信諾集團 (CI) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's fourth quarter 2002 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.

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As a reminder, ladies and gentlemen, this conference, including the question-and-answer session, is being recorded.

We will begin by turning the conference over to Mr. Greg Deavens.

Please go ahead, Mr. Deavens.

Good morning everyone.

And welcome to CIGNA Corporation's financial results review meeting for the fourth quarter of 2002.

I'm Greg Deavens, Vice President of Investor Relations and with me this morning are Ed Hanway, CIGNA's Chairman and Chief Executive Officer, Mike Bell, our Chief Financial Officer, and Pat Welch, the President of CIGNA HealthCare.

Ed will begin the call with a few opening remarks on the quarter and the year and will provide closing remarks before we respond to questions.

Mike and Pat will also provide prepared remarks.

As a courtesy to others on the call, we would prefer that any detailed questions on the statistical supplement be deferred until after the meeting when we can address them individually as these questions may not be of interest to all of the participants.

In our remarks today, we will be making some forward-looking comments regarding segment and company outlooks.

We will remind you there are risk factors that could cause actual results to differ materially from our current expectations.

Those risk factors are discussed in a form 8-K filed this morning with the Securities and Exchange Commission.

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

Thanks, Greg.

Good morning.

This morning, I'm going to begin today's call with comments on our 2002 results.

Mike Bell, our new CFO's then going to review the specifics for our 2002 financial results and Mike's also going to provide our outlook for the full year and first quarter of 2003.

And then Pat Welch, the President of our HealthCare operations, is going to provide an update on the actions we are taking to improve results in that business.

And Pat's comments will including an update on key initiatives underway in CIGNA HealthCare including a review of key performance metrics that we are using to track our progress.

And then I'm going to conclude our prepared remarks with a few closing comments.

Let me start by offering a few observations on the fourth quarter and full year 2002 operating income.

Fourth quarter 2002 operating income excluding certain nonrecurring items, and results from discontinued operations, was $1.27 per share.

Operating income for full year 2002 on the same basis was $6.65 a share.

These results are lower than historic levels and certainly below what we are capable of earning.

But they are consistent with the projections we provided last November, and they are somewhat ahead of the Wall Street consensus estimates.

Nonrecurring items during the quarter included a restructuring charge for the realignment of our HealthCare operations and a charge related to the HealthCare provider class action litigation.

In the fourth quarter, we also recorded a charge to equity related to the company's employee pension plan obligations.

Results in the Employee HealthCare, Life and Disability benefits segment were consistent with the projections we provided in November, and Street expectations.

Our results for the year and quarter reflect increased customer service and technology spending, as well as weak results in our Medical Indemnity business.

These factors were partially offset by strong results in our Specialty HealthCare businesses and Life and Disability insurance operations.

I also want to note that in January of 2003, we completed the sale of Lovelace Health Systems and results for Lovelace are now reported in discontinued operations.

This was a good transaction for us, as Lovelace was clearly off strategy.

Now, our retirement business posted strong results, particularly in the face of volatile equity markets.

This operation continues to attract new customers and assets to benefit from reallocation of assets and to generate good returns.

International operations also posted solid results for the quarter and year, and that primarily reflects growth in our Life, Accident, Health and Expatriate benefits business.

In January of 2003, we also completed the sale of our Brazilian HealthCare operations and reached agreement to sell our Brazilian pension operations as well.

These businesses were sold because we concluded their growth potential did not meet our long-term financial objectives.

The combined results for our other segments, including runoff reinsurance, other operations and corporate, were better than expectations.

The runoff reinsurance operations were somewhat below expectations, due to additional reserve strengthening for certain of these discontinued products, and Mike's going to talk about these segments in detail later.

So in summary, all of our employee benefits operations with the exception of our core medical operations, are performing quite well.

And we are taking the necessary actions to improve the overall operating performance of CIGNA HealthCare.

In a moment, Pat's going to share with you the progress that we are making on our key HealthCare initiative.

I would highlight that we understand the challenges here, we are taking aggressive action, and we are confident in our ability to improve performance.

And with that, I'm going to turn it over to Mike who's going to provide the financial details on the quarter.

Mike?

Thanks, Ed.

Good morning everyone.

In my remarks today, I'm going to discuss CIGNA's 2002 consolidated earnings and segment results, I'll also provide earnings projections for 2003.

I'm going to begin with several reporting items.

First, since we completed the sale of our Lovelace Health Systems subsidiary last month, we are reporting its results as discontinued operations.

This business was sold for approximately $210 million and the sale generated an after tax gain of approximately $30 million, which will be recognized in the first quarter of 2003.

The results from these discontinued operations will be excluded from the 2002 results that I'll cover this morning.

As Ed indicated, we also sold our Brazilian HealthCare operations in January of 2003.

We expect to report a gain on this sale in the first quarter as well.

In the fourth quarter of 2002, we recorded a restructuring charge of $97 million to realign and streamline our HealthCare operations.

We expect the charge to result in cost savings of approximately $100 million after tax in 2003, and $150 million after tax in 2004.

Also consistent with what we discussed in our third quarter conference call, we recorded a fourth quarter charge to equity recognizing incremental pension obligations resulting from declines in pension plan asset values and a revision of the discount rate used for our pension plan.

The amount of the charge was $638 million after tax, in line with our previous estimate.

Now turning to our results.

My remarks relative to 2002 will focus on full year results and will be based on adjusted operating income and operating income per share, meaning that they'll exclude realized investment results and the nonrecurring items described in our press release and stastical supplement.

Operating income for the year was $935 million compared to last year's $1.1 billion.

On a per share basis, earnings were $6.65 in 2002, versus $7.42 in 2001.

The 2002 result is within the range that we provided last quarter.

Relative to the segment results, I'm going to start with our HealthCare, Life and Disability segment.

Segment operating income for 2002 of $724 million was down 16% from 2001.

Now if you include the $8 million of operating income from Lovelace, which was reclassified into discontinued operations, segment earnings are within the ranges we provided last quarter.

Within the segment, I'm going to summarize HMO and the Indemnity.

HMO earnings include results from our health plans and from our Specialty HealthCare businesses.

Excluding amortization of intangibles, HMO totaled $468 million, versus $477 million in 2001.

The decline in HMO results reflects increased spending in our service-related operations, partially offset by margin expansion on our commercial HMO business and continued growth in our specialty operations.

As we discussed last quarter, we consciously increased the staffing in our service operations.

As a result, we've improved our service levels.

Pat Welch will provide additional detail on our service improvement in a few minutes.

Our full-year commercial HMO medical cost ratio improved on a year-over-year basis.

Net premium yields in commercial HMO were approximately 15% in 2002, and are expected to be in the 14% to 15% range for 2003.

Medical costs for our CHMO business in 2002 trended at approximately 14% for the full year.

The fourth quarter CHMO medical cost ratio increased due to the claim development related to earlier quarters during the year.

We saw no change in our underlying medical cost operating metrics and continue to be comfortable with our projection that medical trend in 2003 will be in the 13% to 14% range.

Total HMO medical membership at 6.8 million was down slightly compared to fourth quarter of 2001, and essentially flat with third quarter of 2002.

The enrollment trends reflect a decline in commercial HMO, partially offset by growth in the service business.

HMO revenues, including premium equivalents, were up 15% in 2002 versus 2001.

Reflecting fee increases in medical cost inflation for the ASO business, as well as CHMO rate increases -- excuse me, CHMO rate increases and strong specialty revenue growth.

By selling the Lovelace Health Systems, we divested about 170,000 commercial HMO Medicare and Medicaid members, however, we have retained the 80,000 medical members enrolled in our PPO, traditional medical indemnity, and client service plans in the local service areas, as well as all the specialty HealthCare members.

Moving now to Indemnity.

Full year Indemnity results were $270 million, excluding amortization of intangibles, this compares to our 2001 result of $395 million.

The year-over-year decline reflects disappointing medical indemnity results partially offset by strong results in our group Disability and Life operations.

The factors underlying the medical indemnity results are the same as we discussed in late October and early November.

First, we experienced underwriting execution short falls, and second, we incurred higher operating expenses in the second half of the year in conjunction with initiatives to strengthen our service-related operations.

Total medical indemnity lives were 6.3 million at year-end, down 2% versus a year ago and down 1% sequentially, and this is in line with our most recent projections.

From a revenue perspective, indemnity premiums and premium equivalents were up 7% compared to 2001 levels.

The increase primarily reflects impact of medical inflation, of premium equivalents, and premium and fee increases partially offset by medical membership declines.

Now, overall, we are not pleased with the HealthCare results, while we were not pleased with the results, they were consistent with the expectations we communicated in October and November.

We are focussed on the actions needed to improve the results which Pat's going to discuss in a moment.

Moving on to the Employee Retirement Benefits and Investment Services segment, earnings were $231 million versus $224 million a year ago, up approximately 3%.

This result is above our projections at third quarter, and higher than the average Street estimate.

The year-over-year increase reflects a shift towards higher margin products, as well as business growth and effective expense management, partially offset by the effects of the equity market declines on asset-based fees.

Ending assets under management were down 3% from year-end 2001 and essentially flat versus the end of third quarter.

And this reflects a 6% year-over-year increase in general account assets, and solid growth in corporate insurance, offset by a decline in equity assets reflecting the stock market decline.

Overall, these results are competitively strong and reflect effective execution of our strategy.

In our international segment, operating income was $31 million in 2002, versus $8 million in 2001, excluding the earnings from the Japanese life operation, which was fully divested in 2001.

The increase in operating income was due to improved results in our Life, Accident and Health operations as well as in our Expatriate benefits business.

In total, our HealthCare, Group, Retirement, and International businesses generated $986 billion in operating income in 2002, which was in line with our expectations from November.

Now, let me spend a minute on the runoff reinsurance, other and corporate which generated a combined operating loss of $51 million in 2002, which is somewhat better than the expectations that we communicated in November but worse than the loss of $30 million in 2001.

Beginning with Reinsurance.

The runoff reinsurance segment includes CIGNA's remaining reinsurance operations which are inactive and in runoff mode.

The segment had operating losses, excluding the nonrecurring items, of $38 million in 2002, and $10 million in 2001.

Increased loss reflects lower premiums and investment income, as well as reserving actions associated with the remaining runoff reinsurance businesses, specifically the London based workers' comp book.

Now one of the runoff reinsurance pipelines is the variable annuity death benefit, referred to as VADB.

As we've discussed before, we implemented an investment program last August to reduce the primary VADB exposure, which is a risk of losses from further stock market declines.

Since the program was implemented, it has worked as expected, enhanced successfully offset required changes in the VADB reserves due to the stock market's performance.

I'd remind you that the VADB reserves are a function of other factors besides stock market performance.

For example, mortality, policyholder surrender, both partial and full, and stock market volatility.

On an ongoing basis, we monitor our actual experience on these factors for their impact on reserves.

Experience since August has been in line with our assumptions and our year-end reserve balances and assumptions are appropriate.

There are a lot of interrelated parts and future experience suggests a need to change assumptions, the impact could be material.

To provide and example, a 10% unfavorable change in the policyholder's surrender assumption, over the life of the book of business would be worth approximately $75 million after tax.

We will be discussing this in our 10-K, along with our other critical accounting assumptions and related sensitivities.

Moving on to other operations, which includes the amortized gain on the sale of individual life and annuity business, the runoff leverage, corporate and life insurance business and investment operations.

Operating income for other operations was down slightly from 2001 levels at $74 million for the year 2002, versus $76 million in 2001.

Reflecting the expected runoff of these operations.

For corporate.

Corporate includes unallocated investment income and parent company expenses.

The full-year loss on corporate segment totaled $87 million in 2002, versus $96 million in 2001.

And these results reflect lower expenses.

And before I recap the year, I'd like to spend a few minutes on cash flow and the parent company capital position.

We ended 2002 with a modest level of liquidity at the parent company, essentially in line with our previous projections.

Our leverage ratio at year-end was 33%.

Looking ahead, we expect positive cash flow at the parent company level of roughly $300 million in 2003.

This is comprised of $600 million of dividends from our operating subsidiaries, less $300 million of shareholder dividends and interest paid on our corporate debt.

As we have said, our first priority is to use this cash flow to reduce our leverage and restore our financial flexibility to historic levels.

Relative to leverage, we expect to reduce our leverage ratio to be within our target range of 20% to 30% at year-end 2003.

So to recap 2002, operating income was $6.65 per share, ahead of the average Street estimate, and in line with the November projections.

Turning to the outlook for this year, 2003.

Consistent with our normal practice, the estimates that I'll provide will exclude realized investment results and nonrecurring items, such as gains on the disposition of certain business units.

For the full year, we expect consolidated after tax operating income of $6.25, to $6.50 per share.

And this is consistent with the projections we provided in November and ahead of the current average Street estimate.

Starting with the employee HealthCare, Life and Disability segment, we remain comfortable with the projections we provided at third quarter for segment earnings in total, specifically $675 to $725 million, after amortization of non goodwill intangibles.

We expect HMO earnings of $445 million to $475 million and we expect Indemnity earnings of that to $265 million.

The $20 million swing between HMO and Indemnity relative to our estimates at third quarter, reflects the fact that having finalized our restructuring plans for the HealthCare operations, we now have a better understanding of where we will realize the benefit of reduced expenses.

It also reflects the impact of the pricing actions in HMO and Indemnity.

I would note that our projections for the segment in total and for each of the components continue to be meaningfully higher than the average Street estimates.

We understand that there's skepticism about our ability to achieve these results.

So let me be clear about the key drivers of the expected improvement from our fourth quarter earnings run rate for this segment.

Annualizing for fourth quarter earnings of $122 million gets to $488 million for the full year, which I'm going to round to $500 million for this exercise.

So the question I would like to answer is: How will we increase earnings by approximately $200 million in order to get from the $500 million starting point to our $675 to $725 million range for 2003?

Consistent with our discussions at third quarter, there are several factors which contribute to the improvement.

The first is expenses.

Our restructuring of the HealthCare operations will yield lower expenses than are reflected in the fourth quarter run rate.

As indicated in our press release, we expect to realize $100 million in expense savings in 2003 as a result of the restructuring.

In addition to the $100 million of expense benefit, we also expect continued operating income growth in the components of the segment which are performing well, namely, Commercial HMO and the Specialty HealthCare businesses.

Also, 2003 earnings will benefit from the absence of large case losses which we experienced in 2002.

The overall expected benefit from continued earnings growth in the operations which are performing well, together with the absence of large case losses, is about $100 million.

So to sum up for the Employee Health, Life and Disability segment, we expect to achieve earnings in line with our projections of $625 to $725 million.

Turning to the other segments, we, the expect the companies' other segments in the aggregate to contribute approximately $200 million in earnings, which is consistent with third quarter projections.

Our expectations for the pieces, which reflects some refinement to our third quarter estimates, are as follows: $210 to $220 million to the Retirement, this includes the expected impact of lower sales and persistantcy due to ratings changes which we discussed last quarter and it assumes a return to historical levels of stock market appreciation; $45 to $50 million for the International segment.; $25 to $30 million for the combination of the Other Operations and runoff reinsurance segments and loss of $80 to $100 million in corporate.

So to recap, we expect consolidated after tax operating income of $875 to $925 million or $6.25 to $6.50 a share for the full year 2003.

Turning now to the first quarter of 2003, we currently expect consolidated after-tax operating income, excluding nonrecurring items of $1.30 to $1.50 per share.

Our earnings expectations for the first quarter by segment are as follows: for the Employee HealthCare, Life and Disability benefits segment, we expect total segment earnings of $142 to $162 million after amortization of non goodwill intangibles.

Within this segment, HMO earnings are projected to be $100 to $110 million, and Indemnity earnings projected to be $45 to $55 million in first quarter.

For the Retirement business, we expect $53 to $57 million of earnings, for International, $5 to $8 million, and in the combination of the Other Operations and runoff reinsurance segments, we expect $0 to $5 million.

And we expect the loss in Corporate to be in the $20 to $22 million range.

In total, we expect first quarter consolidated after tax operating income of $180 million to $210 million or $1.30 to $1.50 a share.

So to recap, while our 2002 HealthCare results were disappointing, results in our Retirement business, our Group Disability and Life business, our International operations, and our Specialty HealthCare businesses were strong.

We're making good progress on a number of fronts and our expectations for 2003 consolidated earnings remain consistent with the estimates we've provided at third quarter, namely $6.25 to $6.50 a share.

With that, I'm gonna turn it over to Pat Welch who'll discuss specifics on the initiatives we have under way to improve results in our HealthCare operations.

Pat?

Thanks, Mike.

Good morning everyone.

This morning, I will give you an update on the key initiatives we are taking to restore CIGNA HealthCare to historical levels of profitability and position the business for profitable growth.

We've discussed the initiatives on prior calls.

The five initiatives I cited were: one, organizational realignment; two, service improvement; three, medical management and provider contracting improvement; four, strengthening of underwriting; fifth, operating cost restructuring.

Starting with organizational realignment, in order to better serve customers and better focus our resources, we are aligning the HealthCare business around three customer segments, national accounts, regional accounts, and specialty HealthCare.

Our national account segment serves large multi-site, multi-regional employers with more than 5,000 eligible employees.

Our central, national accounts unit, which is a core CIGNA strength, and which has historically had strong retention rates only served about 120 of our largest accounts.

The balance of the accounts were served through our regional organization, where we had a less consistent customer service model.

As part of our realignment, we are moving responsibility for approximately 200 of these national accounts from the regional sales and client management teams to our national team.

The goals are higher retention, greater in group enrollment, increased penetration of our specialty products, and more consistent quality of service for our customers.

Certain regional client managers who are responsible for relation management with existing customers will transfer to the national account segment team as the transfer of their assigned customers occur.

This transfer process will be completed by April.

The regional segment represents one of the areas of greatest opportunity for us.

Our focus here is on profitably growing our middle market business.

We've always had a large middle market book of business but our market share position is less than for national accounts.

This is an area of great opportunity because the margins are generally higher and there are typically greater opportunities for our specialty product sales.

Let me briefly discuss our approach in the middle market.

We have 13 market leaders who have responsibility for the CIGNA HealthCare distribution franchise in their geographic area.

Market-specific strategies are designed based on our current market position and assessment of growth potential.

Detailed plans are being developed on a market-by-market basis, which includes specific account acquisition and retention strategies.

These local market strategies are being developed with very tight alignment of sales, underwriting, pricing and medical management, all focussed on both growing our profits and our membership.

These plans are targeted to be completed and implemented by April.

Our specialty segment includes our dental, behavioral, pharmacy, vision and our case and disease management operations.

These businesses continue to serve the existing HealthCare membership as well as showing good growth with third-party organizations.

The second initiative is service improvement.

We've made good progress here.

We added staff in our service centers in the latter part of 2002, and we have enhanced the management of our service operations.

I believe that management discipline is key to our service improvements.

The basic technology is sound, we now need to effectively execute operationally.

The investment in staffing and management is paying off.

We are seeing continued improvement in customer satisfaction with our migration in account setup process, telephone service metrics and auto adjudication rates.

The average speed of answer during January of 2003 was strong and significantly improved versus 2002 levels.

For example, our 2003 results on average speed of answer was 24 seconds for our national accounts.

Overall, our speed of answer is significantly better than 2002.

Our first call resolution rate averaged 75% in the first quarter of 2002.

We are now running at 88% in January of 2003.

And based upon consultant feedback, this rate is quite competitive and in line with our expectations.

Customer satisfaction was set up on migration to our instate platforms was 58% in the first quarter of 2002, and it improved to 84% for the third quarter of migrations.

And for new business, approximately 80% of our customers were satisfied in the first quarter of '02 and that had increased to 98% by the third quarter.

We will be surveying our customers again in the first quarter of 2003 to determine their level of satisfaction with the 1/1/03 migrations and account setups.

I'm fairly confident given our results in terms of our ASA's and our first call resolutions, our abandonment rates, our issuance of ID cards, that we'll see very strong scores on that survey.

Our service performance is well ahead of where we were this time last year.

We continue to communicate these results to customers, consultants and brokers, and will continue this dialog throughout the year.

We're not declaring victory yet.

While many of the our customers are receiving strong customer service, our organization is keenly aware of the importance of delivering competitive service levels for all customers on a sustained basis.

We are confident that we'll achieve these goals by the April time frame, and this will aid our selling in the later part of 2003.

The third initiative is improving medical management and provider contracting.

As you know, medical costs represent over 80% of costs.

And whether we are on the risk for these costs or managing them for our self-insured customers, effective management of medical costs is critical to our success.

Our objective is to ensure quality outcomes at the lowest total cost.

I would like to deal with this initiative in two parts: First, provider contracting.

In our old model, contracting was done locally, and standardization was not rigorously enforced.

This led to significant variations in contracts.

We've centralized responsibility for contracting, and that person reports directly to me.

Four contracting hubs have been established with clear lines of accountability, clear standards and guidelines for contracting strategy, the staffing complement to achieve, and we have targeted specific contracts to fix known problems and to support the local market strategies that I referenced earlier.

These changes will decrease variation in our contracts, increase claim auto adjudication rates and increase our efficiency and effectiveness in paying claims timely.

This will strengthen our relationship with employers, members, doctors and hospitals.

The second part of this initiative is our medical management model.

We are developing a common medical management model that leverages our tremendous investment in our clinical resources.

We have over 3,000 medical professionals, including 150 doctors.

We are focusing the activities of the clinicians on the highest value activities.

Focussed on maximizing quality outcomes at the least cost for our customers.

It's really a health facilitation model based primarily on information, outreach, and coordination by clinical case managers.

We are reducing low return activities which were in many cases annoyances to customers and providers, and we are shift ing resources to the highest value activities, such as expanded case management and disease management programs.

The fourth initiative is strengthening underwriting.

As we've said previously, a significant driver of our earnings disappointment in 2002 was execution shortfall for a portion of the Indemnity portfolio, which included a few large accounts.

We have had long-term success with our Indemnity products and have in the past delivered industry-leading margins.

We are focussed on actions that will restore those margins.

Our actions in underwriting involve people and processes.

On the people front, I've appointed a new Head of Underwriting who reports directly to me and have brought in additional resources to drive these improvement activities.

In the process area, we are taking a back to basics approach to underwriting by reviewing, updating and reinforcing all underwriting and pricing guidelines and procedures.

And we have strengthened our front end monitoring tools, improved audit and peer review functions and implemented stricter levels of authority.

I am confident that we are restoring the appropriate level of discipline in this vital part of our organization.

The fifth and final initiative is reducing operating costs.

Given our membership, our operating costs are too high.

We are aggressively reducing operating costs to streamline decision-making, increase operational efficiency, and improve the competitiveness of our products.

In conjunction with this effort, we announced plans to eliminate 3900 jobs, approximately 700 job eliminations were completed before year-end 2002, and another 1,000 in January. 1150 additional positions will be eliminated by the end of the first quarter, and the rest will be completed by year-end 2003.

As Mike noted, we expect to realize approximately $100 million in after-tax savings in 2003, and approximately $150 million in savings in 2004.

I want to emphasize that the restructuring effort will not adversely impact our service operations.

Whereas we've said earlier we added staff in the second half of 2002, and we are absolutely committed to keeping the quality of our service at a high level.

I'm confident that executing the initiatives I have outlined will enable us to achieve our financial and operational goals in 2003.

We remain focussed on strong execution of these initiatives, and delivery on our financial and other commitments.

Before I turn it back over to Ed, let me just comment on our membership levels.

As expected, medical membership on a same-store basis, excluding Lovelace, declined approximately 5% as of January 1, 2003.

This is in line with our November projections.

The actions that I have just outlined will contribute to stabilization of enrollment levels over time, but we believe that membership could decline by another 1% to 2% through year-end 2003.

And this decline is reflected in the guidance which Mike just reviewed.

In summary, we believe we have the organization focussed on the right priorities and actions.

We are driving significant, but necessary change in a short time frame.

Our organizational alignment and medical management and contracting initiatives are well underway.

Our service stabilization is also showing good progress, and we believe that we'll see further improvement and a sustained performance.

Our actions to improve underwriting execution are also well underway.

Our expense reduction initiative is in full implementation.

We expect that the reductions achieved will contribute to the continued competitiveness of our products.

We have a broad inventory of products that can meet our customers' needs and the actions that I have outlined will further improve their competitive position.

Through these efforts, we are establishing a solid foundation for future profitable growth.

With that, I'll turn it back to Ed.

Thanks, Pat.

Now, before we take your questions, I want to provide just a couple of summary comments.

First, our fourth quarter results were as expected, and consistent with our guidance.

And we have a good handle on the operating issues that caused our HealthCare earnings shortfall in 2002, and as you heard from Pat, we are aggressively dealing with them.

Our other employee benefits businesses, and our specialty HealthCare operations performed well in 2002 and should continue to do so in 2003.

We believe that the earnings guidance for 2003 is achievable, and while still below our potential, will position us for stronger competitive results in 2004 and beyond.

Our top priority in 2003 is improvement in our HealthCare operation which is essential to restoring investor confidence.

We have the right people in place and the right actions underway and I think we are making pretty good progress.

With that, I'll turn it back to Greg and I guess we're going to take questions.

Ladies and gentlemen, at this time, if you do have a question, please press star one on your touch-tone phone.

If someone asked your question ahead of you, you can remove yourself from the queue by pressing the pound key.

Also, if you are using a speakerphone, please pick up your hand set before pressing the buttons.

One moment, please, for the first question.

And we go first to Josh Raskin with Lehman Brothers.

Hi, good morning and thanks for a lot of the detail there.

One quick question and then more a strategic one.

First, on the $100 million improvement that was mentioned that will come from growth in the commercial HMO and Specialty, et cetera, and combined with the large case losses that will be absent, I was wondering with you can break out the amounts from each of those two buckets?

Then my second question, just relates to sort of claims payment timing and inventory, and I was wonder to go you had any metrics you could share with us or even anecdotal data, that would help us sot of understand where your claims processing levels are right now.

Are you trying to pay faster to improve service levels, and any expectations going forward with that would be helpful/ Thanks.

Josh, this is Mike.

The - First to begin with your first question on the $100 million of earnings improvement that we expect to get in full year 2003 as compared to the run rate at fourth quarter, the -- about 40% of that in round numbers, about 40% of that stems from the absence of one particular large case which cancelled effectively 1/1/03.

About another 40% of it reflects the improvement in the commercial HMO loss ratio full year 2003 as compared to fourth quarter of 2002.

And the remaining 20% represents the other items in particular growth in our Specialty HealthCare business.

Josh, on the claim payment metric, I'm going to ask Pat to comment on that.

Obviously, the work that we've done around transformation is designed to make us more effective and efficient from a claims-handling standpoint.

So that's clearly been one of the objectives.

I don't know if Pat has the statistics with him of where we are.

Pat?

I don't think I can necessarily quote statistics right now, but we are definitely seeing a reduction in our claims backlog.

And that's coming by focusing an awful lot on improving the effectiveness of our transformed platforms.

In our transform platforms, we are auto adjudicating at about a little over a 60% rate.

The claims backlog has come down significantly on those platforms.

And we're really kind of targeting the, I guess, the bigger, later claims to try to reduce that backlog.

Okay.

I guess just in terms of a little bit more color there, the backlog, I assume you're talking about actual inventory in-house, or are we talking about also reducing the time, you know, sort of out of your control, but from when providers are getting claims to you from the date of service?

And I guess with the connectivity and the transformation you would expect, I assume you would expect, that time to come down as well?

Yeah, our overall management of our own backlog, our inventories, Josh, is in good control and quite frankly with the new technology, we can manage that more effectively.

I think there's no question as we get greater connectivity here, we will see shorter time frame, us and others are getting more of our claims electronically, clearly, than we have in the past.

We'd like to continue to accelerate that and have, you know, fairly significant initiatives underway to do it.

So if that happens, yes, we will get faster turn around time for claims.

That's certainly what our providers want and we want to be able to be in a position to give it to them.

Okay.

So it sound like you're getting comfortable with the inventory levels at this point, probably a little bit more to go and then obviously if the transformation takes hold, you would expect vast improvement as well?

Yeah, we've seen improvement certainly in the last year in terms of the percentage of claims we're getting electronically, Josh, and we expect that to continue.

Okay, appreciate it.

Thanks, Ed.

Thank you, Josh.

We go next to Roberta Goodman with Merrill Lynch.

Hi.

I actually have several questions that are related to the most cost trend.

First, I'd like to know what the impact of the negative retroactivity that you cited from the first part of the year was, and if possible, how that would be distributed in the earlier quarters in the year, and then I wanted to follow up on that.

Okay.

Roberta, this is Mike.

First of all, I just would emphasize the obvious here, that we believe the full year measure is the most meaningful performance indicator as opposed to a single quarter.

But to answer your specific question, the fourth quarter adjustments related in medical costs for CHMO related to prior quarters amounted to about $20 million pretax or about $13 million after-tax income.

And in terms of the distribution by prior quarters, most of that was from third quarter, I'd say order of magnitude, about two-thirds of it.

Okay.

And given that you have had that increase in retroactivity, could you help me understand how you expect to get from a 14% trend down in 2003?

Well, I think the two questions are somewhat unrelated.

The retroactivity is not -- would not drive trend, per se, 2003 versus 2002.

But I'd say we're quite comfortable with our medical cost action plans that we have underway, both on the contracting as well as strengthening our utilization management capabilities and case and disease management capabilities, and again, if you sum up the pieces by category, we continue to be comfortable with the assumption of 13% to 14%.

Okay the, just one final detail on that.

If you look at the components of the trend, you know, in terms of hospital, outpatient, prescription drug, physician, which of those would you see going down as you go into 2003?

Uhm, in terms --

and to what?

Okay.

In terms of year-over-year trends, the two areas that I think we'll see a little bit of downdraft in, in year-over-year trends on are professional services, so the physician services, and also in terms of utilization of inpatient dates, we do expect that to be down a little bit as well, in terms of the comparison of year-over-year trends '02 to '01 , versus '03, to '02.

Okay.

And what would you expect those to be then?

In terms of a physician trend, '03 to '02, I characterize it as something in the low teens.

And for inpatient in sort of the mid teens.

And the other pieces of that, the drug and the --

Uhm, the other components that you described, outpatient and pharmacy, we'd both put in the mid teens.

And that's not a huge change, Roberta, that's not a huge change from what we saw in '02.

You know, the inpatient, outpatient, pharmacy, in the mid teens, and the physician overall is in the low teen, high single digits.

I think the components, the two that Mike noted we expect to see slight improvement, but overall, pretty consistent with the pattern we've been seeing.

You know, we said for '02, I think, pretty consistently, that we would be in the 13% to 14% range.

We ended up at about 14.

We said the yields would be 14 to 15, we ended up at about 15.

So the medical loss ratio improvement that you see for '02 is pretty consistent with what we expected in total.

Okay.

But this is only for the HMO piece; correct?

That's right, Roberta, that's just the commercial HMO.

And what about the aggregate?

I'd say comparable, Roberta.

Yeah, we've historically, when we talk about medical trend, we focus on the commercial.

I think what we're seeing, as most people have, there's not a whole lot of difference in terms of the total.

Okay.

Thank you.

Thank you, Roberta.

We go next to Dan Johnson with UBS Global Asset Management.

Thank you very much.

Your discussion on the outlook for enrollment going forward through the rest of the year I think was about negative one to two potentially.

Could you kind of go through how you've come up with that assessment and how much of your enrollment really still has yet to be determined for the rest of the year?

If you could just remind us as well what sort of visibility you get on some of the different portions of the book, that would be helpful as well.

Thank you.

Yeah, Dan, it's Ed.

I'll take a shot at this and Pat can jump in.

I think as we said consistently, particularly for the larger portion of the business and national accounts and so forth, we get a pretty good sense for, you know, a good 50% to 60% of that book of business January 1.

And that is the 5% that we indicated in November and now confirmed with Pat, we feel that we've reasonably good visibility to that and that's what we're going to expect to see.

The balance of the year, where we could see that 1% to 2% decline, and as Pat noted, that's what we've assumed, at least in the guidance, we're obviously going to try to do better than that.

That's in what I call regional account, Dan. and that tends to renew a little more ratably through the year.

It's still concentrated around January, but then you have a July period and maybe even an October period where you see a little bit more of that.

So obviously it's early to forecast what we would expect in July.

However, as Pat noted, the service improvement activity we've had underway, and our marketing strategies for that regional segment are all designed to be in place by, you know, early second quarter.

So we can attempt to influence that membership for the balance of the year.

So in aggregate, the overall enrollment or the amount of the book that renews, say, July 1 going forward roughly, what would that be?

It's about 20%, Dan.

Okay.

So you get 80% in the first half of the year?

I'm sorry, that's 20% on July 1, per se.

It's about in fourth quarter, it would be about another 10 to 15.

So it's about two-thirds in the first half of the year, then about a third July 1 and on.

Okay, great.

Thank you very much.

Thank you, Dan.

We will take our next question from William McKeever with UBS Warburg.

Thank you.

Just a question on your days in [INAUDIBLE] accounts payable, do you have any numbers or any essentials you can give us there.

Bill, I think you know that we've historically not provided balance sheets broken down by segment.

We are going to include in our 10-K the HealthCare reserves, specifically for our insured and experience rated business.

We're going to include it as a critical accounting estimate.

So what that will show is a year-end 2002 balance of about 1.8 billion that compares to about 1.7 billion at third quarter 2002, and about 1.5 billion at year-end 2001.

We don't think the days payable per se is a terribly meaningful statistic.

There are a lot of factors that impact it, you know, business mix, processing changes, et cetera.

But we're quite comfortable with our reserving process and the reserve balances I just gave you give you sort of a proxy for that.

Okay.

Great.

And then just to get a sense for the year, if I take the midpoint of your first quarter guidance it's in the $1.40 area, annualizing that, it's $5.60, your guidance is $6.25 to $6.50.

Would I take that to imply that the earnings are back-end loaded in the second half of the year and that you see a fair amount of acceleration?

Well, I'm not sure I like your term back-end loaded, I guess it's actually accurate, but the point is earnings will improve, we would expect earnings to improve each of the quarters throughout the year.

That's particularly the case in the HealthCare, Life and Disability segment where we will see, over the course of the year in particular, the expense savings come through from the restructuring actions.

Okay.

Great.

Thank you.

Thank you, William.

We'll go next to Ellen Wilson with Sanford Bernstein.

Yes, I was wondering if you could talk a little bit more about the underwriting practice strengthening that you've done.

And specifically, what I was wondering is, is this now complete or when was it complete or when will it be complete?

And how do you know that you're basically appropriately pricing the accounts at the level that you want to if it's not complete?

There are two questions there.

In terms of what we are doing, as I said, we have gone through and really it's a kind of a back to basics.

There's really no magic in terms of it.

We are definitely being very clear in terms of our underwriting -- kind of the underwriting protocols.

The people strengthening is essentially done.

We're going through the process pieces and we really do have, I think, very clear book of business targets.

We have got good alignment now between the pricing and the underwriting, the field salespeople.

We have book of business profit targets, we're developing individual account retention and pricing strategies.

In terms of the basic, I guess, we call processes and protocols that peer review audits, book of business reviews, those are essentially in place.

A couple more pieces, but they're essentially in place.

And I think that in terms of the restructuring of the underwriting functions, I'd say we could basically say we're there.

Now, going forward, we do have to implement essentially our pricing and underwriting targets, but that will evolve throughout the year and into next year.

Okay.

Two quick related follow ups: When did you last see these mispriced accounts coming on to the books or rolling on?

I know you had seen some as recently as August.

Have you seen any since then?

And the second part, if you can drill down a little bit more what you had done to change sales incentives and to focus on the field sales force?

Ellen, I'll comment on the mispriced business.

Pat, you may want to take the sales incentive process and so forth.

Ellen, relative to this price business, I think we said at the - in November that we obviously weren't completely comfortable with some of the pricing that existed for the 1/1/03 business and that's reflected in the guidance that we've put forward.

I think we feel very good about the processes that are in place now, and that are being checked and monitored and the pricing strategies we have for the accounts.

So as Pat just indicated, as we come into '03 now, we expect those processes to be working quite well throughout the year.

And relative to your comment on sales concepts, we haven't made major changes from a practical standpoint on the sales compensation.

You know, we have always had measures of profitability included in the sales compensation, you're compensated more for business that is more profitable than less profitable.

So I wouldn't say there has been major changes there.

Pat, I don't know if you want to add anything.

I think, again, really we revise that plan annually.

And the changes I would say this year are definitely a very clear focus on profitability of new business, but also retention.

The profitability of business that we're retaining so that our people are being incented for the retention of business, but also the profitability, basically the pricing that we get there.

And we are really linking up the incentives for the sales and underwriting.

So they're on the same team.

We're all focusing on not only growing membership, but growing it profitably.

Okay.

Thanks.

Thank you, Ellen.

We go next to John Rex with Bear Stearns.

Good morning, thank you.

A couple of questions: Following up on the last question, could you quantify for us in terms of either membership or premium revenues, how much of this 1/1/03 business that you consider to be mispriced so we can just get a sense for how large that was on your book of business? [ Pause] Hello?

Yeah, John, I'm thinking about how we can quantify that for you.

Quite frankly, I don't think I can provide you -- I don't think Mike can either, with a specific number for the, quote, mispriced business.

We said that the pricing was not at historical levels, so that we weren't getting what we would consider historically adequate margins for that business.

Some of it, not all of it clearly.

And remember, this again, tends to be focussed in the Indemnity area.

I think maybe the better way to think about this is to go back to Mike's characterization of the year-over-year improvement, recognizing that $100 million comes from expenses and the balance comes from a combination of less mispriced experience rated business and improvement in the others.

Mike, I don't know if you have anything you want to add to that.

No, John, the only other piece I'd give you is color commentary, and that is that we now have gone back and done a detailed review of the cases that were sold 1/1 and certainly based on that detailed review, we're comfortable with the guidance that we gave you for 2003 earnings.

Maybe this other color commentary.

Were there any cases anywhere near the size of the Miami Dade case that were sold?

No, nothing close to that.

In terms of that membership.

Okay.

John, you that mentioned higher inpatient costs were a factor in the fourth quarter, and apparently you're assuming that will come down in your trend outlook.

I was wondering if you can tell us what you identified in terms of what was driving the higher inpatient costs and how you see that settling out as you move into '03?

I think in terms of Roberta's question from a few minute ago, I think what she was asking for is the change in trend '02 to '01 or '03 to '02 as compared to '02, '01.

So what I was getting at there, is that inpatient trends in '02 were in the mid to high teens, and we're expecting those to go down to the mid teens for '03.

And that's primarily driven by less of an increase in utilization in '03 as compared to what we saw '02, relative to '01.

Was there anything particular that drove that utilization, I guess it was related to the first three-quarters?

There's nothing specific that I would point to there.

Okay.

Also, just with regard to the membership that was rolled on to the new platform in January, what did you end up doing in terms of total numbers of members?

In line with what you talked about before -

Pat, do you want to take that?

Yeah, I can take that.

We put on, in terms of the actual migrations, about what we had said before, and we think that really as of January, in January, the membership on the instate platform is now about 5 million members.

About 5 million.

And what was the incremental move as of January 1?

As of a year ago, 12/30 -- excuse me, the incremental move was about 700,000.

For January 1?

Yeah.

Okay.

Great.

And you just said that your experience with the summer moves, in terms of call volume, was much better?

Yes.

The summer - the summer - the July 1 migrations were much better than the January of last year.

Pat, I think, commented on a statistic I just want to repeat.

I think we had a mid-50s, roughly satisfaction level with, quote, with migrations 1/1/02.

We did the same surveying, now, we had fewer members migrate 7/1 but that same statistic was in the mid-80s.

So we had a clear improvement in the July and later migrations.

Now, we haven't surveyed yet for 1/1/03, but given the call statistics that we're seeing and our own internal measurements, we expect to see levels at least equal to what we saw in the summer.

All right.

Thank you.

Thank you, John.

We'll take our next question from Christine Arnold with Morgan Stanley.

Good morning.

Can we talk about your indemnity book of business for a moment?

My first question relates to your experience rated book.

As I understand it, excluding Miami Dade County, you ate about $50 million of deficit second half of '02 on experience rated book.

What gives you confidence that that same thing is not going to happen second half of '03?

And then I have a follow-up.

Okay.

Christine this is Mike.

In terms of the deficits for 2002, the -- excluding the one large case that's gotten all the attention, the deficits went from about $250 million at the beginning of '02, we ended the year at about $290, which is generally consistent with what Jim talked about at third quarter.

And in terms of 2003, we do expect a similar increase in deficits from the beginning of '03 to the end of '03.

So the -- again, as a result, we don't have banked into our earnings guidance for '03 a sort of relative improvement in the deficit pattern.

Again, excluding the one large case that's gotten all the attention.

Okay.

So to clarify that, you expensed $40 million associated with accounts that decided not to re up and pay you back those deficits.

Is that accurate?

No, that is not accurate.

To be clear here, we did take an earnings hit of $40 million pretax in 2002 as a result of the deficits for cases that are still around having increased over the course of the year, from the beginning of the year to the end of the year.

That $40 million of deficit increase on cases that are still active hits our income statement dollar for dollar.

Right, then you also ate all the accounts, excluding Dade that left and decided not to stick around.

What was that hit in '02?

That amount is, again, is about flat '02 versus '03.

It's about -- I'm sorry?

Flat?

Yeah, we would expect that pattern to be flat '02, '03 at this point based on what we now know about the January 1 experience.

So why wouldn't there be second half of the year negative seasonality in Indemnity the way there was in '02?

And so why wouldn't second half of the year numbers be lower than first?

For Indemnity?

Uhm, I don't expect it to be materially different.

Remember, Christine, we have cases that are renewing across the year.

In some cases, we get supplemental premium agreements.

I would not -- put it this way, I would not project that we'll see a deteriorating pattern on the indemnity loss ratio over the quarters of the year.

Okay.

I'm sorry, I'm still confused.

Can you help me understand, am I wrong that second half of the year Indemnity poor seasonality in '02 was largely owing to this?

And if you don't expect it to change, then shouldn't second half numbers be lower than first?

Okay.

Let me take your first part of your question.

I would point out that we certainly learned a lot from the 2002 experience, and again, with the -- knowing what we know now, as claims emerged over the course of the year, we had to revise what our estimated medical costs were at the beginning of the year.

But I think that's different from saying that we would expect in 2003 a similar kind of pattern.

I mean, we've tightened our estimation processes, we've tightened our underwriting controls and again, I would expect that the -- I mean, obviously the stuff bounces around, but the -- there's no reason to project a deteriorating loss ratio on the Indemnity book over the quarters that make up 2003.

Okay.

So you're saying -- your estimating it and spreading it over and trying to take it more in the first half of the year rather than being surprised like you were this year, taking it second half?

Again, let me put it this way: I think we're estimating things better in 2003 than we were in 2002 and I think we have a much better handle on the underwriting situation than we had in 2002, and again, I would expect the loss ratio to be, you know, again, it may bounce around, but I'd expect it to be reasonably constant.

And prior to '02, Christine, that's been our pattern.

I think we acknowledged in November that, you know, clearly, the front-end processes did not work as effectively as they had previously, and that's why the back-end review in late third quarter resulted in the need to revise significantly.

Okay.

I think if we went back previously, you would see a much more consistent pattern of earnings, and that's what we expect in '03.

Right.

And then my follow-up realities to, there was an issue also in Indemnity, 'cause I think your systems are doing better based on what we're hearing from the market, so I'd like to just focus on the Indemnity for a bit.

On the guaranteed cost in Indemnity, there was an earnings problem there this year.

How many members do you have and what's the rate costs spread for '03 look like versus '02 on that guaranteed cost Indemnity?

First of all Christine, the -- we have a couple hundred thousand members of guaranteed cost indemnity, it's not a big number.

And the trends on Indemnity tend to be a little bit higher than HMO and PPO.

So I'd say sort of mid to high teens.

It's heavily dependent of course on the benefit plan design that the employers have, and you've got mix shift, year-over-year, but sort of apples to apples, I'd characterize it as mid to high teens.

And what about the rates?

What do the rates look like '03 versus '02?

About the same.

Okay.

Thanks.

Thank you, Christine.

We go next to Eric Veil with Deutsche Banc.

Thank you.

Mike, I wanted to follow up, you alluded to in your discussion on the runoff segment, the guaranteed death benefit reserve, that there might be some other changes to the assumptions that you've made that could potentially result in charges coming in 2003.

And in order of magnitude, could you give us some sense, I think you said $75 million, if you had a 10% change, I missed the measure that you were moving there.

And then to follow-up on that, would any component of those charges that you mentioned be cash?

Okay.

First on your first piece, obviously we do not believe that it is probable that we're going to have to change assumptions in 2003 related to VADB reserves or we would have changed those reserve assumptions now.

The point I was trying to make is that we continue to monitor experience, we'll continue to communicate how the experience is running, again, thus far, the experience is telling us that our reserve assumptions are appropriate.

But the point I was trying to make there is we think it's prudent to clearly communicate that there is some uncertainty, that there are a lot of moving parts.

And so your second point on the components, I, again, there's no particular component there that I would anticipate that -- you know that, we believe it would be probable that it would change, again we're simply trying to flag the uncertainty.

Okay.

You did give an example though in your prepared comments; correct?

Yeah, the example I gave in my prepared comments related to full policy surrenders where an individual annuitant surrenders their policy either for cash or to roll it over to a different annuity.

If, in fact, our last assumptions had to be changed 10% across the board, meaning 10% in every duration, that would impact our overall reserve balances, and would require a $75 billion after-tax charge.

Again, I don't believe it's probable, obviously, and I don't feel discomfort with our current reserve assumptions, again, simply trying to flag uncertainty going forward.

Okay.

Thank you.

Thank you, Eric.

We'll go next to John Szabo with CIBC World Markets.

Good morning, thank you.

Just a follow-up on some of the earlier questions about the commercial HMO trend.

What exactly were you pricing for in 2003 as it relates to trend?

The -- John, this is Mike.

When we set our prices for 2003, we were anticipating and continue to anticipate medical cost increases of 13% to 14% relative to the full year '02.

Okay.

I guess in the third quarter, you're saying 13 to 14 percent, but now you're saying 14, so I guess relative to the earlier question, to get to that 13 to 14, you're going to have to be successful with some of these programs to lower the professional services and the inpatient; is that correct?

Yes, that's correct.

Okay.

Second question was: Have you guys reached overall service levels that would allow you to fully participate in the 2004 selling cycle?

As I said a little earlier, I think we made great progress and it's our belief that we will be really at competitive parity by April.

So yes, the answer is I believe that for the midyear selling season and the '04 selling season, service will not be an issue for us.

Okay.

The only other comment I would make on service, I agree with Pat, we are also attempting to communicate that fact pretty aggressively because we obviously recognize that the perception of service somewhat trails the reality of service.

So that's why Pat mentioned we're working pretty actively with the consulting community to ensure that they understand the progress we're making.

Okay.

Then just two real quick follow ups.

On the workers' comp exposure that you mentioned, was that -- I just want to make sure I understand the full extent to your workers' comp exposure, is that only that London syndicate and Unicover, are those the only two sort of places where you have exposure to workers' comp.?

Yeah, basically that's right, John.

Okay.

That's the runoff business, John, that we haven't been in for several years, it's the reinsurance, it's the two pieces you noted.

Okay.

There's nothing else?

No.

Okay.

A question on the parent company cash flow, does any of that include the proceeds from Lovelace or would that be considered separate?

In effect, John, the Lovelace, if you will, gets us to a starting point of approximately zero.

So the $600 million from dividends from subs and the $300 million out, none that have includes Lovelace.

Okay.

And then can you give us an idea of that cash flow, how much of that is coming from sort of nonregulated entities where you're not -- where you don't necessarily need regulator approval to pull the cash?

Let's see, I don't have that specific number at my fingertips, but order of magnitude, of the $600 million, about half of it comes from Connecticut General Life Insurance Company and about half of it comes from the - from our other operating subsidiaries, most of which are in the category you're describing.

Most of them are nonregulated?

In the -- let me circle back to you with the specifics.

But again, it's -- I can tell you that it's the half CG Life, half other.

I don't have the half other rate at my fingertips.

And is Connecticut General in a position now, that after everything you've done over the last two quarters, that you can pull money out of it?

Yes.

Okay.

Thank you.

Thank you, John.

We go next to Joseph France with Credit Suisse First Boston.

Thank you, two quick questions, one to clarify part of your answer to Dan's question.

What is your enrollment 1/1 versus 12/31?

I think the enrollment on 1/1 is about 12 and a half million.

So that's down how much relative to 12/31?

It's down about 5%.

Okay.

And the second question is regarding the new guidance on retirement business, you're assuming a return to historic levels of appreciation.

What is the number your assuming?

And what's the sensitivity to maybe the market being flat?

Okay.

Joe, the -- we're assuming about 2% market appreciation per quarter, and the -- if the market instead was flat over the course of 2003, that would be worth about $4 million after-tax.

Because, again, as I think Jim has talked about on prior calls, a 1% change in the market has an annualized impact of about $1 million of after-tax earnings.

Thank you very much.

Okay.

Thank you, Joseph.

We go next to Matthew Borsch with Goldman Sachs.

Hi.

Can you break out for us the portion of enrollment that declined in national accounts versus regional accounts on January 1?

Uhm Matthew,I don't have those numbers right at my fingertips.

Again, it's known, I don't have them with me.

Can we follow up with you off-line on that?

Yeah, sure.

Can you give me any indication, though, is it some from each or --

Yeah, I'll give you some color commentary.

The -- our national account persistency ran at its- pretty close to its historical levels of in the low 90s, I think at times we've been a couple points higher than that.

But it was sort of in the ballpark of the low 90s for 1/1.

What I don't have to be able to compute that to membership, I don't have the sales split memorized here for in terms of sales.

Okay.

And just a related question, are there some national account customers who have delayed their 2003 renewals past January 1 and can you give us any update on that?

Matt, it's Ed.

There may be a few, but it's not material.

We commented on that, I think, at the third quarter we got that question.

And we acknowledged there were a couple and I think they're still there.

But we haven't seen any increase in that trend.

That's not a significant issue.

And even the number we're not material.

I forget what it was, but it was small.

Okay.

Thanks.

The last question on a separate topic, can you on the commercial risk NLR, are you looking for that to be approximately flat in 2003 over 2002?

Yeah, approximately flat, Matthew.

We may get a shade of improvement given that we're expecting yields in 14 to 15 range, and medical costs in 13 to 14, but sort of flat to slightly improved.

Okay.

Thank you.

Thank you, Matthew.

We go next to Edmond Kroll with SG Cowen.

Good morning.

I've got a couple of quick ones here.

On your discussion of the death benefit liability and some disclosures that would be forthcoming in your 10-K, any material difference from what you're going to put in this K and what we saw in the third quarter Q?

Ed, this is Mike.

The -- is it materially different?

I would see it is expanded sensitivity analysis.

We are also referencing the point that I made earlier, I believe to Eric, that the -- we are going to communicate, we think it's prudent to clearly communicate that there is some uncertainty under the assumptions.

And so we will reference that there is -- that the impact of changing assumptions could potentially be material.

Okay.

Fine.

And in your cash flow guidance for '03, about $300 million, I think you said that you would use for dividends and interest.

So I guess we can pretty much assume, basically, the dividend is safe?

You would assume the same level of dividend payout for '03, as '02?

It's Ed.

First of all, obviously, the Board sets the dividend.

But I think we said consistently in the third quarter that we didn't expect any change in the dividend policy and we don't.

Okay.

Great.

And then how about share buyback?

When might that come back into the realm of possibilities?

Well, we don't forecast, never have, share buyback and we said that clearly our objective in '03 is to rebuild flexibility and get our leverage ratios down.

As we do that, our use of excess capital will be consistent with what it's always been, which is we have a fair -- we're very comfortable relative to the ability to fund internal growth.

We could conceivably look at acquisitions, and if we didn't find any of those that hit our criteria, we would repurchase stock as hour track record has been.

But I think it's premature to forecast when that might be.

Okay.

And then finally on the transformation project, maybe just an update on what you think that might be, you know, what the completion date would be and is there any change to your -- the spending on that baked into your guidance for '03?

On the baking into the guidance, no real change in the spending.

And I think we believe that all of the migrations will be complete by the end of 2005.

By the end of '05.

Yeah.

Okay.

Thank you.

Thank you, Edmond.

We no next to Lee Cooperman with Omega Advisers.

Thank you.

It's really a follow up on Ed's call.

Just to question.

If I take the midpoint of your earnings guidance that's roughly $900 million of net income, and your dividend's about $186 million, roughly, that leaves $714 million left over.

And I was just wondering how can -kind of roughly, do you see this being allocated during 2003 and if you can make some general comment qualitatively or quantitatively about how you'd view your capital adequacy at the present time.

Okay.

Lee, it's Mike.

And I'll, I'll start and then Ed can chime in with any additional commentary.

The about - in terms of your net income versus free cash flow reconciliation.

It's the remaining features include about $150 million that's been earmarked for the charge that we calculated to be provider class action suits.

And as well as, the conscious strengthening of our Connecticut General Life Insurance company subsidiary.

In the remainder of -- in terms of specific use of free cash flow, would be to support growth in subsidiaries.

Now, I'd also point out, we've got some debt maturing in 2003 as well, which we would not plan to refinance.

So we'll use about $125 million for -- to pay off that particular debt.

So does that mean it's about $440 million that you could dividend, something, about $440 million that you would be dividending up to the holding company?

Here's the way I would -- I'd characterize it.

In terms of -- we're projecting dividends from the subs of about $600 million.

That compares to, ex the bond interest, something in excess of $900.

Again, that's $150 for strengthening CGLIC and the provider class action charge, and the remainder of that would be to support the business growth in the operating subsidiaries.

I would not expect that the -- that the dividends from the operating subsidiaries would be much in excess of the $600 million.

So what I'm trying to get at, just to help me out, what are you thinking in 2003 you'll have in the way of discretionary, uncommitted monies dividend to the holding company, is it order of magnitude of $300 to $400 million?

I now better understand your question.

We've got $300 million of cash flow between the projected dividends and the -- from the subs and the dividend to shareholders interest to bond holders.

In terms of that $300 million, we'd expect to use $125 million for to it pay off the debt, and about another $100 million for a handful of other sources including the funding some growth in some international subsidiaries, as well as funding reinsurance.

So we project to end the year at the parent company level with about, call it, $75 million of uncommitted capital balance.

Got you.

Okay.

Very good.

That was the number I was looking for.

So the cash flow this year is pretty much committed, but in a typical year, I guess you would be generating somewhere between $400 to $500 million of excess cash?

That's right, Lee.

Okay, great, thank you very much.

All right.

Thank you, Lee, our final question will come from Scott Fidel with JP Morgan.

Yes, hi, good morning.

You had earlier provided some efficiency metrics.

Can you provide what your -- the amount of claims currently being processed through auto adjudication and also through electronic data interchange?

Thanks.

I can do the auto adjudication.

On the instate platform we're up around 60% of auto adjudication.

Electronic, I'm not sure I can do the EDI statistic for you today.

Okay.

Thank you.

This does conclude today's question-and-answer session.

Mr. Deavens, I would like to turn the conference back to you for any closing or additional comments.

Thank you.

At this point, we'll bring the meeting to a close.

I'd like to thank everybody for participating in the call this morning..

Investor relations will be available to respond to additional questions shortly.

Ladies and gentlemen this, concludes CIGNA's fourth quarter 2002 results review.

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Thank you for participating, we will now disconnect.