Todd Richter, an analyst with Banc of America Securities in New York City.

Standard & Poor's analyst Shellie Stoddard cited "challenges in underwriting, pricing, service and expenses which are expected to reduce operating earnings significantly in both 2002 and 2003" as a reason for lowering the insurer's credit rating. But CIGNA continues to have a strong business position, based largely on its other businesses besides health care.

CIGNA insures more than 13 million lives with its health care plans and millions more in the dental and behavioral health care fields, most of them in the eastern half of the country. It is the only major player in the health care market to offer other products beyond health insurance, such as life and accident insurance and benefits administration services.

CIGNA's recent financial dilemma seems to be the exception to the rule, but its plans to cut jobs may not be so rare.

Hartford, Conn.-based Aetna Inc. recently reported third-quarter earnings that beat analysts' estimates, though the company had announced its plans to lay off more than 15% of its staff earlier this year. Several other insurers, including Anthem Inc., WellPoint Health Networks Inc., Humana Inc., and PacifiCare Health Systems Inc., recently reported healthy third-quarter earnings, many of them beating analysts' estimates.

Wrong judgment

Pricing "misjudgments" in the face of stiff competition, especially in the indemnity business, along with increased spending to raise service levels were to blame for the poor quarter, CIGNA Chair H. Edward Hanway said.

"In some cases, we reduced margins on renewals and new sales to retain existing members," Hanway said. "Our renewal was at less-than-target levels."

CIGNA's restructuring effort will cost about $100 million.

While CIGNA's HMO earnings increased 7% over the third quarter of 2001, its indemnity business declined 67%. The company reduced its estimate of indemnity members from about 7.3 million to about 6.4 million, though executives say it will not impact revenues or operating income. Improved technology has led to a more detailed estimate of membership beyond the typical formula used by health plans, executives said.

Hanway classified 2003 as a rebuilding year, an assessment with which analysts agreed.

"I think it's a big deal, but I think they'll get back on track," Richter said. "The earliest they can make any headway is 2004, because pricing for 2003 has already been set."

In a conference call Nov. 1, Hanway addressed the question of why CIGNA executives didn't realize the company's financial troubles until the third quarter. "A detailed third-quarter review of that book of business showed the misjudgments," he said. "Our front-end monitoring was not effective, but the back-end review has been working to fix them."

ADDITIONAL INFORMATION:

Cig-nificant loss

A $1 billion charge-off of reinsurance losses and declines in its health business put CIGNA in the financial hole:

                             Net      Earnings 
          Revenue          results    per share
        ------------   -------------  ---------
 3Q 01  $4.8 billion    $270 million    $1.81 
 3Q 02  $5.2 billion   -$877 million   -$6.27
                                             
YTD 01  $14.2 billion   $798 million    $5.26
YTD 02  $15   billion  -$445 million   -$3.16