信諾集團 (CI) 2003 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by for CIGNA's third quarter 2003 results review.

At this time, all callers are in a listen-only mode.

We will conduct a question and a session later during the conference and review procedures on how to enter queue to ask questions at that time.

If you should require assistance during the call, please press star key followed by zero on our touch-tone telephone.

As a reminder, ladies and gentlemen, this conference including the Q&A session is being recorded.

We'll begin by turning the conference over to Mr. Greg Devon.

Please go ahead sir.

Good morning, everyone and thank you for joining today's call.

I'm Greg Deavens, Vice President of Investor Relations and with me are Ed Hanway, CIGNA's Chairman and Chief Executive Officer, Mike Bell CIGNA's Chief Financial Officer and John Coyle, Senior Vice President of CIGNA Healthcare.

In addition David Cord, Chief Financial Officer of CIGNA Healthcare will be available during the Q&A segment of our call.

The purpose of today's call is to review the CIGNA's results for the third quarter and to discuss our outlook for full year 2003 and preliminary estimates for 2004.

CIGNA uses income from continuing operations excluding realized invest results and special items such as unusual charges and gains as the principal measure of performance for our operating segments.

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

Please see Note Two and Exhibit Two of today's press release which is posted in the Investor Relations of CIGNA.com for a discussion and reconciliation of these two measures.

In the third quarter of 2003, CIGNA expanded its segment reporting to report results from its healthcare operations and its disability and life business as discreet segments.

Previously, results from these operations were reported in our employee, healthcare, life and disability benefits segment.

In the new disability and life segment we report the results of our separately managed group, disability, life and accident business.

The new healthcare segment includes the results of our HMO and indemnity medical products as well as specialty healthcare products.

I would note that our healthcare segment includes some disability and life contracts which were sold on a package basis with medical accounts.

Schedules reflecting historical data for these new segments as well as our quarterly statistical supplement are posted in the Investor Relations section of CIGNA.com.

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

We would 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 it over to Ed.

Thanks, Greg.

Good morning, everyone.

I'm going to begin today's call with a few comments on our third quarter results and I'm then going to spend some time discussing progress we are making to improve our healthcare results.

I've asked John Coyle who heads up Medical Management and Distribution in our healthcare business to join today's call to elaborate on certain of our improvement initiatives.

John is going to describe some of the actions we are undertaking in his areas of responsibility.

And then Mike Bell will follow with the review of the financial results of the quarter as well as provide our earnings outlook for 2003 and 2004.

Third quarter 2003 income from continuing operations excluding realized investment results and special items was $1.45 per share, even with the third quarter of 2002.

Our results reflect sequential improvement in our healthcare operations and strong results in our other employee benefit businesses and the quarter's results are slightly higher than expectation.

The sequential improvement in the healthcare segment result reflect early signs of progress and positive momentum in our turn-around efforts.

Medical costs for the third quarter were improved versus the second quarter and in line with our expectations driven by improvements in medical management.

In addition, we benefited from lower per member operating expenses in our HMO medical business.

I'm going to provide additional detail on these drivers as well as updates on our major healthcare initiatives in a few moments.

Results in our disability and life segment increased 14% year-over-year reflecting strong underwriting and disability claims management.

And we are also seeing solid revenue growth here due to good sales and improved persistency.

Our retirement business posted a solid quarter aided by the impact of asset appreciation.

In July, we announced that we were exploring strategic options for our retirement business.

Specifically we announced that we were considering either the separation of the business into a different wholly owned subsidiary or sale of the operation.

We are making steady progress on this initiative and expect a decision shortly.

Our international operations also had a strong quarter.

Mike will provide additional details on the quarter in a few minutes.

Now let me share a few highlights on the progress we are making in our healthcare improvements efforts.

As you know several months ago I re-assumed responsibility for the day-to-day management of our healthcare businesses.

Together with other members of our healthcare management team I established four key areas of focus for our turn-around efforts.

These key areas are first, reducing medical costs trends.

Second, driving operating efficiency.

Third, continuing to deliver improved quality service, and fourth, stabilizing and then growing medical membership.

In the area of medical costs, our first priority, we have begun to see improvement in utilization of medical services as the effectiveness of our medical management activities have improved.

Specifically our new medical management model is beginning to drive improvements in inpatient utilization.

In the quarter, commercial HMO inpatient utilization trend was approximately 3% versus 7.5% in the first half of the year.

Now in the second quarter earnings call, we indicated that we expected utilization trend to be approximately 4% for the second half of 2003.

So we are slightly ahead of our expectations.

Results in our administrative services only HMO business or ASO HMO business were also strong.

In this business, inpatient utilization trend was just over 1% in the third quarter as compared to a 3% trend in the first half of the year.

Looking forward, we expecting inpatient utilization trend in both fully insured and ASO to moderate further in the fourth quarter of 2003 and in 2004 as we achieve further improvement and benefit from our new medical model.

On the unit medical cost side we've begun to execute our planned facility recontracting efforts.

We have had some initial success and remain confident that these efforts will contribute to results in 2004 and beyond.

John will share some additional insights relative to our medical management actions in a minute.

Our second key priority is improving operating efficiency and our administrative cost position.

On this front we will soon complete the job eliminations associated with the healthcare restructuring plan that we announced in the fourth quarter of 2002.

And in 2004 we will take actions necessary to drive further productivity improvements and right-size the organization to expected membership levels.

Relative to service which is our third priority, our performance remains strong.

In terms of the specifics, customer migration to the new in-state platforms remain on schedule with continued strength in customer satisfaction levels, which are running in mid-90% range.

Both service delivery metrics and productivity results for the new system and processes are strong.

First call resolution rates remain strong in the mid to upper 80% range and our auto adjudication rate on the new managed care platform is now in access of 65%.

And our overall call volume per member is down 7% as we sustained very competitive average speed of answer metrics.

Also during the quarter we continued our efforts to improve service to and our relationship with healthcare providers by agreeing to settle class action litigation which has been pending for several years.

As a part of this settlement we agreed to make a number of process changes that will make it easier for providers to do business with us as they work with us to improve the health of our members.

This a key step in improving our overall service delivery.

Our fourth priority is stabilizing and growing medical membership.

Through the first three quarters of 2003 our medical membership has declined 10% on a same-store basis.

And this is clearly an unacceptable result, driven largely by our service challenges in 2002.

As we indicated in our second quarter call, one of the issues here is the lag between the markets perception of our service recovery and our actual performance.

For full year 2003, we now expect medical membership to be down 10 to 11%, and this outlook reflects lower in-group enrollment levels driven by higher unemployment levels and sluggish job growth which is a challenge for the entire industry.

We will see further downward pressure on membership as we enter 2004 and we currently expect January 1 membership to be down in the 6 to 7% range which includes 1 to 2% in losses resulting from targeted underwriting action.

We are maintaining a very disciplined pricing and underwriting posture.

We are addressing member growth by first sustaining our service improvements, secondly aggressively communicating those improvements to our customers and key producers, third, enhancing our product offerings, and fourth, demonstrating the value of our medical management and specialty healthcare capabilities.

So to recap, we are making strong progress with the turn-around of our healthcare operations.

We recognize there is much more work to do to realize the full potential of and maximize the results in our healthcare business.

The improvements reflected in this quarter's results are just the beginning but they do indicate that our turn-around efforts are having an effect.

Now with that as an overview, I'm going to turn it over John Coyle to provide additional details on our healthcare turn-around initiatives.

And as I indicated before, Mike Bell will follow John with a review of third quarter financial results and our outlook for the reminder of this year and for full year 2004.

John?

Thanks, Ed.

Hello, and good morning, everyone.

As Ed indicated I have responsibility for the medical management and distribution operations of CIGNA healthcare.

These operations are intimately involved in and primarily responsible for two key elements of our healthcare turn-around plans.

The two key turn-around elements are reducing medical costs trends and stabilizing and growing membership.

We have specific actions underway to drive execution of these key initiatives.

I will spend a few minutes outlining those actions and highlighting some of our early successes.

Relative to medical cost trend, our third quarter results reflect initial signs of improvement.

In this area our actions are focused on improving utilization trends and slowing the pace of unit cost increases.

Our utilization related actions are focused in three key areas.

First, improving execution of fundamentals such as case management and concurrent stay review with both locally deployed and regionalized resources.

Second, leveraging our new special case management capabilities to improve quality outcomes for our highest severity members.

This market-leading approach focuses on such areas as catastrophic and neonatal cases.

Our third utilization related activity is aggressively selling leaner benefit designs and products to help our customers better manage and control costs.

Finally, an important aspect of the actions is our ability to leverage our broad database from across our core health and specialty business to help drive our utilization and unit cost management results.

These and other actions that we have underway are designed to improve key inpatient utilization trends.

As Ed noted these actions have had a moderating impact in the third quarter of 2003.

We expect these actions to contribute to the overall medical cost trend moderation in 2004 as well.

On the unit cost front we have three key actions underway.

First, we have developed and are implementing a broad-based facility recontracting strategy to improve overall reimbursement terms of these contracts.

We are focusing our near-term effort on our top 250 hospital systems.

We will take action in 2004 on other facility contracts upon renewal.

Second, we have a contract and network based effort underway to simplify the administrative aspect of these arrangements.

We expect this effort to improve service for our providers and customers.

This will also improve our operational effectiveness.

And the third unit cost effort focuses on insuring we are working to make sure our network is aligned to emerging products, customer needs and to balance both cost and quality outcomes.

In the area of membership we clearly have work to do to stabilize and position ourselves for membership growth.

We continue to improve our value proposition.

While we continue to sell new business, sales and retention are below what we are capable of.

I would remind you that we segment our sales, marketing and client management activities based upon employer characteristics.

Many of the actions that we have underway impact both our national accounts and middle market segments.

These enterprise-wide initiatives are supplemented by appropriate segment specific actions.

Our enterprise actions to stabilize and grow membership include first, executing targeted retention strategies for our risk and experience rated customers that consider account profitability and other attributes.

This approach has expected us to help retain the highest performing accounts while migrating underperformers into improved performance categories or out of the book.

Our second membership action is implementing targeted new business, prospecting and product strategies focused on particular risk profiles and buying criteria that align with our capabilities.

Our third membership action focuses on consistent marketing positioning and effective delivery of CIGNA sales story.

Here we are essentially focused on helping customers answer the question, why CIGNA.

Our fourth action is implementing improved producer strategies and programs that align key producers with CIGNA's sales marketing efforts and incentive arrangements.

Our fifth action involves modifying our sales compensation program to more aggressively reward our sales and client management people for retaining profitable accounts, selling and renewing plans with leaner benefit structures and implementing appropriate renewal rate actions.

Let me come back for a moment to the third of these priorities which involves helping answer the question, why CIGNA.

In our view quite frankly, the answer is clear.

We have a value proposition that is grounded in a committed focus on helping our employers and their employees control cost and improve health outcomes.

We accomplish by delivering a broad array of medical and specialty products to the market that we serve, and maintaining a national team of clinical professionals and account managers who are armed with the state-of-the-art health intelligence data that is critical to controlling cost, improving medical outcomes and helping employers retain productive and healthy workers.

We offer these capabilities on a national scale that when enhanced a unique approach to medical management.

As we go market our sales and client management resources are able to leverage the breadth of our medical product portfolio, our commitment to clinical quality, and our leading industry specialty healthcare portfolio.

The bottom line is we are well positioned to deliver integrated benefit programs that best meet the needs of our customers and their employees.

In summary, we believe the actions we are taking will improve CIGNA's healthcare performance and position us for longer term profitable growth.

With that I will turn it over to Mike.

Thanks, John.

Good morning, everyone.

My remarks today I'll review CIGNA's third quarter 2003 earnings and I'll also discuss our earnings outlook for the remainder of 2003 and for full year 2004.

Before reviewing the results, I would note that as Greg discussed earlier, we have begun reporting the results of our healthcare business and our group [inaudible] life operations as separate segments.

Implementing this new segment reporting is a first step in providing greater visibility into our healthcare results.

Now turning to our third quarter results I'd note that the quarter reflects several special items including a $37 million after-tax charge related to the settlement of provider class action litigation.

This was addressed in our September 3rd news release.

There were also several other smaller special items.

These items and our realized investment results are discussed in this morning's earnings release.

Now in my discussion of consolidated and segment results this morning I'll 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.

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

On this basis, third quarter 2003 earning were $204 million or $1.45 per share.

That compares to $202 million or $1.45 per share in the third quarter of last year.

I'll now provide the detail and segment results beginning with CIGNA healthcare.

Healthcare earning for the third quarter of 2003 were $121 million compared to $73 million in second quarter and $129 million in the third quarter of last year.

These results are somewhat better than our recent expectations and are improved on a sequential basis.

The sequential improvement was driven primarily by two factors.

First, we experienced some moderation in medical cost trend reflecting the improvement in utilization as a result of the actions that Ed and John just discussed.

Second, we benefited from some favorable prior period development related to earlier this year as compared to unfavorable prior period development that we experienced in second quarter.

Medical membership on the same-store basis was 10% lower than year end 2002 and that reflects lower customer retention and sales.

Now as Ed stated we expect continued downward pressure on medical membership and estimate a full year 2003 decline of between 10 and 11%.

Premiums and fees for the segment decreased 2% relative to last year's third quarter as the impact of lower medical membership was partly offset by rate increases.

Now relative to the components of the segment results I'll discuss HMO and then indemnity.

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

HMO earnings in the quarter totaled $120 million and that compares to $70 million in second quarter and $124 million in the third quarter 2002.

The modest decline in HMO results from a year ago reflects increased medical costs, lower membership and higher per member expenses partly offset by improved pharmacy results.

On a sequential basis the increase in HMO earnings reflected better medical cost results and an improvement in the expense ratio.

The sequential improvement in medical costs reflected the moderation in trend that I mentioned earlier as well as the absence of the unfavorable prior period development seen in second quarter.

The commercial HMO medical loss ratio was 86.8% and that compares to 90.7% in the second quarter of '03 and 84.5% in the third quarter of '02.

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

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

And by component, the medical cost trends are expected to run in the mid to high teens for impatient outpatient and in the low teens for professional services and pharmacy.

For our administrative services only, or ASO HMO business, we expect overall medical cost trend to be approximately 13% for full year 2003.

Turning now to indemnity.

Third quarter indemnity results were $1 million compared to $5 million for the third quarter of '02.

The year-over-year decline primarily reflects the impact of lower membership and the resulting higher operating expenses per member.

So to recap for the healthcare segment, our third quarter earnings were somewhat lower than last year but were improved sequentially and above our recent estimates.

I'll move now to the disability and life segment.

Disability and life earnings were $32 million in the third quarter of '03 compared to $28 million in the same period last year.

The increase in earnings largely driven by higher longer term disability results and also by larger improvement on certain life insurance products.

Premiums and fees for this segment increased 11% over 2002 due to solid sales results and improved persistency.

Moving on now to the retirement segment.

Earnings were $58 million compared to $57 million in the third quarter of '02 mainly reflecting higher fees due to asset appreciation partly offset by lower interest earnings.

Ending assets under management were up slightly from last quarter and 6% higher versus a year ago.

In our international segment, earnings were $15 million versus $8 million in the third quarter of '02.

The increase in earnings was primarily driven by favorable expenses and the absence of losses on divested operations.

Switching now to the runoff reinsurance segment.

The loss for that segment was $20 million compared to a $16 million loss in the third quarter of last year.

And the increased loss primarily reflects strengthening of reserves for reinsurance recoverables.

Moving on now to the other operations.

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

For corporate which includes unallocated investment income and parent company expenses, the third quarter loss was $21 million which was essentially in line with the loss of $22 million in the third quarter of '02.

Excuse me.

Fighting a cold obviously.

I'll now summarize the outlook for full year 2003 and 2004.

Beginning this quarter we will streamline our earnings outlook to focus on consolidated results in the healthcare segment.

Specifically we're going to provide projections for consolidated earnings, for healthcare segment results and for the balance of our reporting segments as a group.

Recognizing that the majority of our investors are focused on results in our healthcare operations, this change will simplify our projections while affording appropriate focus on healthcare, our largest business.

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

On this basis, we are raising our estimates for the full year 2003.

We now expect consolidated earnings of between 755 to $780 million or $5.35 to $5.55 per share.

For the healthcare segment we expect earnings of between 425 and $440 million and we expect the balance of our reporting segment to contribute approximately 330 to $340 million.

These projections assume that our fourth quarter results on the consolidated basis and in our healthcare operations will be essentially in line with third quarter results.

So to recap, we expect full year 2003 consolidated earnings to be in the range of $5.35 to $5.55 per share and this implies earnings of about $1.30 to $1.50 per share on a consolidated basis for fourth quarter 2003.

Turning now to the full year 2004, we currently expect consolidated earnings before realized investment results and special items to be between 780 and $840 million or $5.55 to $5.99 per share.

Within this total we expect the healthcare segment to generate between 450 and $500 million in earnings during 2004.

We expect the balance of our reporting segments to contribute approximately 330 to $334 million of earnings which is flat with our 2003 estimates.

Now relative to the key assumptions a comparison of the midpoints of our 2003 and 2004 healthcare estimates indicates that we expect 10% year-over-year earnings growth for healthcare.

We expect this year-over-year improvement to be driven by improved medical cost results as well as underwriting actions.

With respect to medical costs, as we continue to get traction from improved utilization management, better provider contracting and other medical costs initiatives, we project a decrease in the commercial HMO trend from this year's estimate of 15% to a result in the 11 to 12% range for 2004.

Now relative to underwriting we are implementing targeted actions to address underperforming business.

Now relative to some other key assumptions, our outlook assumes a 6 to 7% decline in medical membership as of January 1st, 2004 as compared to the expected year end 2003 levels.

And as Ed noted, this includes a 1 to 2% impact from targeted underwriting actions on unperforming business.

We also expect to offset much of the adverse impact of lower membership through continued operating expense reductions.

Now based on the assumptions that I just outlined, we expect full year 2004 consolidated earnings in the range of 780 to $840 million or $5.55 to $5.99 per share.

So to recap, our third quarter consolidated results improved relative to 2002 and increased on a sequential basis.

These results were also ahead of our previous estimates.

This sequential improvement reflected better healthcare earnings primarily due to improved medical cost results and results at our other businesses continue to be strong.

With that I'll turn it back to Ed.

Thanks, Mike.

Let me share a couple of closing remarks.

Our results for the quarter reflect continued good performance in our disability and life, retirement and international businesses and early signs of improvement in our healthcare business.

As I said before, we understand the challenges that we face in healthcare and we have appropriate actions underway to address them and improve results.

John and I shared a number of those actions with you today.

We are committed to a disciplined approach to addressing the fundamentals of this business.

We will continue to apply this discipline to underwriting, pricing, service, and medical management.

Now while there's been a lot of news about consolidation in our industry this week, our focus continues to be on our value proposition which differentiates us from our competitors.

The key element of this value proposition is our committed focus to helping employers and their employees control costs and improve outcomes.

As John noted, we accomplish this by offering a broad array of medical and specialty products and by arming our clinical professionals and account managers with state of the art health intelligence data.

Given our national platform, the breadth of our medical product portfolio, our commitment to clinical quality, and our industry leading specialty healthcare portfolio, we are well positioned to deliver integrated benefit programs that best meet the needs of our customers and their employees.

Relative to our retirement business, we will provide an update on our strategic review as soon as a decision is made and we remain committed to pursuing the option that is in the best long-term interest of shareholders and customers while concluding this assessment as quickly as possible.

Our outlook for the reminder of 2003 and full year 2004 will require continued strong performance across all of our employee benefits businesses and we are committed to taking the actions necessary to achieve these results.

I remain optimistic about our ability to improve the performance of our healthcare business and sustain the solid results in our other businesses.

With that, I think we will take your questions.

Thank you.

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

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

Also, if you are using a speaker-phone, please pick up your handset before pressing buttons.

One moment please for the first question.

We'll go first to Matthew Borsch with Goldman Sachs.

Good morning.

If I could ask as a first question, if you could give some sense on how the expected enrollment drop in January '04 breaks out between your regional and national account segment.

And if possible if you could give us some sense of how it breaks out in terms of risk versus experience rated versus pure ASO?

Hey Matthew, it's Mike.

In terms of 1/1/04, again obviously that's not in the books yet but our current expectations for 1/1/04 are for approximately consistent membership changes between national account and regional.

So again, about in the 6 to 7% range for both of those blocks of business including the in-group disenrollment that Ed mentioned during his prepared remarks.

In terms of the product line split, again that one would be even more speculative.

Obviously the targeted underwriting actions of 1 to 2% tend to be focused on the insured business so I would expect the insured business to be a little greater of a little greater of the decline versus the ASO business.

I'd also say the only other piece for completeness that I would add would be, we'll probably see a little bit more decline in indemnity relative to HMO based on the current trends.

Great.

And when you say insured, are you referring to the pure risk portion or also to some of the retrospectively experience rated business?

I was referring to both of those.

Both the fully insured as well as the retrospectively experience rated business.

Great.

If I could ask just one follow-up question.

The cost trend expectation for it to drop it 11 to 12% on your commercial HMO risk versus '03.

How much of that is from the medical management initiatives and how much do you believe will come through the targeted underwriting or account calling that you're doing for January?

Well first in terms of earnings improvement on a year-over-year basis, it's about 50-50.

About 50% of the earning improvement on a year-over-year basis comes from the targeted underwriting actions on the specific block of underperforming business a lot of which we wrote back in 2002.

And the other half would come from the improved medical costs as compared to our pricing.

I think specific to the trend number the 15 to the 11,12, I think the way we thought of it is that the utilization portion of that is about a point and a half to two.

Unit cost is about a point of that and then the benefit buy down is about a point.

So that is your roughly the 300 basis points.

So is the targeted underwriting contributing to that or all then or is it all on the medical management side and the recontracting side?

Matthew, it's Mike.

The numbers that Ed just described are really primarily focused on the medical management side.

I'd say we probably have a little bit of benefit in the utilization and the benefit buy down piece from the targeted underwriting actions but certainly the vast bulk of that reflects the stronger medical cost performance.

Great, thank you.

Thank you, Mr. Borsch.

We'll go next to Charles Booray with Smith Barney.

Hi, good morning.

First question is balance sheet related.

How much free cash is at the parent right now and can you walk us through any net dividends that came up from subsidiaries or had to get pushed down in any of the subsidiaries during the quarter?

Charles, this is Mike.

Hey, Mike.

The parent company cash balance at the end of third quarter was $131 million and on a year-to-date basis if I recall correctly, the dividends from our operating subsidiaries on a year-to-date basis had amounted to about $533 million.

So a little bit higher than what we had projected before.

In terms of the balance of the year, I would expect that we will not have a proportionate amount of additional dividends from the operating subsidiaries in fourth quarter.

And therefore we will end the year somewhere in the 50 to $100 million range in terms of cash at the parent company group, maybe a little closer to the upper end of that.

Then for '04 can we look at the healthcare net income and take some, you know percent of that as an assume dividend up from the healthcare subs?

In terms of 2004 it's a little early to give real firm projections on parent company cash flow for 2004 mainly because of the strategic review that we have underway with our retirement business.

But what you're describing is certainly rational.

Maybe a way to think about it for 2004 is if you take the earnings projections that we gave you and then assume that you know, call it about $300 million is retained at the operating subsidiary level to support the growth and the surplus needs and any other statutory accounting issues that are coming up, and assume that the, essentially the remainder would be dividended up to the parent, that's a reasonable assumption at this point.

Again, it's imprecise mainly because of the uncertainty around the retirement business.

But once we complete that strategic review, we'll be in position to give you updated estimates.

Is there a relationship where the strategic review of retirement could reduce the amount of dividends available from the healthcare subs?

That would be unlikely.

Yeah.

Okay.

And just next question real briefly.

On the '04 medical cost trend assumptions to get to the 10% overall earnings growth assumptions the healthcare segment, could you just briefly give us sort of unit cost versus pricing on the main inpatient, outpatient pharma and professional?

Yeah.

For 2004, we would expect on inpatient that the utilization would be flat to down a couple points and that the unit costs would be, I would say in the 10 to 12% kind of range.

For the other pieces, for the outpatient and physician, the trend for next year we'd expect to be pretty close to 50-50 in terms of split between utilization and unit cost.

And in terms of pharmacy that we would expect that to be essentially unit cost driven.

Got it.

Why the unit cost increases in pharmacy for '04 what's the key driver there?

Is it a change in the formulary or is it based on inflation on sort of same drug inflation?

Yeah.

Charles, it's Ed.

I think it's not based on material change in formulary as a practical matter.

I think it's based on our view of what's likely to happen with underlying cost trend and there is some, we do expect to see cost increase as well as some new drug flow, there, so as Mike suggested it's predominately unit cost it's not a result of formulary change, it's more just what we expect to see the cost pressure being.

Any change in terms of carve-ins versus carve-outs on your large employers going into '04 for the pharma benefit?

Not a lot Charles, no.

Now we of course have continued to suggest that the effective integration of behavioral pharmacy and medical provide a good opportunity to have a bit more effective total medical cost management and we have seen some of that.

So if you were considering that carve-in then, yes, we've seen some of that.

We think that trend will accelerate over time.

But I wouldn't say we've seen a massive movement to carving back in.

Got you.

Final question on specialty also, mental health parity and any, you know, pending legislation.

Can you give us sort of generally what a potential impact would be positive or negative would it mean you have to spend more on behavioral or would it mean more business for your behavioral subsidiary or a little of both?

Well, probably a little of both.

I think net-net, even though I'm not necessarily, I don't necessarily believe that some of the parity legislation that we see is appropriate, as a practical matter given the strength of our behavioral healthcare company, it's likely more of a positive for us than it would be a negative.

Got you.

Okay thanks.

Thank you, Mr. Booray.

We'll go next to William McKeever with UBS.

I have some high level questions.

You gave your guidance for healthcare for '03 and '04.

If I take the midpoint of the range for '04, $475 million, wonder of you could tell me what margin assumption you have embedded in that?

And then if you could maybe share sort of your longer term vision where you think that margin can go over the next whatever timeframe you feel comfortable with whether it's a year or two out, '05 or '06 that kind of thing.

Bill, it's Mike.

I'll start with the comments on 2004 and then I'm sure Ed will provide color in terms of the longer term.

In terms of 2004 as you correctly noted, the midpoint for healthcare for 2004 is $475 million of earnings and that's about 40-something million greater than the midpoint for 2003 full year.

As I mentioned based on an earlier question, about half of the, excuse me, about maybe a better way to think about it here would be, about a little over $50 million of improvement in 2004 versus full year 2003 would come from targeted underwriting actions.

This is going after specifically underperforming accounts.

We'll get a little over $50 million as well from an improvement in our medical cost performance and specifically the relationship between pricing and medical costs on the insured block.

So adding those together you get about $125 million of margin improvement if you will between the targeted underwriting actions and the medical cost performance in the outlook for 2004.

On top of that, as I'm sure you'll recall, we had some prior, some negative prior year development earlier this year that's obviously embedded in the full 2003 numbers.

We would not expect that to continue obviously for 2004.

So you can add back, call it about $35 million for that.

And the balance essentially is based upon the relationship between our membership outlook and the outlook for operating expenses.

So net-net some improvement in overall margins although as I mentioned there are some other moving pieces as well.

Ed, do you want to talk about the long-term?

Yeah, Bill, I think what I would say relative to the long-term is we don't expect that the '04 margins that are inferred here are in any way as good as it gets.

I think we've had a history in this business as having very strong margins as a result of the combination of good medical capability and even better specialty capability that allows us to build pretty deep relationships with customers.

That continues to be the strategy and we would expect that longer term beyond 2004 that our margins could continue to improve.

We are very focused within this timeframe that we are in right now, in really getting the book of business to be underwritten and priced on a basis that we are comfortable with that really supports a strong base to then move forward from.

So I would say the '04 progress is meaningful and we expect to see margins continue to improve thereafter.

Okay.

And then related question on the recontracting that you mentioned earlier with the providers.

Could you give us some sense for what percentage you've completed for '04 now that we're in November, what's left to be done?

Either of a hospital side or if you have a general number?

Bill, it's Ed again, and I'm sure John will pile on here.

As John noted, we're targeting the top 250 and I think if I'm correct we have about 115 to 120-some odd hospitals that we are very focused on that renew 1/1/04.

And so we expect to make improvement in those both on cost but importantly as well to John's point on standardizing certain terms and conditions that will make it easier for us to administer those contracts and therefore easier for the providers to interact with us.

John, do you want to add anything to that?

Sure, Ed.

A couple thoughts.

One is, that as Ed said that we've identified the top 250 we're about 120 of those into that process.

These top 250 represent probably about 55, 58% of our total medical spend so that was the reason why we targeted those because of the large volume.

And these are systems not necessarily hospitals.

On the administrative simplification component, there's a couple of pieces.

One is that we want to make sure that these contracts are simple, they're easy to administer, that from either a provider point of view there's less complicating components associated with them.

The other thing that we're trying do is, we're trying reduce the number of contracts that use percent of billed charges and get into a more fixed rate environment.

And we've already reduced the number of that exposure by about 5% for the contacts remaining that renew on January 2004 so we think we've made some good progress there.

The other thing that we're looking at is aggressively pursuing other types of activities like the reduction of stop loss in the contracts or outpatient and carve-out type of activities both from a, to try and better manage the unit cost component and the administrative simplicity associated with it.

All with an eye of trying to get getting to a predictability of our reimbursement cost stream which I think gives us better insight into our cost for both our guarantee cost product as well as for our customers and providers.

Okay, great.

And my last question has to do, and I appreciate the guidance for '04, you probably have seen quite a bit of your book already priced for '04.

Could you tell us what that percentage might be so how much do you know about your prices for next year?

What the percent might be?

Bill, it's Mike.

I'm assume you're referring to the experience, to the insured block of business?

Yes.

First I'll take it in two buckets.

For the experience rated block, about, just a shade over half of the block renews on January 1.

And for commercial HMO it's about 55% of the overall membership block.

At this point we know in almost all cases what prices we've gone out with.

At this point we have only partial information on how much of it does stock.

So I would say, embedded in the guidance for 2004 is pricing for both of those blocks that's somewhat higher than our medical cost assumptions for 2004.

Specifically for commercial HMO, we would expect pricing yields next year to be in the 12 to 13% based upon what we've experienced thus far and what we have on the docket here for the remainder of 2004.

Okay great.

Thanks for the information.

Thank you, Mr. McKeever.

We'll go next to Christine Arnold with Morgan Stanley.

Good morning.

Question on the experience rate of book of business.

I'm trying to get a handle on what are the risks of those accounts leaving you with those deficits and you having to reserve for them is behind you or whether that's still a risk factor.

Can you address that and do you know which accounts you decided to leave for '04?

And I have a follow-up.

Okay, Christine, this is Mike.

At this point we don't have perfect clarity obviously into what accounts we're keeping and what accounts we're going to lose for 2004.

In terms of your specific point though on the deficits, remember, any deficits that we have on the books for experience rated, that's already been charged absolutely dollar for dollar, the full impact has already been charged to our earnings here for 2003 and before it in 2002.

So therefore, in the situation that you're describing, we would either have upside if we have plans for deficit recovery in 2004 or if the account left then we will have essentially no deficit recovery but we wouldn't have an earnings impact, an earnings hit from that since we've already charged said ourself fully for the deficits that would have occurred here this year.

Okay.

I have a quick follow-up on that.

If a new account the experience rate of book of business decides to leave, my understanding is that you would have to fund that claims runout.

Is that a risk factor?

Do you know which of those have left?

Again, we don't have perfect clarity into what accounts are staying with us in 2004 versus will leave us.

Given that our sales for the experience rated block were pretty low in 2003, certainly lower than we would like and about half the level that the sales for experience rated were in 2002, I would not expect that to be a material problem.

Okay.

And then my follow-up is on the hospital unit cost 11 to 12%, that seems kind of high given that you're eliminating the outlier payments and the stop loss issues.

How did you arrive at that, and what does that look like for 2003?

And is that a conservative assumption based on what you're seeing already or is there something else going on there?

Christine, it's David.

The inpatients unit cost projection is really the buildup of facility by facility understanding of where we're are in negotiations based upon what John represented before.

What we would see is that the inpatient unit cost in 2004 would represent a slight improvement from the 2003 level as we begin to secure the improved rates and position ourselves for improvement in the inpatient unit cost even going beyond 2004.

Christina, I also just want to follow-up on your experience rated comment briefly.

And that is, I would remind you that when we put new business on, and as Mike said, the experience rated new business is rather small in the current year but essentially we reserve for and try to best represent the liabilities for that relationship.

So to the extent which is not our objective, but to the extent the case leaves after the first year, we have already reflected our best estimate of that liability in our income statement already and would not anticipate even in the event that happens a further drain.

So you're saying that the conservative estimates you made entering this year accounted for the change and lapse as you experienced in '02 to a higher level?

And therefore was already reserved for earlier this year and you haven't been unpleasantly surprised by the actual experience of people leaving?

Is that accurate?

Christine, maybe let me answer that question a different way because I get to the theme of it.

We've typically talked with you about the status of our deficit balance.

And our deficit balance as we sit here today, our accumulated deficit, which as you know is a memo entry, it's not sitting on our balance.

It's available for future recovery.

Is essentially on line with our expectations as of this point in time or about $300 million.

So the puts and takes, if you will, new deficits as well as deficit recoveries on existing business as well as lost cases are about in line with our expectations as we sit here today.

Okay that sounds like good news.

Thanks.

Thank you, Miss Arnold.

We'll take our next question from Patrick Holo with Credit Suisse First Boston.

Good morning.

Are you willing to detail what the prior period favorable development was this quarter?

Sure Patrick, it's Mike.

For this quarter it was about $10 million for the commercial HMO book.

And that's after-tax, pre-tax?

I'm sorry that's after-tax.

After-tax.

Okay.

And that was from I would imagine this year?

That's correct.

The vast bulk of that was from this year.

Okay.

Regarding your trend.

It's running about 15% which is similar to where it was last quarter, and yet you had a great improvement in MLR this quarter.

How does that jive and should we see more of a cost trend deceleration this fourth quarter given what we see in MLR?

Patrick first the 15 that you are referencing continues to be our outlook for the full year.

As we talked about I think I answered a question on the second quarter call, we saw in the first half of the year, for the commercial HMO book, the fundamental medical cost trend excluding noise of around 16%.

On that basis in terms of looking at the medical cost fundamentals excluding any noise for third quarter, that number is in the high 14s.

So we continue to expect a full year outlook of 15 but it did in fact improve in third quarter as compared to the first half of the year.

Okay.

So that's sort of, it's a full year or year-to-date figure, the 15%.

So you would say you're on target for what your stated goal was last quarter which was roughly a 200 basis point improvement second half of the year over first half of the year?

Is that right?

That is correct.

We expected that we continue to expect that while the first half the year medical cost trend on a year-over-year basis for commercial HMO was 16.

The second half of the year medical cost trend for commercial HMO on a year-over-year basis would be 14 or a little bit better.

Okay.

Can you talk in a little more detail about what you did, what you've accomplished with the medical cost management operations with the health facilitation centers to make this rapid improvement in the fix possible?

You talked about doing more hiring, you talked about doing better and more training.

Was it that simple?

Patrick, it's Ed first of all.

This area is never simple but this is an area that I think again historically we have performed quite well.

We made some significant changes in our approach to medical management earlier this year, and as I acknowledged I think on the second quarter call, those changes were significant.

There was some disruption and we had a period where obviously we did not execute as well as we can and will.

Now we addressed that very aggressively, we have a lot of confidence in the model it really allows us to leverage what is a very strong group of clinicians in the organization, and now that we've gotten through that initial period, training has been improved.

The staffing levels, the productivity of the people are all hitting the levels that we have anticipated, and as a practical matter we view this ultimately as being a competitive advantage for us and I think while we're pleased with the progress and a little surprised at the pace, this is what we've intended.

John, you want to add to that?

I'd say there are four broad categories of things we've really focused on.

The first is complex -- let me back up and state that as we look at the data just like in the industry there's a relative small proportion of cases that generate the biggest component of utilization.

And we've really focused to try and better manage that in four key areas.

The first is in complex case management, the second is in continued stay reviews, on site reviews for example, disease management and catastrophic and case management.

And in all of those either we have made our focus more crisp and disciplined or in some cases we have rolled out new products within those areas in order to be more effective within various populations.

That would be one large area.

I think a second area is that as you know healthcare delivery a local phenomena.

And as Ed indicated, some of the structural issues we've made sure that the organization is very focused geographically so that we align those local resources back into the regional structure so that we want people focused at that local market, at that hospital or at a physicians office doing the right things within that bucket of activities that I mentioned.

So how much more do you think is left?

Has it happened so quickly and readily that you're moving on to more of the contracting issues and other maybe other new product development issues or is there more left to be done?

I would never look at Ed and say that's all there is.

I would say that we view our medical management capabilities, both strategically and tactically as something that we should be doing as a best-of-breed or industry leading.

And so I think we should say that we are looking to have over a period of time, top core top performance in medical management both from utilization and quality outcome metrics.

Patrick, this is Mike.

I would add just in terms of the numbers, in fourth quarter we are expecting that inpatient utilization will be about flat with fourth quarter of 2002.

And as I mentioned in response to an earlier question, we do expect that inpatient utilization next year will be flat to down a point or two.

And that's in fact what's built into the estimates for both full year 2003 and full year 2004.

One last question.

You talk about membership being down January 1, 67% is that a year-over-year figure or a sequential drop from fourth quarter to first quarter?

That's a drop from year end.

From year end to year end.

That's a drop from year end 2003 to 1/1/04 so it reflects the 1/1 accounts.

Okay.

Are you at all concerned about what you're going to do with your cost structure with such a significant drop in membership and whether we should model at least temporary drop in margins because of that?

I think what we acknowledged Patrick, was that we will continue as we did this year to work hard to adjust our cost structure to be reflective of the membership count and our estimates reflect that.

Fair enough.

Thanks a lot, guys.

Thank you, Mr. Holo.

We'll go next to Dan Johnson, UBS Global Asset Management.

Thank you very much.

Just following on that last question.

The 67 was a January number, do you have any thoughts about continuing enrollment or disenrollment for the back half of, or for the remainder of '04?

And then would you mind going back to the medical cost components?

Again, I think the inpatient you gave us a good read like zero utilization, 10 to 12 on the costs.

I'm assuming roughly getting you to, I'm just being simplistic 6%, 7% total.

Would you mind going through the other components again in terms of the actual numbers in terms of increases you're expecting?

Thank you very much.

Dan it's Ed.

I'll comment briefly on the membership number and I'll let David comment on the specifics of medical trend.

Relative to the membership, we did acknowledge what we believe 1/1 is going to look like.

We've not yet acknowledged what we think the full year will look like and I think that is dependent upon our success with implementing a number of the actions that John outlined.

I think we believe that we should be able to see improvement but, we've been disappointed obviously with the back half of this year and we are as Mike noted, going to insure that we take appropriate pricing and underwriting actions to maintain our discipline there.

So I think it's a little early for us to forecast full year.

I think we feel confident about the 1/1 forecast and as I said, it's going to be dependent upon how effectively we execute against some of the growth initiatives that John went through.

Which I think we've positioned the organization to execute pretty effectively.

Just to clarify on that.

So about 40 some odd percent of your book comes up after January 1 is that roughly in the ballpark?

Dan, it's Mike.

That's true for the insured block.

For the ASO business a greater proportion renews on 1/1.

I just don't have that current number committed to memory, but it would be, call it a third for the remainder of the year.

All right, good.

Good.

Thanks.

On the medical cost trends I'll speak to '04.

I'll give you the trend numbers first and then the breakout respectively in terms of our utilization and unit cost which I think is what you're looking for.

On the inpatient side, essentially we're in the 10 range for 2004, 10 to 11% range.

Outpatient would be in the 13 to 14% range, professional is pushing in the 8 to 9% range, pharmacy in the 14% range.

The breakout I think what you are looking for in terms of how did it sort between unit and unit cost essentially for inpatient, consistent with what Mike indicated, we expect utilization to be flat to down slightly so the driver there is really unit cost.

On the outpatient and on the professional side it's really split about 50-50 between unit cost and utilization.

And in the pharmacy side, the majority of the driver, 75 to 80% of it is on the unit cost side.

Great.

Thank you very much.

Thank you, Mr. Johnson.

We go next to Josh Raskin with Lehman Brothers.

Josh Raskin, CFA: Thanks.

Just a quick question.

Ed, you have mentioned that one of the problems would be membership totals and the growth there has just been the difference between really the perception and the performance and I was just wondering when do you think you start to see a difference in the market with either the brokers or the consultants and what are some of the specific initiatives that you guys are taking in an effort to sort of stem that tide?

Josh, I guess I would say a couple of things.

First, obviously the challenges that we faced in 2002 relative to service, the way I like to explain it, caused people to look, in other words, we were disrupting and they decided to look.

They looked at a time when the markets were getting more aggressive so it's not surprising that we saw that pressure.

In terms of getting the perception of the marketplace to equal the reality of our service delivery, we're working very aggressively on that, Josh and have been but will continue into '04.

We've articulated a very concise value proposition and have trained our sales force or in the process of doing it as we speak, to be much more aggressive in the marketplace in telling our story inclusive of the service improvement.

We've also initiated a very formalized consultant/broker outreach program that is involving a number of people across the organization to get out and tell the story.

And as we are also seeing increasing numbers of customers who are willing to be references.

So I think it's a matter of simply telling the story effectively but even more importantly continuing to deliver, which we are very focused on doing.

Josh Raskin, CFA: Okay that is helpful.

Then a quick question on the 1/1 renewals.

Just wondering, can you just give us the percentage of the existing book of business that you are still awaiting to renew?

That's a good question.

David, do you have that percentage?

The specific question is the percent that we are waiting [inaudible] on rates?

I think what Josh is asking, Josh, let me try it this way.

I think we have pretty good visibility into the 1/1 at this point in time.

Particularly relative to the national account or the larger block of business.

Now we obviously don't have the middle market quite as tight, but in terms of national accounts, we have pretty good visibility at this point into what's renewing there.

So the estimates are reflective of that.

Josh Raskin, CFA: Okay.

And the national accounts make up a large majority I assume of the 1/1 book anyway?

They make up a larger percentage as Mike noted, yeah.

Josh Raskin, CFA: Okay.

And then just quick last question.

You guys had mentioned potentially exiting your Medicaid program and still see the membership showing up there.

I was just wondering was that still on schedule?

Was that still planned?

Josh, it's Mike.

That's still on schedule, and that will show up in fourth quarter.

Josh Raskin, CFA: Okay.

So it's completed now?

Yes.

Josh Raskin, CFA: All right.

Thanks.

Thank you, Mr. Raskin.

We'll go next to Scott Fidel with JP Morgan.

Hi, my questions have been answered, thank you.

Thank you, sir.

We'll go next go next to Eric Veal with Wachovia Securities.

Thank you.

Mike, can you help us just get our arms around how you took a 180 basis points out of the commercial administrative expense ratio sequentially when we look at the membership drop what kind of cost cutting you were able to do, you know, is this real estate, personnel, what we did there, what you did there and then what we can look for going forward on that?

Okay, first off in terms of the commercial HMO expense ratio, remember this a block of business with only about $1 billion of revenue per quarter so we're not talking about a gargantuan number when you apply the 180 basis points to it.

So rather than just focusing just on commercial when we broaden it to the overall healthcare block of business which is obviously a bigger issue, we've had work underway as we've talked about for quite a while to decrease our operating expenses both in the CIGNA healthcare division as well as overall corporate wide.

This is important work since we need to offset the membership declines that we've had here this year and even more important in terms of strengthening our competitive position going forward.

In terms of your question on the sources of it, some of it has been through attrition, some of it has been through decreasing cost of outside services, we're doing a better job with the procurement function.

Some of it stems from the productivity improvements from the transformation work, some of it as we've announced publicly, some of it has involved layoffs and the restructuring.

So I would not point out a single item, instead it's been a multifaceted focus.

If we just take the actually I'll talk to you about that offline.

Second question just going back to, Ed your comments on the retirement business and the decision there, I believe you said that something is expected soon, it feels like something has been expected soon for awhile there.

I was wondering if you could maybe put a tighter band on the definition of soon and if maybe any color on sort of what the final decision points are here between selling and just splitting this out into a separate legal entity?

Eric, I don't think I'd add anything than what I said.

We continue to work on this, we'll make the decision that is in the best interest to shareholders and customers and we expect that to be soon.

Okay.

And then a final clarification on the prescription trend for 2004.

The pricing seems rather higher are you including specialty injectable and biotech products in that trend number?

Eric, it's David.

In general yes, to the extent those are not procured in a hospital setting or through an outpatient treatment, then yes, they are in the pharmacy trend.

Great thank you.

Thank you, Mr. Veal.

We'll we go next to Brian Monteleon with Citigroup.

Morning.

Actually Dave McGowan.

One quick numbers question for clarification and then a question about retirement.

Just to make sure I understood you on membership.

Your 1/1/03 to 12/31/03 declined as expected to be in the 10 to 11% range and then from 12/31/03 starting in 1/1/04 down another 6%?

Am I understanding that correctly?

That's correct on a same-store basis.

Thank you.

I want to make sure I got that.

On retirement I don't think you've addressed this.

To the extent you make a separate versus sell decision, would you have to raise more capital or allocate more capital to Connecticut General to boost the RBC in order to get it's rating up?

Can you talk about where you stand with the agencies on that decision?

David, I'm not going to add anything additional to the retirement comments over and above what I said in the second quarter and today.

There are, as we said, a couple of different alternatives underway here and we'll be motivated by what's best for shareholders and customers and expect a resolution shortly.

I think that's all I'm prepared to say about the retirement piece.

Thank you.

Thank you.

We go next to Iris Zuckerman with Nutmeg Securities.

Could you give us an idea of what the competitive landscape looks like for January 1 renewals especially given the consolidation that's going on in the industry?

Iris, it's Mike.

In terms of the insured block of business, again it varies of course market to market but I would say broadly speaking we are seeing price increases out in the market in the low teens range on the net basis net of benefit buy downs.

And something in the mid-teens on a gross basis so excluding benefit buydowns is what we're seeing to at this point.

Again, different market to market but in aggregate it's about that.

Okay.

More specifically do you see the industry, your competitors being more or less competitive than they have been?

Iris, it's Ed.

It's a very competitive market.

It always has been.

I was just going to say it always has been.

And you know you can always find a pocket or a particular competitor in a particular situation that is very aggressive.

But I wouldn't say that at this point in time there is an industry trend towards more aggressiveness, although I would acknowledge that as we've said we are going to be very disciplined around our pricing and underwriting because we want to restore those margins.

Okay.

Thanks.

Thank you, Mr. Zuckerman.

Our final question will come from Joe Francs with Banc of America.

Joe Francs, CFA: Thank you.

What percentage of your enrollment decline year-to-date and in the recent quarter was due to attrition as opposed to a market share loss?

Joe, it's Ed.

By attrition?

Joe Francs, CFA: Well, I mean like shrink, layoffs.

Layoffs within in in-group enrollment.

I would say, Mike, what'd you say, a couple of points?

A couple of points of loss due to, what I would call attrition in-group shrinkage, that kind of thing.

Joe Francs, CFA: So if enrollment's off 10% year-to-date 8 points is due to market share and 2 points is due to attrition?

Yes, that's fair in round numbers, Joe.

Joe Francs, CFA: Thank you very much.

Ladies and gentlemen, this does conclude today's CIGNA's third 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.

You may access the recorded conference by dialing 888-203-1112, or 719-457-0820.

The pass code for both numbers is 788712.

Thank you for participating.

We will now disconnect.