信諾集團 (CI) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's second quarter 2003 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 ask questions at that time.

If you should require assistance during the call, please press the star key followed by zero on your touchtone phone.

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, sir.

Good morning, everyone.

Thank you for joining today's call.

I'm Greg Deavens, Vice President of Investor Relations and with me are Edward Hanway, CIGNA's Chairman and Chief Executive Officer, and Michael Bell, our Chief Financial Officer.

The purpose of today's call is to review CIGNA's financial results for the second quarter and to discuss our outlook for full year and third quarter 2003.

As I mentioned on the first quarter call, the Securities and Exchange Commission has issued rules dealing with the use and presentation of financial measures that are not determined in accordance with generally accepted accounting principles, or GAAP.

To comply with the rules, we have reconciled non-GAAP measures used in today's press release and those we expect to use on today's' call to the most directly comparable GAAP measures.

These reconciliations are included in today's press release and in our second quarter statistical supplement.

Both of these documents are posted in the Investor Relations section of cigna.com.

We continue to use income from continuing operations excluding realized investment results and special items such as unusual charges and gains as the principle measure of performance of our operating segment.

This measure is the most directly comparable to the GAAP measure income from continuing operations.

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

We would remind you that 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, folks.

Three weeks ago we preannounced second quarter results and discussed our revised outlook on a July 14th conference call.

The results we reported today are in line with the revised expectations we disclosed at that time.

Today we will discuss second quarter results for each of our employee benefits businesses and actions we are taking to improve our healthcare business.

Following my introductory remarks.

Mike will review the financial details for the quarter and our earnings outlook.

Consistent with our revised outlook second quarter 2003 income from continuing operations, excluding realized investment results and special items, was $1.13 per share.

Income for the second quarter of 2002 on the same basis was $1.96 per share.

Results for the quarter reflect challenges in our healthcare business partially offset by solid results in our other employee benefits businesses.

As I mentioned in July, I have assumed direct responsibility for the healthcare operations to further accelerate our improvement efforts.

I led that operation between '96 and '99 a period during which we achieved strong results.

In addition, John Coil [ph], formerly of Trigone Healthcare, joined the company to lead our sales, distribution, marketing and medical management efforts.

John's focus is on improving execution in these areas to better meet our customers' needs.

Together with the other members of the healthcare management team, we are committed to improving results in the business.

The two primary challenges impacting healthcare's second quarter are higher than expected medical costs and lower than expected membership.

The key drivers of higher medical costs are operational challenges associated with the transition to new healthcare facilitation centers, accelerating costs related to certain provider contract terms, and the impact of reprocessing certain 2002 medical claims.

And we discussed each of these issues at some length on the July 14th conference call.

Now in order to address the medical cost issues, we have taken a number of actions.

To address a rise in utilization rates, we added additional nurse case managers and we directed them to focus on improving quality outcome and reducing costs in the more challenging markets and facilities.

We have also increased training in the new care facilitation centers to improve the effectiveness and productivity of our nurse case managers.

And substantially all of our new case managers have already received this expanded training.

To address rising unit costs, we are targeting specific facility contracts for renegotiation as we seek to reduce our exposure to reimbursement arrangements based on discounts off of bill charges.

We have stratified providers with these types of reimbursement arrangements and we are focusing our efforts on the highest priority opportunities.

We implemented service improvements to address the root causes of our claim reprocessing and other service issues.

Based on our improved service performance, we expect to see a lower level of reprocessing activity in the future.

We expect that our service improvements, together with successful implementation of our new medical management model, will ultimately improve medical cost and quality outcomes.

As we have previously acknowledged, our 2002 service issues have put pressure on medical membership.

Through the end of June membership is down about 8% on a same-store basis from December 2002 levels.

We now expect medical membership on this basis to decline an additional 2% by year end.

The fact of the matter is that our improvement in service results have clearly outpaced market perception.

We continue to actively communicate with customers, benefit consultants and brokers about our progress in service and other areas.

We are confident that our efforts will, in time, be reflected in our results.

Our service metrics this year have been strong and are now very competitive.

Specifically, we have seen improvements in our customer satisfaction and call center metrics.

Satisfaction for existing customers migrated to the new platform is over 90%, and new customer satisfaction with account implementation is approaching 100% and this represents significant progress versus early 2002.

Our average speed of answer for our large segment HMO customers is currently averaging 26 seconds, again a major improvement over early 2002 levels.

And the first call resolution rate for our customers is now approximately 90%.

In the claim processing area our current claim processing inventories are at industry standard levels, and we are also autoadjudicating 60-65% of the claims on our new HMO platform.

Again, we continue to actively communicate the results to employers, benefit consultants and brokers to close the gap between market perception and our actual performance.

Today we have three key priorities for our healthcare business.

These priorities are first, improving medical costs through contracting and our medical management efforts; second, is stabilizing membership by maximizing profitable sales and account retention opportunities and continuing to drive service improvements; and, third, reducing our cost structure by completing our restructuring plan and pursuing further efficiency gain.

Now regarding improving medical costs, we have substantially completed the implementation of our care facilitation centers.

While this generated some disruption in the first half, that disruption is now largely behind us.

I am confident that that this model is appropriate and will improve medical costs as well as quality outcome.

We are now focusing on improving productivity of our nurse case managers as we also work to reduce unit costs to the contracting actions that I discussed earlier.

Regarding stabilizing membership, it is too early to project our membership outlook for 2004, but we addressed one of the key drivers of our membership losses by significantly improving our service levels.

As the market broadly acknowledges these improvements, our membership should stabilize over time and begin to grow.

On the expense front, we are well along in executing the restructuring plan that we announced in the fourth quarter of 2002 with this helping to reduce costs this year and will result in additional savings in 2004.

Through our severance actions and attrition we have reduced staffing in the healthcare operation by approximately 3,000 people since the fourth quarter of 2002.

This represents substantial progress against our planned reduction of 3900 positions.

Before I conclude my observations on the healthcare operations, I want to emphasize that our specialty healthcare operations continue to perform quite well.

For example, our behavioral health business continues to experience growth in membership and also our pharmacy business has seen a significant increase in mail order prescription volume over the first half of last year due to increased mail order penetration in our medical customer base and increased use of mail order as the source for maintenance medications.

Let me move now to our other employee benefits businesses.

Second quarter results in our retirement business were strong.

Ending assets under management increased during the quarter, and we continued to benefit from the movement of assets to higher margin products.

Earlier this week we announced that we are exploring strategic alternatives to further maximize the value of our retirement and investment services business.

Our strategy for this business is sound and as I mentioned, the results continue to be strong in both absolute and competitive terms.

The options that we are considering include placing the business in a separate operating company with its own financial ratings for a possible divestiture.

CIGNA has a long track record of making decisions that are in the best interests of its shareholders and customers.

We expect that any option that we pursue relative to the retirement and investment services business will meet this standard.

We recognize the need of our retirement customers for financial security, and we are committed to pursue steps to enhance that security.

At this point we are not in a position to comment further on this matter and as we have more to tell you, we will do so.

Our group disability, life and accident business is also performing well and earnings are tracking in line without original expectation.

In addition, our solid service delivery and actions to increase penetration in the middle market segment are contributing to these results.

Our international operations also posted strong results for the quarter, primarily reflecting growth in our ex-patriot benefit business and our international life and accident business which also continued to perform well.

Relative to our healthcare business, results clearly need to improve.

At the same time, the significant operational progress we have made to date bodes well for the future.

Results in our other employee benefits businesses are strong and are consistent with the estimates we provided on the first quarter call.

We are determined to improve healthcare results and to restore our the leadership position in this core business unit and, again, we are confident in our ability to do so.

With that I'm going to turn it over to Mike who will review the financial details of the quarter.

And after Mike concludes his remarks, I want to make a few further observations before we take your questions.

Mike?

Thanks, Ed.

Good morning, everyone.

In my remarks today I will review CIGNA's second quarter 2003 earnings and provide our outlook for the full year and for third quarter of 2003.

I would begin by noting that relative to special items in the quarter we recorded a $286 million after-tax charge to strengthen reserves for the variable annuity death benefit business or VADB.

This charge is consistent with our discussion three weeks ago, and I will provide additional details in a few minutes.

In the balance of my remarks, I will comment on income from continuing operations before realized investment results and special items.

This view of earnings is useful in understanding the performance of our businesses.

This is also the basis on which we provide our earnings outlook.

On this basis, earnings were $158 million or $1.13 per share in this year's second quarter versus $280 million or $1.96 per share last year.

Our second quarter results were consistent with the estimates we have provided in our mid-July preannouncement.

I will now comment on segment earnings beginning with our healthcare life and disability benefits segments.

Segment earnings for the second quarter of '03 were 108 million compared to 229 million for the second quarter of last year.

The year-over-year decline was due to the impact of higher medical costs and lower membership.

The higher medical costs reflected three key factors.

The first is increased utilization due to the disruption that we experienced in implementing our new medical management model.

The second is increased unit costs which primarily relate to certain facility contracts based on discounted bill charges rather than per diem or fixed case reimbursement rates.

And the third is the impact of claims submitted for reprocessing.

Medical membership on a same store basis was down 8% from year end reflecting lower customer retention in sales.

Premiums and fees for the segment decreased 1% relative to last year's second quarter with lower membership largely upset by rate increases.

Relative to the components of the segment, I will discuss HMO followed by indemnity.

HMO earnings include results from our health plans and from our specialty healthcare businesses.

Excluding amortization of intangibles, HMO earnings in the quarter totaled $73 million versus $132 million in the second quarter of '02.

The decline in HMO results from a year ago reflected increased medical costs, lower membership and higher per member expenses.

Our year-to-date commercial HMO medical loss ratio increased to 88.3% compared to 84.3% in '02.

This increase reflected higher utilization in unit cost as well as prior period adjustments including the impact of reprocessed claims.

For the full year we continue to expect commercial HMO net premium yields to be approximately 14-15%.

We expect commercial HMO cost trends for the full year to be approximately 15%.

By component cost trends are expected to run in the high teens for inpatient and outpatient and in the low teens for professional services and pharmacy.

For our administrative services, our ASO HMO business, we expect overall medical cost trend to be about 13-14% for full year '03.

Now moving to indemnity.

Second quarter indemnity results, excluding amortization of intangibles, were $39 million.

This compares to $100 million for the second quarter of '02.

The year-over-year decline reflected lower membership and higher operating expenses per member as well as the impact of higher medical costs.

Within indemnity our group disability life and accident business continued to perform well.

Moving now to the employee retirement benefits and investment services segment.

Earnings of 59 million compared to 57 million in the second quarter of '02 reflecting higher interest margins and lower tax expense offset by the impact of the lower average level of the stock market.

Ending assets under management were approximately 5% higher than at the end of the first quarter of this year and relative to the level a year ago.

In our international segment earnings were 11 million versus 8 million in the second quarter of '02.

The increase in earnings was driven by growth in our ex-patriot benefits businesses.

Our life, accident and health businesses also continued to perform well.

Relative to our other reporting segments, the runoff reinsurance, other operations and corporate segments, reported an aggregate loss of $20 million.

I'll comment briefly on each of the pieces.

The runoff reinsurance segment includes CIGNA's remaining reinsurance operations.

The segment reported a loss of $20 million, excluding the charge for VADB that I mentioned earlier.

This compares to a $3 million loss in the second quarter of last year, and the higher loss primarily reflected the impact of increases in claims and reinsurance recoverable reserves.

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

Earnings for this segment of $19 million were slightly better than second quarter of '02 mainly reflecting improved results in our investment operations.

For corporate, which includes unallocated investment income in parent company expenses, the second quarter loss was $19 million compared to a loss of $28 million in the second quarter of '02 and the year-over-year change reflected lower operating expenses.

Before providing our third quarter and full year '03 earnings outlook, I'll provide details around the VADB charge and I will discuss our cash flow outlook, capital position and ratings.

Relative to the VADB charge, we have completed a reserve review for the runoff VADB [Inaudible] and we have recorded a charge in second quarter to strengthen reserve.

Last year we implemented a hedging program to reduce the exposure to stock market declines.

The hedge has been performing in line with our expectations and is essentially been offsetting the impact of stock market results on our liability.

There are a number of factors in addition to the stock market which affect our exposure.

These include mortality and policyholder decisions to lapse or to withdraw part of the funds from their accounts.

The latter are commonly referred to as "partial surrenders" or "withdrawals."

The reserve review looked at all relevant factors and reviewed both our experience to date and assumptions for the future.

Based on the review, we have increased our reserve and recorded a charge of 286 million after tax.

The increase in reserves primarily reflected updated assumptions related to partial withdrawals.

It also reflected updates to other assumptions including mortality and lapses.

Now relative to the partial withdrawals, I'll start by recapping the three ways that partial withdrawals affect reserves.

First, partial withdrawals reduce account values and, hence, the opportunity for future account value growth which would reduce the death benefit.

Second, partial withdrawals reduce future premiums because premiums are usually based on account values.

And, third, policyholders who undertake partial withdrawals are less likely to lapse in the future.

To date, we have experienced a modest level of partial withdrawals.

In the course of our review, we made two adjustments to our reserve.

First, we increased our reserve provisions related to partial withdrawals that have occurred to date.

Our existing reserves had taken into account the locked in death benefit and reduced account value for the policyholders who had withdrawn partial balance.

We have now increased reserves to reflect the assumption that these policyholders will not lapse in the future.

Second, we made an explicit provision for additional partial withdrawals in the future based upon our experience.

So by way of summary, our hedging program implemented last August has been effective in significantly reducing our exposure to equity market fluctuations.

In the course of our reserve review, we established a specific reserve for partial withdrawals to date, established an explicit reserve for future partial withdrawals and reflected updated assumptions for other key factors including mortality and lapses.

We believe our reserve assumptions and provisions for future experience are appropriate.

It is important to remember that there are uncertainties related to these assumptions.

Our disclosures will continue to discuss the uncertainties and the potential impacts and we will continue to closely monitor our experience for the factors that affect these reserves.

As I noted on the July 14th call, this is a GAAP charge and does not require any immediate cash outlay.

I'll now turn to our cash flow outlook and capital position.

I discussed our parent company cash flow outlook on our July 14th conference call.

As I indicated then, we continue to expect to end the year with approximately $50 million in cash at the parent company group.

The expected sources and uses of cash for 2003 are as follows: We started the year with approximately $50 million.

This year's dividends from subsidiaries, that is, their dividends from the parent group after satisfying their own operating needs, amount to $500 million.

We will pay out a total of $300 million in combined interest to bondholders and dividends to shareholders.

We retired approximately $125 million in debt during the first quarter, and we expect other uses of cash to net to approximately $75 million.

This will leave us with approximately $50 million in free cash as a parent company group at year end.

As we said before, this modeling assumes no change to the current rate of dividends to our the shareholders.

Further, we have no additional corporate debt maturing until 2006.

I'll now comment briefly on our ratings.

As a result of our announcement on July 11th, S&P and Moody's reduced the financial strength rating of our Connecticut General Insurance subsidiary.

I would note that at the new levels Connecticut General's rating remain on par with or better than our major healthcare peers.

We are aware that many of our retirement clients are sensitive to financial strength ratings, and we are strongly focused on meeting our customers' needs.

Turning to the outlook now for full year 2003 earnings.

I would start by noting that our projections for consolidated earnings and for results in the employee healthcare life and disability benefit segment are unchanged from our discussions on July 14th.

Consistent with our normal practice, I will provide estimates of the after-tax earnings and continuing operations before realized investment results and special items.

On this basis for the full year, we expect consolidated earnings of $5.00 to 5.25 per share.

With respect to the segment, starting with the employee healthcare life and disability benefit segment, we expect earnings of 500 to $550 million including amortization of intangibles of $15 million.

We expect [Inaudible] earnings of 365 to $395 million, and we expect indemnity earnings of 150 to $170 million.

Before moving on to the other segments, I would like to explain how we expect to achieve our revised full year segment earnings estimate of 500 to $550 million.

Taking the $108 million that we earned in the second quarter and adding back the impact of prior period development, we begin with an estimated second quarter run rate of about $130 million.

Repeating this run rate in the third and fourth quarter yields second half earnings of about $260 million which is consistent with our full year projection.

We expect to see some improvement in medical costs results in the balance of the year from the initiatives that Ed described.

This should approximately offset the impact of projected membership declines.

We also expect to continue to generate the strong disability life and accident and specialty healthcare results that we have delivered in the first half of the year.

So to sum up for the employee healthcare life and disability benefit segment, we expect to achieve earnings of 500 to $550 million for full year '03.

Turning now to the other segments.

We expect the company's other segments in the aggregate to contribute approximately $200 million in earnings which is consistent with our previous projections.

We expect 215 to $225 million for the retirement business.

This assumes stock market appreciation of approximately 2% per quarter in the remainder of the year.

We expect 45 to $50 million for the international segment and we expect 10 to $20 million for the combination of other operations and the runoff reinsurance segments and we expect a loss of 70 to $95 million in corporate.

So to recap our full year '03 outlook, we expect consolidated after-tax earnings from continuing operations before realized investment results and special items of 700 to $750 million or 5.00 to 5.25 a share for the full year '03.

Turning now to the third quarter.

We currently expect consolidated earnings before realized investment results and special items of $1.15 to $1.35 per share.

Our expectations for the third quarter by segment are as follows: For the employ healthcare life and disability benefit segment, we expect total segment earnings of 120 to $140 million including amortization of intangibles of $4 million.

Within the segment we expect HMO earnings of 92 to $102 million and indemnity earnings of 32 to $42 million.

For the retirement business we expect earnings of 52 to $57 million, for international we expect 12 to $14 million and in the combination of the other operations and runoff reinsurance segments we expect between 0 to $5 million of earnings.

And we expect the loss in corporate to be between 20 and $22 million.

In total, we expect third quarter consolidated after-tax income from continuing operations before realized investment results and special items of 164 to $194 million or $1.15 to $1.35 a share.

So to recap, our second quarter results were in line with our revised outlook, results were below last year due to lower earnings in our healthcare business, results in our other businesses continued to be strong.

As I noted earlier, our financial position and outlook remains sound.

And with that, I'll turn it back to Ed.

Thanks, Mike.

Now before we respond to your questions, I wanted to make a few additional observations and reiterate a few of the points that we have made this morning.

The first is that I want to emphasize that three of our four employee benefits business, the retirement and investment services, international and group disability and life operations, continue to perform well.

Relative to the first quarter, the retirement business had a strong quarter and it benefited from both equity market gains and good premium and deposit inflows.

The group disability life and accident operations also posted a solid quarter with good sales in the disability business, and this disability business has been particularly successful in increasing our share position in the middle market segment.

And the international operation also posted strong results driven by the ex-patriot benefits business and the continued contributions from the international life, accident and health operations.

I feel good about the progress we have made in each of these businesses, and given the strength of these operations as noted, I'm focusing my time and attention on accelerating progress in our healthcare business.

I also want to emphasize that within healthcare our specialty healthcare results remain strong.

The area with the greatest need and opportunity for improvement is clearly the core medical business.

Our top priority for the healthcare business include first, effectively managing and reducing medical costs, second, stabilizing and then growing our membership, and, third, improving our operating efficiency and cost positions.

Our medical costs initiatives include continuing implementation of our new medical management model including intensified case management activities resulting in improved quality outcomes and lower costs, executing targeted recontracting initiatives to standardize and improve contract structures and terms and changing benefit plans to address evolving market needs.

Regarding our second priority, actions to stabilize and then grow our membership, include continuing to improve in our service delivery to employer, members and providers.

Our current service levels are competitively strong as I noted, and we will sustain them while aggressively communicating that strength to the marketplace.

We are also enhancing our product offerings to ensure they are meeting our customers' needs for both cost effectiveness and quality, and we are driving and demonstrating the value of clinical integration of our core medical and specialty healthcare product offerings.

And with regard to our third priority, achieving ongoing efficiencies, we will complete our healthcare restructuring plan over the balance of 2003; and we will continue to migrate customers to our new service platform with a target of 70% of members is on the new system as of 1/1/04 and will contribute to increased operational and service efficiency.

To conclude, while we still have challenges to deal with, I believe we have already made meaningful and measurable progress.

Further, we have the resources and determination to get the job done.

And I'm confident that we will return the company to its historical pattern of profitable growth and in turn achieve our principal objective of building shareholder value.

And with that, we'll now take your questions.

Thank you, ladies and gentlemen.

At this time if you do have a question, please press star 1 on your touchtone phone.

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

Also, if you are using a speakerphone, please pick up your handset before pressing the button.

One moment please for the first question.

We'll go first to Bill McKeever with UBS.

A question on the care facility centers that you -- I just want to get a flavor for how those are going to operate and how many of those you put into place and could you give us some flavor for that operation?

Yeah, Bill, it Ed.

I can.

There are currently about seven care facilitation centers.

And what we have done here is to consolidate our telephonic nurse case reviews and also to have those centers be the focal point in coordinating our local activities of on-site nurses and on-site medical professionals.

This has afforded us a couple of things.

First of all, it has allowed us to consolidate resource.

It will also allow us to have a very consistent approach to how we execute in our utilization management areas across the country.

So some of the local differences that might have existed in practice will no longer occur.

We'll be much more consistent, and it will support very directly our personal health facilitation model.

The other area that is quite important within this is we will be able to specialize in areas like neonatal and cardiovascular and cancer areas, some of our clinical resources.

And we have a very significant cadre of medical professionals and through these care facilitation centers, we will focus expertise around those areas and some additional ones to provide a very high level of touch and interaction with our members as well as the facilities that are providing services in those areas.

So we believe it is an extremely important strategic move for us while we have acknowledged we have had some bumps. we are beyond those, and I think these centers are starting to function very effectively.

Thank you.

And on -- I know on '04 it is a bit early to give us some indication for yields and for costs, but what do you think the differential has to be between the yields and the costs in '04 for the margins to get back to normal levels?

Bill, it is Mike.

You have it right.

It is a little early for us to give you specific guidance around 2004.

I would expect that our pricing trends next year will be roughly in line for our commercial HMO business with our cost trends; but we're literally working through that decision-making process as we speak, and we would expect to give you the specific guidance at third quarter.

Okay.

So yields are in lines with costs Then the way to improve the margin is through the care facilitation centers; is that the approach for '04?

Well, that will certainly be a one element.

We do expect that utilization with improve over the second half of this year and into '04, and that does provide an opportunity for us.

Like I said, it is early to give you a specific sense of medical loss ratio for next year which I think is at the heart of your question.

Well, I'm not asking so much the specific number rather but sort of the strategy of do you think you can just -- want price in line with costs or do you want to go above costs?

Well, I think the -- the first thing I would remind you is that around both utilization and unit costs we have specific action plans in place and we expect to mitigate trends next year as compared to this year.

Again, how much of that we reflect in our pricing is something that we are still working through as we speak.

Okay, fair enough.

And then my last question on the retirement and services business.

You mentioned that one of the options might be to keep the company and have a separate company.

Would this involve possibly a spinout to the current shareholders of CIGNA retirement services that would trade in the market; is that what you mean by that?

Bill, this is Ed.

I think as we indicated in the formal comments, as we have more information to share we will do so.

What we have said is that the option we would look at relative to cordoning off that business, if you will, or establishing a separate enterprise, would be one that would have its own rating and think that is as far as we have gone.

As we said in the announcement, we are looking at various alternatives.

So I think it is a bit premature to speculate what those alternatives might be in total.

Okay.

Great.

Thank you very much.

We will go next to Josh Raskin with Lehman Brothers.

Good morning.

First question, just on the provider renegotiations, is this a strategy to go back to the providers intercontract term or is this as they expire you guys are negotiating to, you know, take out some of the stop loss or just more the percentage of bill charges is the first question?

Josh, it is Ed.

Actually, it is both.

As I said, we have prioritized where we think we have contracts that are inconsistent with what is best for both us and the facility, and some of those contracts are coming up for renewal so we will deal with it in a normal renewal cycle.

And some of those are contracts we're going back to the facility and opening those contracts and attempting to negotiate changes today.

So I would say it as bit of both, Josh.

And are the providers open to this?

I mean, I assume you have sort of these, you know, general 60 day outs and you could always get out if you had to; but what is the response on the providers?

Are they understanding that yeah, this is the way the market is moving and we are willing to do that?

Well, they may be understanding.

I wouldn't stay it's always a pleasant conversation, but it really differs facility to facility.

And it involves where that facility might be with its contract and some things that they might want to change, so it really is quite different facility by facility.

But I would stress that we are having some success.

We have been working at this for awhile and we have good information and I think we know how the market is moving and so do the facilities.

So as in any negotiation, it is something you just have to stay at and work hard at.

Second question is on the membership levels.

And I know you guys aren't commenting on expectations for 2004 levels, but I think you have made some comments around RFP activity at least and as you were moving through the large [Inaudible].

Could you just give us a sense of what percentage of your book is up for renewal and maybe the level of external RFPs that you have responded to would be helpful.

I think what we said a couple weeks ago, or what I said a couple weeks ago, was I think about 15% of the -- let's call it the largest national account book were out to bid at 1/1.

And that was, to be honest with you, about what we expected.

And we are in the process of getting decisions back on those as we go, so it's a little early to say exactly what we can expect there.

I think right now we expect the retention rates at 1/1/04 to be a bit better than they were a year ago.

We haven't seen is much flow of new business.

We seen some and we've actually been successful in some, but not the level that we would like to see or expect over time.

So the retention levels for 1/1 will be a little bit better but offset somewhat by slightly lower new business activities?

Yeah, that is about what we see right, But, again, it is fairly early still.

And then just a last question.

There seemed to be a pretty sizeable capital gains -- that may be a question for Mike -- on the sale of investments.

I was wondering was that higher investment sales than typical or was that securities that happen to have gain?

Josh, it is more the latter.

We manage each of our portfolios with specific investment strategies, and it happened to result in more realized capital gains than prior periods.

So it really does not have to do with managing outside monies or how our investment operations are dealing with those customer markets.

Okay.

Anything further, Mr. Raskin?

No, thank you.

We go next to Charles Boorady with Smith Barney.

Thanks.

Good morning.

A couple questions.

First the VADB charge, the $441 million, it wasn't clear to me where that would show up on the balance sheet.

What line item is that on?

Is that a contraasset or does that show up as a liability?

No, it is a liability, Charles.

It is in the reserve number.

Let's see if I can pull out my [Inaudible] supplement here.

I am on Page 3 of the [Inaudible].

Maybe while you're looking that up, I was also trying to understand this is probably a very fundamental basic question, but on a GAAP basis how do you decide what to report as GAAP earnings in the segment given the magnitude of these charges?

Or how should I think about what time period this $441 million should be spread across when I think of an ongoing GAAP earnings number for that second?

First to answer your other question, the VADB reserves show up in future policy benefits so it would be in the $11.997 billion number.

In terms of your question around the GAAP reserve and how to think about spreading that back, I don't think I have a good way to mechanically tell you how to do that.

The VADB reserves are based on a very complex model that has a lot of assumptions, a lot of moving parts of a number of judgments.

The change in the reserve for second quarter reflects the reserve review that we just completed.

The biggest component, as I said in my prepared remarks, is the partial withdrawals.

Some of the reserve for partial withdrawals are based on the experience that we have seen to date, and we now have an explicit assumption about what the level of future partial withdrawal experience will be.

So I don't think there is a clean way to, you know, think about pushing this back to prior periods.

I mean, I would remind you, we got out of this business in the late '90s, so it is purely in runoffs.

I guess to some extent you could go push it back to the '90s if you wanted.

Yeah, except that it just keeps hitting the income statement and trying to understand the real ongoing GAAP profitability of the company.

When there is a large charge like this it is hard to know how to normalize that.

I was just curious how you thought about it.

Let me respond to that embedded question.

Let me be clear, we do not expect VADB to be a drag on future income.

We do not expect that we are going to need to continue to strengthen reserve assumptions.

Again, I mean if that was the case, obviously I would have selected different assumptions this go-round.

My point was actually the opposite, that by taking a large charge like this it could make the GAAP earnings look higher than they otherwise might have been, and I wasn't sure how to think about that going forward.

Okay.

Yeah, I wouldn't count on any earnings from VADB in the future and I wouldn't count even -- I mean, there is a lot of uncertainty here, obviously, so there might be gains, there might be losses.

But I suggest that you think about that in terms of zero going forward.

And given the future policy benefits where the $441 million shows up, that only increased by $210 million from the first quarter?

Yes.

Was there other items that would have drawn that account down by the $210 million difference?

Well, it bounces around a lot.

Let's remember for VADB in particular, we had a drop in the reserve balance in second quarter as a result of the stock market increasing.

So absent the reserve review at second quarter, the VADB future policy benefits reserve would have been lower than it was at the end of first quarter.

Remember, we had $312 million of pretax hedge losses in second quarter, that would have been offset by about $312 million of reserve drop in second quarter X the reserve review.

And reserve review sounded like a special event, whereas in my mind it seems like something that would be done on a continuous basis as you get new data on the behavior of the customers in terms of the rate that they are surrendering, et cetera.

Do you have like an annual plan reserve review, or could you explain the background behind what was different about this reserve review versus what you do as a normal course of business going forward?

Sure.

Again, I would first remind you that the VADB reserves are based on a very complex model.

There are a lot of assumptions here.

There is a lot of uncertainty, a lot of moving parts.

This model does require a series of judgments particularly as we think about experience in the future.

When we saw the first quarter experience data, basically I determined that an end-to-end review would be appropriate.

And basically we went back and looked at all of the assumptions, all of the considerations all of the inner workings of the model and that is what you see here.

Again, do I expect to look at this annually going forward?

Well, I mean, we're looking at it on an ongoing basis.

If the experience data changes materially, I'm sure we would do another, you know, thorough end review, start-with-a-clean-piece-of-paper-type approach.

But that is the thing that was really different at first quarter.

It sounds like there are real material swings from quarter to quarter, and so, I mean, it sounds like the review should be taking place more on a continuous basis.

But do you plan other special reviews the way you just concluded this one?

Charles, this is Ed.

I just want to reinforce something that Mike said here.

There is a fair degree of complexity to this, and these reserves are reviewed literally every month and every quarter.

But the normal process for reserves with this type of complexity and so forth is from time to time you make a decision that you need to go back and look in detail at all of the underlying assumptions.

And that really is dependent upon the analysis you do month to month.

So this is not something where we look at it once a year and forget it for 11 months, that's not the case at all.

We are constantly reviewing it and will continue to do that.

Thank you, Mr. Boorady.

We go next to Christine Arnold with Morgan Stanley.

Good morning.

I have a couple questions.

You said that you'd reprocessed claims from 2002 and that that is like 20 to $25 million worth.

Were there any reprocessed claims in the second quarter that related to the first quarter and, if so, can you give us some sense of magnitude?

And then I have a follow-up.

Christine, it's Mike.

It is the case that we had prior year development in second quarter that amounted to about $25 million.

I would not pin all of that literally on reprocessed claims but certainly the bulk of the 25 would have been driven by the reprocessing.

We did have some prior quarter development in second quarter that relates back to first quarter.

And, again, some of that I'm sure had to do with the reprocessing that we experienced in second quarter.

Order of magnitude?

Can you give me a sense?

I would say $4 million after tax in second quarter belonged back to first quarter.

Okay.

And then if we think about the second quarter enrollment decline, how much of that were groups that really were up for renewal in the first quarter but delayed their decision versus groups that made a fresh decision in the second quarter because they were up for renewal?

I would say a small percentage was in your first category.

The vast bulk would have been in the second category.

So I guess, I mean, well here is the issue: Accounts that are now up for renewal are deciding to leave.

So as we look into 2004, you said you have 15% of accounts that you think you RFPs out on that are your existing accounts that may go elsewhere.

First, how do you know if they're inviting someone else bid against you?

And second of all, what was that percentage this time last year?

Christine, it is Ed.

First of all, I just want to clarify one thing.

I said that there were about 15% that we know have RFP requests for proposals out.

We don't expect that 15% to go somewhere else.

We expect to retain a portion of those accounts.

So that is one.

And secondly, in terms of year-over-year, actually I think that is about consistent with what it would have been a year ago.

I don't believe it is significantly higher or lower than a year ago.

It is about the same, about 15%.

We have about oh, I think, 300 or so odd accounts in this particular block that we are talking about.

So that's about 40, 45 accounts out for RFP.

And I guess the other part of your question, Christine, was how do we know?

Well, when an account goes out for a request for proposal and it is a renewal piece of business, in other words, we have it and they go out for an RFP, we know that they're going out to other people other than just us.

So you it have pretty good control over that in terms of understanding what the competitive situation is.

Okay.

So just so I understand now to think about this, and help me frame this if I'm wrong.

About the same amount of membership is out to bid this year as was last year, so for in order for the enrollment progression to change '04 versus '03, and just in terms of what your enrollment looks like since you have less new business potentially coming in, your retention would have to go up a lot on the stuff that is already out?

They would have to put their RFP out and then decide in more circumstances to stay with you than last year for the enrollment to look better; is that right?

That would be right, yes.

We said -- in fact, I think I said this earlier, that the account retention rates looked to be a bit better and the new business is a bit less than we would like.

Okay.

Now this is just -- the other thing I would stress, Christine, is this is just the national account block.

We have got a significant amount.

I guess half the book is in middle markets, and we still have to understand what that is going to look like.

I think one of the things we shouldn't forget is our service condition at this point in time is significantly improved.

I won't go through all that again, because I did in my prepared remarks.

Right.

And we're hearing that from the market, too.

Pardon me?

We're hearing from the marketplace that your existing service is better.

Yeah.

Well, that is encouraging.

And so that is obviously going to have a positive impact on both retention and new business as we go forward.

The final question is on retirement.

Could you give us a sense for the earnings of that segment from assets that you manage internally to find contribution assets internally managed versus ones that you hand to others to manage?

Well, Christine, it is Mike.

I think a better way to think about the profitability of the retirement business is to look at it on an all-in-customer basis.

Trying to split out how much money do we make on the recordkeeping versus money that we make on assets that we manage in that relationship versus earnings that we make on assets in that relationship that are managed by somebody else, I don't think is a particularly helpful way to think about the profitability of that business.

Then let me try and get at this a more direct way.

I'm trying to think about the value of this, and my understanding is that if you manage the assets you get a bigger multiple.

Is that wrong?

How do you think about the value?

I think about the value by looking at the $220 million, plus or minus 5, that we expect to make this year from that operation.

That 220 includes the retirement business and the ongoing corporate-owned life insurance business.

I think that is a better way to think about it as opposed -- and certainly the vast bulk of those earnings are driven by the combination of the services that we provide our customers as well as the investment management fees on those assets.

I think that is a better way to think about it than try trying to split it underneath that.

So am I wrong to assume that a buyer would assign a higher -- I'm just not a retirement person, so forgive my ignorance, please.

Sure.

I just don't know how to think about how a buyer would think about the value of the assets that you manage versus the ones that someone else manages.

You're saying there is not a difference in the value that would be assigned externally?

I think the way any outsider ought to look at the value of this business is to look at the all-in earnings of the relationships that we have with our customers.

I think that is a much better way to do it than to try to sort of split out various pieces.

Okay.

Thanks.

Sure.

Thank you, Miss Arnold.

We go next to Scott Fidel with J.P. Morgan.

Good morning.

The first question is just on your pricing strategy.

I know you already talked about '04, but just for the back half of this year.

You said you are expecting full year yields of 14 to 15%, so should we just assume that that is going be stable in the 14 to 15% area in the back half of this year so that you expect some moderation in trend and that's where you get the spread back on the second derivative in the back half of the year?

It's Mike.

Yeah, what you're saying is accurate.

We do expect the pricing trends for the second half of the year to be on the upper end of that, so I would say 15ish for the second half of the year.

And we do expect the margin improvement over the course of the second half of the year to be primarily related to medical costs.

Remember at this point about 75-80%, depending upon the product line, of the accounts have already renewed so the pricing lever is more powerful early in the year.

Okay, got you.

And then just a second question.

In terms of your HMO business, just looking at the specific markets, are there any markets that are relatively underperforming that you might look at exiting and, you know, given or vice versa -- any markets that are performing better than the others, you know, where you would plan on focusing on?

Scott, it is Ed.

You know, we have over the last several years taken a hard look -- this is on the fully-insured HMO I would stress -- and I would, you know, we have pulled back from some small markets over the last 15 or 18 months.

As I look at the book of business today there are some regional differences, but I wouldn't point to any huge variations or significant markets where we would make what I would describe as a meaningful change.

It doesn't mean there might be some very small commercial HMO markets where we might look to withdraw.

I would say what is more important is we are looking very closely at the book of business on an account-by-account basis and ensuring that we are comfortable with the profile, the accounts, the segments that they are in, the classes of business that they are.

And that where we will look to attempt to get the book of business positioned effectively so we can reach our margin goals.

It is less geographic as a practical matter for us than I think it is a total book of business review.

Okay.

Thank you.

Thank you, Mr. Fidel.

We go next to Eric Veiel with Wachovia Securities.

Thank you.

A question about the underlying cost trend and some of the things that you are going to adjust that and the making to improve it is.

It sounds like all of the things that we are talking about here, you know, getting the care facilitation center productivity up and recontracting on the hospital side, is all focused on the inpatient.

But if we look at your professional trend in the low teens, it looks to me that it is running above industry average.

So first part of the question is what are you going to do to get that part of trend down?

And, then second part of the question is, how can we be comfortable that that part of the trend isn't running higher just due to bad risk selection in the group?

And I'm sorry, [Inaudible] the business.

Eric, it is Mike.

Regarding the physician trends in particular, we do expect those to moderate in the second half of the year as compared to what we have seen in the first six months of the year.

We are actively market-by-market relooking at all of the fee schedules and all of the provider contracts that we have.

Some of those are capitation, many of them are fixed fee schedules.

In between the recontracting effort, as well as the collateral benefit that we get on physician utilization due to improved inpatient utilization, we expect that to moderate somewhat in the second half of the year.

Okay.

In terms of your other question around risk selection, it was as we have talked about before.

We really feel quite pleased about the progress that we have made in underwriting.

We feel great about the underrating management team that is now in place and have restored some critical disciplines there.

As we have looked at the book of business results through our backend monitors, they would suggest that we are in fact enforcing strong new business pricing disciplines, and we are executing effectively on renewals and executing effectively on risk selection.

So I would not point to underwriting as being a culprit of the trend.

Okay.

Second question, again, still on the cost side of -- the medical cost side.

If you think about the network right now and as you go through these negotiations, are you willing to shrink the network from a hospital side if you just -- if there is no motivation by the facilities?

Do you think that you can provide a smaller network product in the marketplace and still meet your enrollment goals in 2004 if that is what it comes down to?

Eric, we look at that market-by-market and we take into account the particular employer situations we have in that market.

But yes, we have had situations where we have chosen to separate from certain facilities; and if we thought we needed to do that we would consider it.

Obviously, there are a lot of things that go into that consideration, including the particular employers that we are working with in a market and so forth.

But that is part of the equation and when we look at what I'll call the medical contracting strategy on a market-by-market basis.

Then just the final follow-up.

Ed, can you give us any more quantifiable or empirical evidence to support the statement that you made in response to someone else's question earlier that the care facilitation centers are starting to function more efficiently?

I mean, is there anything you can specifically point to get us comfortable with that?

Eric it is Mike.

Yeah.

If we look at the second quarter year-over-year trend in inpatient days as compared to the first quarter inpatient year-over-year trend in days, that has moderated somewhat and we expect that to moderate further in the second half of the year.

Can you give us the actual numbers?

First quarter was up on a days per thousands basis for the commercial HMO book 8% year-over-year.

Second quarter, again, there is still some runout to be had there, but I would expect to be closer to 7.

And at this point we expect the second half of the year to come in at a year-over-year trend rate on inpatient utilization of 4%.

Okay.

Thank you very much for that extra detail.

Thank you, Mr. Veiel.

We go next to Ellen Wilson with Sanford Bernstein.

Yes.

First on the negative prior period development and claims reprocessing, I just want to make sure I'm right in understanding your guidance applied for the back half of the year assumes that you will no more of that running through the healthcare segment earnings in third and fourth quarter, so I want to make sure I'm right in assuming that.

And if so, I just want to understand what kind of visibility you have if that is going to be the case, particularly given that [Inaudible] already developing related to the first quarter.

Ellen, it is Mike.

It is correct that we do not expect any additional prior year development in the second half of the year.

And in terms of visibility, we have now done an end-to-end review of the reprocessing volumes.

We have looked at the volumes that we have had, we have looked at the percentages that have required additional payment, and we are confident that we have built that higher level of claims into our baseline of medical expenses that were accruing at throughout this year.

So at this point we are confident that our reserves are appropriate and fully include the recent pattern and volume of reprocessing.

I would also point out for completeness we have addressed several of the root causes of the service problems that we had in 2002 that contributed to this pattern of reprocessing.

So we do expect over time this reprocessing to be much less of an issue, but the point is the reserves themselves include the acknowledgement of the higher medical cost in the baseline.

I know you all talked about it a few weeks ago, but could you just remind me exactly why you think all the reprocessing is occurring?

Well, again, this is an industry phenomenon.

It is certainly not unique to CIGNA.

This situation, as we talked about, is where providers asked us to review certain claims.

They are, in effect, questioning the reimbursement that we have made.

We have historically had a certain level of this, we have historically had reprocessing adjustments -- some are positive, some are negative -- and that historical pattern is what was reflected in our claim reserve factors.

What we saw this year is that in second quarter the volume -- actually throughout 2003 -- but we saw a significant increase in the volume.

And it also became clear to us in second quarter that the claims that we were actually reprocessing was requiring a greater proportion of additional payments to be made versus what we had seen in the past.

In terms of what is causing that, again, the providers are questioning the reimbursement level.

And as we have gone back to reprocess it, again, there have been more situations where we needed to make an additional reimbursement.

And then also, second quick follow-up.

On the experience rate healthcare business, could you just give us an update on where you are right now in the true-up process and renewal discussions for the portion of that business that is a 1/1 renewal?

And remind me what portion of that business is a 1/1 renewal.

Ellen, to be clear, are you talking about a 1/1/04 renewal?

Yes.

Okay.

First off, about 50 to 55% of the experience-rated business renews on January 1 .

We are in the very, very early stages of those renewals.

Again remember, this is mostly middle market business as opposed to national account business, so it is a little early to speculate on 2004.

I would point out even with the challenges that we have had in experience rated, this continues to be a good product line for us and it is making money for us in '03, although I would acknowledge not as much as it has historically.

Okay.

And then just kind of related to that, what kind of assumptions are you making as you do get ready to go into the true-up process renewal discussion related to what you might have assumed a year ago, assuming some of those might not renew with you and what have you in terms of medical claims exposure that you might take on if they choose not to true-up, basically.

Ellen, it is a little early to give specific medical cost trend guidance for 2004.

At this point, we have been looking at it on an account-by-account basis and on a market-by-market basis, but I prefer to wait for third quarter to get specific trend assumption information for 2004.

Okay, thanks.

Thank you, Miss Wilson.

We go next to John Rex with Bear Stearns.

Thank you.

Back on the visibility front, as I recall in that first quarter when you had unfavorable reserves value for 4Q, one of the issues identified were care centers and the fact that the issues you had in getting those going.

And as I recall from the discussion that I had with you at that point, that you identified the issue, you believed it was fixed.

And then we come into Q2 we see it wasn't -- As you have gone back and looked at this, what were the gaps in the data?

What you think back in that period that actually the processes were running better?

And, I guess, how do we have confidence that something has been fixed but now you really know that they are running better?

John, it is Mike.

In terms of the healthcare facilitation centers, the measures that we use there relate to inpatient utilization days.

We did see an increase in inpatient utilization in fourth quarter and we saw it again in first quarter.

With the benefit of hindsight, the claims emerged in first quarter related to fourth quarter services at a higher level than we had originally estimated, and I wouldn't say that it was driven more -- I wouldn't say that it was driven primarily by utilization.

Instead it was really higher unit costs per day that drove that.

Now some of that still relates back to the healthcare facilitation centers, because one of the key roles that our case managers in our healthcare facilitation centers play is to make sure that people that are in the hospital are going to the appropriate level of care.

In my view it still relates to some of the early challenges in the steeper learning curve that we had on the healthcare facilitation centers, but that was the nature of the prior period development that we saw in first quarter related to fourth quarter and probably, I'm speculating, but I would speculate that part of that is what we saw in second quarter related to first quarter as well.

Ed, did you want to add there?

Yeah.

John, a couple of things.

I think your question is okay.

Well, how do you have confidence that what you expect for the second half of the year now is going to actually occur?

And a couple of things.

First of all, this was a fairly significant change and a fairly significant number of people were impacted by this.

We had to do a significant amount of training, we had to get people up a productivity curve reasonably quickly and we can sit here today and see the results of that in terms of how those centers are behaving say through the end of the second quarter and now into July.

So what I'll call the "early advance warning metrics" look quite good here.

We are achieving what we expected to.

We put people through additional training and when you look at the specific centers -- I won't go into a lot of detail -- but when you look at the specific centers, earlier in the year we had more difference in performance levels between some of the centers that were grouped around where we had a significant concentration of people previously versus newer centers where we had to do more hiring, and that has completely normalized.

So we feel very good that these centers are performing quite well at this point in time.

The only other thing I would add is we did this consciously because we believe the outcomes here will be better than they have been historically.

I think we have had a good reputation as an organization in terms of how effectively we have managed medical costs.

We believe the care facilitation centers will enhance that; and we are starting to see evidence that that is, in fact, the case.

And that will only improve as we execute against some of specialty areas I talked about before.

So we do have a reasonable degree of confidence here that we are already seeing the benefits that we have anticipated for the second half.

I guess the concern I have, it felt like you came off the Q1 with reasonable confidence that you identified improving metrics from those centers from what had occurred in Q4 and that the issue had been fixed, and yet we found out it was actually worse.

And what were the metrics that misled you after the Q1 to think that things had been fixed?

And that is what I'm trying to get at.

Something made you feel like things were fixed and yet they actually were getting worse.

Was there just a gap in the data?

I'm not sure what happened.

John, it is Mike.

The are really two different issues here.

First, there is the data question around the reserves.

And then, second, there is the execution in the healthcare facilitation centers.

In terms of your question around the data that we use to establish the reserves, I would say that that data was a lot better in second quarter or at the end of first quarter and into second quarter than what it had been at year end.

The piece that we didn't anticipate that obviously led to additional prior period development in second quarter was the claim reprocessing.

As I mentioned earlier, while we have always had a certain volume of these claims, the increase that we saw in reprocessing in first and second quarter of '03 was quite a bit higher than what it had been in prior years, mostly related to services provided in 2002.

And what we discovered in second quarter that was not evident to us in first quarter is that as we actually reprocessed the claims, they were requiring a greater proportion of additional payment, additional reimbursements to be made versus the historical patterns.

That is what drove the second quarter piece.

I think it is a little different from the challenge around the first quarter.

Let me see if Ed wants to talk further about the healthcare facilitation centers execution.

No, John, I really don't.

I think I have probably said it all.

I think I understand your questioning.

The only thing I would close with is we do have very good insight into how those centers are performing today and that performance is improving as we have anticipated.

Okay.

We feel pretty confident about the rest of the year.

And I was wondering, can you size for us how much membership to date you have actually signed for 1/1/04?

I mean, new membership that is coming in, or is it insignificant at this point?

The number of new accounts signed -- I'm talking about [Inaudible] -- but thus far how many new members you signed for 1/1/04?

John, I don't have that number with me.

And as I said before, you know, certainly the new business level is not what we would like.

There is some of it and there are a couple of meaningful accounts here, but I think it is premature to put a number out there simply because all the decisions aren't made.

We still some new business proposals out there we are waiting to hear on.

So I'd rather wait until we had a more complete picture.

Okay.

And then just one last kind of high-level strategy question.

Let's just make a presumption here.

Let's assume you were the sole retirement service.

From a strategic perspective, what do you think is the best use of cash?

Do you think buying back shares or do you think there are some significant strategic investments you should make in your healthcare business that would be a better pace to put that cash?

I'm just wondering how you kind of approach that thought process?

Well, John, first of all, I'm going to repeat what I said before which is we don't really have anything additional to tell you on the retirement side and when we do we will.

I think we have always been very consistent with our capital deployment strategy here at CIGNA and that has been first, to support growth, second, to consider acquisitions if they made sense and added strategic as well as economic value, and [Inaudible] the first two, to repurchase shares.

So that strategy, that philosophy has not changed; but it is premature to discuss any outcome from other deals.

Strategically, do you think it would help your business to make any regional health plan acquisitions to get some more regional density, or do you not view that as very relevant to the health business?

Well, John, I think size is clearly relevant.

I think we're very comfortable with our size.

We would obviously like to begin to grow the franchise again, and that is what we are focused on.

And clearly local membership is important to us, but we feel very comfortable with what we have.

It doesn't mean that over time we wouldn't look at an acquisition if it made sense, but we don't feel compelled to do that to be very competitive today.

Great.

Thank you.

Thank you, Mr. Rex.

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

Thank you very much.

A question on the reprocessing.

I think you said previously that a portion of these were ASO clients as well.

Sir, could you tell me, how does that work?

Do you then ask for money back from your ASO clients?

And then I have a follow-up after that.

Dan, it is Mike.

Remember, the reprocessing is overall a relatively small percentage of the claims and dollar amounts that are out there.

But to specifically answer your question, all adjustments to claims, whether they be positive or negative, all those adjustments are returned to our ASO customers.

Now, obviously any handling charge or any kind of late claim interest that would be our liability.

Thanks.

And then just your data point questions.

Roughly what was the retention in the national accounts book, and just curious as to why the third quarter outlook for retirement is actually down versus the second quarter?

Was there something interesting in the second quarter to spike out especially since in theory the daily S&P average could be up in the third quarter versus the second?

Thank you very much.

Sure.

Dan, in terms of national account persistency, the national account persistency that we are projecting for full year 2003 is about 91%.

And in terms of your question around the retirement earnings for second quarter versus the balance of the year, we did have some favorable expense timing in second quarter, and we don't expect that to continue through the remainder of the year.

And I like your optimistic forecast on the stock market.

It has got to happen one of these days.

Thank you, Mr. Johnson.

We go next to Roberta Goodman with Merrill Lynch.

[Inaudible] on the cost trend issue, but I wanted to make sure that I understand exactly what you are saying about this year and how it could be presumed to flow into next year.

It sounds as though when you are talking about the 15% trend for the full year that you're assuming that it would be substantially or somewhat higher in the first half than it would be in the second half, so you would be looking at a second half cost trend of somewhere in maybe the 13-14% range?

Am I misunderstanding something?

Roberta, it's Mike.

You've got it essentially right.

The trends that we saw on a year-to-date basis through second quarter for commercial HMO was about 16%, and we expect the full-year trend to be out 15.

So, therefore, the second half of the year in '03 relative to the second half of the year in '02 we would expect to be closer to 14.

Okay.

And would you be assuming that there would be further improvements into '04?

We would expect that the actions that we have taken to improve utilization management and particularly the healthcare facilitation center work that Ed talked about, as well as the work around unit costs, to renegotiate a number of facility contracts as well as relook at physician fee schedules to have improvement in the second half of '03 and for that to continue into '04.

Yeah, Robert, I would only add one thing to Mike's comment and that is the other thing we are doing a fair amount of work on is benefit design specifically as it relates to the commercial HMO book.

I mentioned that we believe we need to ensure that our benefit designs are what I will call reflecting current desires or current preferences in that marketplace, and we have always had benefit designs that were a little bit richer.

The marketplace today is looking for skinnier designs, and so we are doing a fair amount of work to be sure we get that done.

But that doesn't change the trend that just changes the base.

It can change the trend as well, Roberta, depending upon certain coverages that you might have or not have.

Now you should price for those coverages, and we think we have.

But it can impact trend.

Okay.

Secondly, you talked about the customer service metrics for the large segment HMO.

Obviously, that is not the sum total of your business and, in fact, you have got a very substantial portion of it that is not.

Could you go through what those kind of metrics would look like on the balance of the book?

Yeah.

I'm not sure I have them at my fingertips, but the call times are a little bit longer.

The average speed of answer is a little bit slower.

I think in total we're probably in the mid-30s ASA.

I'm doing it from memory.

And the one [Inaudible], for example, that I acknowledge is about 90%.

That is pretty consistent.

It is the average speed of answer is just slightly longer.

What about the autoadjudication?

The autoadjudication is [Inaudible] the book.

Okay.

And then, finally, what would be the cost basis in the retirement services unit?

Roberta it's Mike.

As Ed said earlier, it is way too early to speculate about any particular pieces there.

Again, when we have information that the market would find valuable we'll communicate it.

But you must know what you're carrying it on your books at, right?

Well, let me remind you that the retirement business is in a shared entity.

It is in Connecticut General Life Insurance Company, so your question is not a trivial one.

Okay.

So in terms of pulling it apart and figuring out if that is what you opt to do and what that actually would have as a basis would be a fairly complex exercise?

That is correct.

Okay.

Thanks.

Thank you, Miss Goodman.

Our final question will come from Ed Kroll with SG Cowen.

Good morning.

I dialed in a little late, so I don't know if you gave this number or not.

What was your GAAP operating cash flow for operations for Q2?

Ed, it's Mike.

I did not give that that specific number.

You're talking about our overall GAAP cash flow?

Yes.

On a year-to-date basis through second quarter it was $640 million.

And as I said before, I would suggest that you not put too much weight in that particular metric.

There are a lot of factors that go into it plus and minus.

As examples, we had tax refunds of over 300 million that relate to prior year earnings that would be in that number.

We have had negative cash flow as a result of the VADB hedge, which I feel okay about since it is offset by a decline in the reserve.

We had the restructuring charge back in fourth quarter of 2002 for CIGNA Healthcare that we are now paying out in cash.

So I am happy to provide the number, I would just ask that use caution and don't overweight it.

Sure.

Thank you for that.

And then my final question: The liability for the VADB, how big is that number on your balance sheet now with this reserve adjustment, and which line is it in on the balance sheet?

Ed, the total VADB reserve on our balance sheet is $1.5 billion and it is in the future policy benefits line item on our balance sheet.

Got it.

Okay, thank you.

Thank you, Mr. Kroll.

Ladies and gentlemen, this concludes CIGNA's second quarter 2003 results review.

CIGNA Investor Relations will be available to respond to additional questions shortly.

A recording of this conference will be available for 10 business days following this call.

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Thank you for participating.

We will now disconnect.