信諾集團 (CI) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's fourth-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 enter queue to ask questions at that time. If you should require assistance during the call please press the star key followed by the digit zero on your touch-tone phone. As a reminder ladies and gentlemen this conference, including the question-and-answer session, is being recorded. We'll begin by turning the conference over to Mr. Greg Deavens. Please go ahead, sir.

Good morning, everyone and thank you for joining us.

Please go ahead, Mr. Deavens.

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, John Coyle, Senior Vice President of CIGNA HealthCare, and David Cordani the Chief Financial Officer of our HealthCare business. John and David will participate in the Q and A portion of today's call.

The purpose of this call is to review CIGNA's financial results for the fourth quarter of 2003 and to discuss our outlook for full-year and first-quarter 2004. CIGNA uses certain measures which are not determined in accordance with generally accepted accounting principles, or GAAP, when describing its financial results.

Specifically, CIGNA uses income from continuing operations, excluding realized investment 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 of today's press release which is posted in the Investor Relations section of cigna.com for a discussion of these matters.

As we discussed in our third-quarter filing with the Securities and Exchange Commission, the Financial Accounting Standards Board and the American Institute of Certified Public Accountants issued new accounting guidelines in 2003. These guidelines primarily affect CIGNA's accounting for experience rated pension policy holder liabilities which are subject to the pending sale of our retirement business. The new guidelines are being implemented in the fourth quarter of 2003 and the first quarter of 2004.

As permitted by these new accounting rules, we have reclassified certain investment securities which support these liabilities to a separate line item on our consolidated balance sheet. The reclassification did not affect CIGNA's consolidated net income.

In subsequent quarters, application of these new accounting guidelines could result in adjustments to contract holder deposit fund liabilities for changes in the fair value of mortgage loans that also support these liabilities. The earnings outlook discussed on today's call excludes any adjustments that might result from implementing these new guidelines.

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 turn it over to Ed.

Thanks, Greg. Good morning everyone.

Before we discuss our fourth-quarter results, which were quite strong and clearly demonstrate the progress of our healthcare improvement initiative, I want to share a few thoughts on CIGNA's new strategic direction.

As you know, last November we reached an agreement to sell our retirement operation. The transaction is expected to close around the end of the first quarter. The sale represents the last major step in CIGNA's transition to a diversified healthcare and related products company.

With our capabilities fully concentrated on these core businesses, we are well positioned to become a leading healthcare and related benefits company with a focus on best in class products and service for our customers. In fact, our current portfolio of products and services is already stronger than many of our primary competitors, some of whom are only beginning to enter a number of the specialty markets in which we already have top-tier position.

We have wide-ranging capabilities to create integrated benefit solutions tailored to our customers' specific business requirements, and we have a national team of clinical professionals and client managers working to improve medical outcomes and help employers retain productive employees while controlling costs.

To support the success of this strategic direction, we recently initiated organizational changes to realign our operating model and management structure. Specifically, we are moving away from our historical structure which consisted of stand-alone operating divisions with somewhat overlapping divisional and corporate support functions, to an operating company structure with well-defined market-focused businesses and more efficient sharing of functional support resources.

These actions position us to meet our customers' growing expectations for continuous improvement in administrative efficiency and responsiveness. Our management team, which includes the leaders of our businesses and functional support area, is aggressively working to flatten the organization and reduce operating expenses while continuing to deliver on our commitments to shareholders and customers. Further personnel changes and staffing reductions will occur as the organization is realigned.

By continuing to tightly manage our costs and infrastructure, we will maintain fully competitive product and service pricing in support of our commitment to profitable growth. Mike will share some of the financial implications of these changes with you in a minute.

Now as noted in the press release, we are also revising our capital management strategy to reflect our transition to a healthcare company and to bring our strategy more in line with our competitors in the managed care sector.

We will maintain a disciplined approach to capital management going forward. As we compare CIGNA to our healthcare peers it is evident that our dividend policy is inconsistent with the sector, and as such we are reducing our annual dividend to 10 cents per share or 2.5 cents a quarter, a level which is more consistent with other managed care companies. As noted in the press release the change will take effect after the closing of the sale of the retirement business.

We will continue to pursue share repurchase as a key vehicle for returning excess capital to our shareholders as we have done in the past and as other healthcare companies do currently. This overview of our strategic direction should be helpful in providing a context for understanding many of the initiatives that we are currently pursuing and changes the company is making.

Now with respect to the quarter.

Fourth-quarter 2003 income from continuing operations, excluding realized investment results and special items, was $1.65 per share, up 14% sequentially and 30% from the fourth quarter of 2002. These results are ahead of our expectations and primarily reflect improved medical cost and underwriting results in our healthcare business as well as solid results from our other businesses.

The healthcare results throughout the second half of 2003 reflect good progress in executing our improvement initiatives. I'll discuss the progress in healthcare further after Mike provides his financial recap of the quarter and outlook for 2004.

Full-year disability results, or full-year results in our Disability and Life segment, increased over 10% with top quartile margins, representing a strong competitive performance. The earnings growth reflects strong sales momentum and good execution of the fundamentals. And we continue to see good sales growth going into 2004.

Full-year earnings in our retirement business reflect good fundamental execution in a tough environment. Our International operations had a strong year, reflecting solid results in the expatriot benefits and life, accident, and health businesses.

Overall, the fourth-quarter results were strong and demonstrated the progress with our improvement initiatives in healthcare as well as continued success in our Disability and Life and International businesses.

While we are making good progress there is still significant opportunity for meaningful improvement, particularly in our healthcare operations. Through focused and disciplined execution of our improvement initiatives I am confident we will accelerate margin improvement as well as stabilize and grow membership.

I would also note that earlier this week CIGNA's settlement of provider class action litigation was approved in federal court. We are pleased with the settlement and confident that it will help to us further improve our relations with physicians and will ultimately benefit our healthcare customers.

With that, I'm going to turn it over to Mike for a review of our fourth-quarter results and our 2004 outlook. Mike.

Thanks, Ed. Good morning, everyone.

In my remarks today I'll review CIGNA's fourth-quarter 2003 earnings. I'll also discuss our earnings outlook for 2004.

I would note that the quarter reflects two special items which are detailed in our earnings release. We had a $33 million benefit associated with the retirement business that is being sold to Prudential. The benefit reflects a reduction in the allowance for amounts recoverable from retirement customers for their share of realized investment losses. We also had a $9 million benefit from a previous restructuring charge. These items and our realized investment results are discussed in our earnings release.

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, and it's also the basis on which we provide our earnings outlook.

On this basis, fourth-quarter earnings were $233 million or $1.65 per share. This is a strong improvement from our third-quarter 2003 and fourth-quarter 2002 results and reflects good progress in our healthcare improvement initiatives. It also reflects continued strong results in our other businesses.

Turning to the segment results I'll begin with healthcare.

Healthcare earnings for the fourth quarter of 2003 were $153 million compared to $121 million in the third quarter and to $84 million in the fourth quarter of 2002. The improvement relative to third quarter primarily reflects improved underwriting results and lower medical costs, including favorable prior period development.

The prior period development amounted to $25 million and primarily related to the second and third quarters of 2003. Stronger medical cost results reflect continuing solid execution of the medical management initiatives that we've discussed on previous calls.

Premiums and fees for the segment decreased 7% relative to the fourth quarter of '02, with the impact of lower medical membership partly offset by rate increases. Medical membership on a same-store basis, that is excluding the impact of our exiting the Medicaid business, was 11% lower than year-end '02 levels reflecting lower sales and customer retention.

Relative to the components of the segment results, I'll discuss HMO and indemnity. HMO earnings include results from our health plans and from our specialty healthcare business.

HMO earnings in the quarter totaled $140 million versus $120 million in the third quarter. The sequential improvement in HMO results reflects lower medical loss ratios in our risk HMO business, continued earnings growth in specialty healthcare, and expense reductions partially offset by the impact of lower membership.

The commercial HMO medical loss ratio was 84% for the quarter compared to 86.8% in the third quarter '03 and 86.4% in the fourth quarter of '02. For the full-year 2003, commercial HMO net premium yields were approximately 14%. Commercial HMO medical cost trend for the full year was approximately 15% which is consistent with our recent estimates.

Importantly, inpatient utilization trend in the second half of the year was approximately 3% compared to 7.5% in the first half, resulting in a full-year trend of 5.5%. The improvement in the second half reflected the impact of the utilization improvement initiatives that we've previously discussed. For our administrative services only, or ASO HMO business, overall medical cost trend was 13% for full-year 2003.

Turning to indemnity, fourth-quarter indemnity results were $13 million compared to $1 million for the third quarter of 2003. The sequential improvement reflects improved underwriting results including the impact of the non-renewal of some unprofitable business, partially offset by the impact of lower membership.

One final note on healthcare segment results. While the full-year effective tax rate was in line with 2002, the fourth-quarter tax rate was lower than the first three-quarters of the year, reflecting year-end true-ups.

So to recap the healthcare segment, fourth-quarter earnings showed good improvement relative to third quarter reflecting additional progress in strengthening our healthcare fundamentals.

I'll now move to the other segments.

Earnings for the Disability and Life segment were $36 million in the fourth quarter of '03 versus $32 million in the third quarter. This is a strong competitive result as the Disability and Life business continues to benefit from effective disability management, good persistency and higher middle market sales. Premiums and fees increased 6% over 2002 reflecting solid sales results and strong persistency.

Moving on now to the retirement segment, earnings were $55 million compared to $58 million in the third quarter of '03 and $60 million in the fourth quarter of '02. Within the current quarter earnings of $55 million, the businesses being sold to Prudential contributed $43 million and the corporate-owned life insurance business that we are retaining earned $12 million.

Overall ending assets under management were $57.6 billion, up slightly compared to the end of third quarter and 7% higher than year-end '02.

In our International segment, earnings were $14 million, and in line with third quarter and improved over the '02 result of $7 million. The increase in earnings relative to fourth-quarter '02 was primarily driven by solid growth in our life, accident, and health business and the positive impact of our divestiture of underperforming operations.

The remaining segments, including runoff reinsurance, other operations, and corporate, generated an aggregate loss of $25 million, which is slightly higher than the third quarter.

Before providing our 2004 outlook, I'll review our capital position and actions we're taking to reduce our expense structure.

Our capital position at year-end 2003 is strong and improved from the prior year. Specifically in 2003, we paid down $125 million in debt, we reduced our leverage ratio from 29 to 25%, we increased our excess liquidity position at the parent company from 50 million to $160 million, and we increased statutory capital and surplus in our primary insurance subsidiary, Connecticut General Life, by approximately $500 million over the course of the year after taking into account dividends paid by Connecticut General to the parent.

Our capital position will be further strengthened in 2004. We expect our operating subsidiaries to provide dividends to the parent of about $500 million based upon the strength of the ongoing businesses.

In addition, we will realize net proceeds of approximately $1.7 billion after taxes and transaction costs from the sale of the retirement business.

Our priorities for the use of capital following the retirement sale are consistent with our comments in November. First, we will provide capital necessary to support growth and maintain or improve financial strength ratings of our subsidiaries. Consistent with my comments last quarter, we expect that capital infusions into our subsidiaries in 2004 will be modest, specifically we expect less than $100 million.

Second, after the closing of the retirement transaction, we intend to maintain at least $500 million in cash at the parent company group through the remainder of 2004.

Third, also following the closing, we plan to implement the dividend policy change that Ed discussed and to use share repurchase as the primary vehicle for returning excess capital to investors. We'll take a measured approach to repurchase, taking into account market conditions and the achievement of continued improvement in our healthcare results.

We also plan to pay down some corporate debt to maintain our leverage ratio near the midpoint of our targeted 20 to 30% range.

Regarding expense reduction actions, we are taking additional actions to significantly reduce operating expenses in 2004 and beyond. In 2004 we expect these actions to result in a $300 million net year-over-year decrease in healthcare operating expenses.

The savings will reflect the impact of lower staffing levels, achieved through attrition and severance actions in 2004, as well as the annualized benefits of 2003 actions. In addition, we will achieve productivity improvements including those related to our new, more efficient service platforms. And we will realize savings from improved vendor contracting and actions to reduce real estate costs.

We expect to record related restructuring charges in 2004. While we are in the process of finalizing the actions to be taken, we do not expect the total restructuring-related charges in 2004 to exceed $100 million after tax including a first-quarter charge not expected to exceed $75 million after tax.

Turning to the outlook for 2004, consistent with our normal practice I'll provide estimates of after-tax income from continuing operations, excluding realized investment results and special items. Special items would include the restructuring charges that I just mentioned. By way of overview, our outlook remains consistent with the estimates that we discussed in November.

For the healthcare segment we expect earnings of between 450 and $500 million. The midpoint of this estimate represents a modest year-over-year earnings increase reflecting the benefit of lower medical costs, improved underwriting, and lower expenses largely offset by lower medical membership.

With respect to medical costs, as we continue to see results from our utilization and the other medical cost initiatives we estimate that commercial HMO trend will decrease from 15% in 2003 to a range of 11 to 12% in 2004. Also for 2004 we expect net premium yields to be between 12 and 13%.

Relative to underwriting we will realize the benefits of actions initiated in 2003 to address underperforming business. And we plan to significantly reduce our operating expenses.

The impact of the improvements in the areas that I just mentioned will be mostly offset by the impact of '03 and 2004 membership declines. Our January 1, 2004, membership was somewhat lower than we expected due mainly to lower sales and persistency in the middle market.

Our middle market results include the impact of non-renewing some unprofitable business and our commitment to maintaining pricing and underwriting discipline in the face of increasing competition on many insured accounts.

Total membership declined by 10.5% on January 1st, and we anticipate additional pressure on the balance of the year. This expectation is reflected in our estimate for full-year 2004 healthcare earnings.

While membership stabilization is important we are committed to maintaining our pricing and underwriting discipline for new and renewing business. The quality of our book of business has improved relative to 2003, and we expect our underwriting and pricing actions to result in further improvement in profit margins in 2004.

Now turning to the balance of our reporting segments.

Excluding the sold retirement business, we expect our other businesses to contribute between 150 and $160 million in earnings in 2004. This is approximately 10% higher than the comparable 2003 result, and consistent with the estimates that we provided in November.

The year-over-year growth reflects our expectation of continued strong performance in our Disability and Life and International businesses.

Now with respect to the impacts of the retirement sale, subject to regulatory approval we continue to expect the transaction to close at or near the end of first quarter. As I mentioned earlier, we expect to realize net proceeds after taxes and transaction costs of $1.7 billion and we expect the total GAAP gain on sale to be about $500 million after tax.

Consistent with our November discussion, there are a number of moving parts that affect the timing of the gain recognition. Our current estimate is that about $50 million of the gain will be recognized at the time of the transaction. The remainder of the gain will be deferred with a portion recognized on an accelerated basis over the next two to three years, and the remainder gradually amortized into earnings.

As to 2004 earnings impact from the sold businesses there are three main components included in our outlook. First, we will record earnings on the sold businesses through the date of sale. Assuming that the sale closes at the end of first quarter, we would estimate these ongoing earnings to be between 43 and $47 million.

Second, we will record some of the amortized gain on the sale. Our current estimate is that this amortization will be approximately 5 to $10 million per quarter which will amount to about $25 million for calendar year 2004.

Third, while we will fully eliminate the overhead allocated to the sold businesses by the end of 2004, there will be some residual overhead from the time of sale through year end as we implement cost reductions. We currently estimate that the residual overhead in 2004 will be approximately $25 million after tax.

In total, then, assuming an end of first quarter sale we would expect net earnings contribution in 2004 from the sold retirement business to be approximately $45 million. That full-year estimate is the $45 million of expected first-quarter earnings with the amortized gain on the sale through the remainder of the year approximately offsetting the residual overhead.

To be clear, this estimate excludes the gain which we will recognize at the time of sale, as well as any acceleration of the deferred gain. These two parts of the gain will be treated as special items in our reporting.

So putting together all of the pieces we estimate that our consolidated earnings, excluding realized investment results and any special items, will be between 645 and $705 million for 2004.

Our consolidated earnings per share will be impacted by share repurchase activity. As I mentioned, our approach to share repurchase, which we do not expect to resume until after the retirement transaction closes, will be measured.

Since there are a number of factors to be considered as we carry out our repurchase activities, including prevailing market conditions during the year, we are not in a position to estimate the amount or timing of repurchase in 2004. We will take appropriate steps to return excess capital to investors at a pace which takes into account market conditions and other considerations.

Turning to the first quarter of 2004, we currently expect consolidated earnings before realized investment results and special items to be between 170 and $200 million, or about $1.20 to $1.40 per share. Within this total we expect the healthcare segment to generate between 95 and $110 million.

We expect the sold retirement business to contribute approximately 43 to $47 million, and we expect our other operations, excluding the results of the sold retirement business, to contribute between 32 and $43 million of earnings.

So to recap, our fourth-quarter results improved sequentially and were ahead of our previous estimates. The sequential improvement reflected better healthcare earnings primarily due to improved medical costs.

Results in our other businesses continued to be strong. We made good progress in improving the fundamentals of our healthcare business in 2003 and are positioned to make further progress in 2004.

In addition to continued progress in healthcare, our overall outlook for 2004 reflects continued strong execution in our Disability and Life and International businesses and an intense focus on productivity and operating efficiency.

With that I'll turn it back to Ed.

Thanks, Mike. Now I want to provide observations on our performance improvement initiatives in healthcare as well as some further perspectives on our strategy and future direction.

Our results for the quarter as we said were strong and ahead of expectations. While we are pleased with the progress there is still more to be done to restore our profitability to fully competitive levels.

Our 2004 outlook reflects an expectation of improved underwriting execution, continued improvement in controlling medical costs, significant action on expenses, and high quality and consistent service delivery in healthcare. In addition, we expect continued strong performance from our other businesses.

As we've discussed on previous calls, our key priorities for the healthcare business include lowering medical cost trends, continuing to deliver quality service, lowering administrative expenses and stabilizing and growing membership. We have specific actions underway to drive execution of these key initiatives, and I'll spend a few minutes outlining those actions and highlighting some of our success to date.

Relative to medical cost trend, our third- and fourth-quarter results show clear signs of strong progress. Our actions are focused both on improving utilization trends and slowing the pace of unit cost increases.

Our utilization-related actions are focused in three key areas. First, we are improving the effectiveness of case management and concurrent stay review with both locally deployed and regionalized clinical resources.

On this front, as Mike noted, progress continued in the fourth quarter; and consistent with our expectations, our fully-insured commercial HMO inpatient utilization trend declined from 7.5% in the first half of 2003 to 3% in the second half, which includes the impact of a fairly harsh flu season. These improvements were driven by good execution of our medical management model.

We are experiencing strong results with our case management, concurrent review, specialty case management, and disease management programs. Results have also been aided by better leveraging our predictive modeling capability which drives proactive outreach from our care advocates and case managers.

Our second utilization-related initiative is to sell leaner benefit designs and products to help our customers better manage and control costs. We have had some solid success here, and we view this area as having additional opportunity for us.

And third, we are increasingly working to integrate our core medical and specialty product capabilities by leveraging our clinical information database from these businesses to drive lower utilization and improve health and cost outcomes.

And I want to give you an example of the power of this integration. By using integrated clinical data and protocols, CIGNA case managers can detect gaps or errors in things like cholesterol and asthma care, and then reach out to members and providers to assist in implementing the appropriate therapies.

For example, in one case we were able to get one-third of the patients who were previously not using asthma controller therapies to use them. This results in a better quality of life for members and lower costs for employers through reduced emergency room visits.

In several cholesterol programs through active outreach we were able to get three-quarters of members with high cholesterol to lower their cholesterol levels. In fact, 40% of these members actually reached their LDL levels.

Again, the outcome is better quality and lower cost through decreased instances of heart attacks and coronary procedures. CIGNA's ability to integrate our products and clinical database makes these outcomes possible.

These and other actions that we have underway contributed to significantly lower inpatient utilization trends in the second half of 2003, and they will contribute to further medical cost trend moderation in 2004.

On the unit cost front, we are aggressively implementing a broad-based facility recontracting strategy to improve overall costs as well as administrative terms with our providers. We have focused our near-term efforts on our top 250 hospital systems which represent about 800 hospitals.

This contracting process is ongoing, and we expect these actions to result in 100 basis point improvement in inpatient unit cost trend in 2004. Our ongoing medical management actions will help us to drive cost trends lower and keep our medical costs fully competitive.

Now regarding service.

In January of 2004 we added 2.1 million new and existing customers to our new, more efficient technology platform. This process went well and marks six consecutive quarters of successful migrations of customers to our new platforms.

Over the last several months I've spent time with several of our largest customers, and I recently spoke with one of our new national accounts that was particularly impressed with our handling of their implementation. And after only 30 days this company has already volunteered to be a reference for CIGNA with prospective customers.

Today nearly two-thirds of our members are seeing the benefits of our new service and technology platforms and we expect to complete the remaining customer conversion in 2005.

Our overall service results continued to be solid throughout the fourth quarter and in the month of January. Our ongoing service results and very successful January migrations provide positive momentum as we enter the 2005 national account selling season.

With respect to administrative expenses I described in my opening remarks actions that we have initiated to realign the company for maximum efficiency and effectiveness. We are committed to this effort and view it as a key contributor to our future success. Again, as Mike indicated, we expect to reduce overall net administrative spending by $300 million in 2004.

Moving on to membership. I'd start by saying that the fundamentals in our business, including medical cost trends, service, and administrative expenses are showing strong improvement.

As I've noted, medical cost trends are moderating, service levels are very competitive, and we are reducing administrative expenses. Successful execution of these fundamentals is a prerequisite for stabilizing and growing membership.

As Mike noted the overall decline in January membership was somewhat greater than we anticipated. Overall retention rates and new business sales levels were lower, particularly in the middle market.

The lower than expected middle market membership reflect a number of factors including greater than expected non renewals of unprofitable business as well as lower sales and persistency in an increasingly competitive market. Clearly membership stabilization and growth is key to our business. At the same time, we are committed to maintaining our pricing and underwriting discipline for both new and renewing business. As we continue to improve the key fundamentals in our healthcare business we expect membership levels to improve.

This is a primary area of focus for us in 2004 and 2005. And we have the capabilities necessary to improve both new sales and customer retention.

Our product portfolio is strong, our service, as I noted, is now at competitive levels, our networks of providers are cost competitive, broad and deep in key geographies, our results in clinical quality are best in class, and we have the tools and resources that enable employers and their employees to monitor and improve their health and make informed healthcare decisions. These strengths represent the fundamental basis of being a leading healthcare provider.

At the same time, we are building on these strong fundamental capabilities by enhancing our product offerings. In the coming weeks CIGNA Healthcare will launch an innovative new product suite that takes our customization capabilities around employer and member needs to the next level.

This new product suite features modular medical management capabilities, our second-generation health advisor program, expanded availability and access to high-performance networks and a leading edge consumer-directed health plan. We expect that these new product offerings combined with the underlying improvements in our fundamentals and increased investment in sales resources, training tools, and partnership programs with brokers and consultants will drive profitable membership growth.

While I expect these actions to result in improved membership levels, I must continue to stress that we will maintain our pricing and underwriting discipline, and we will not seek to grow our business by compromising profitability.

In summary, in 2004 we will continue to execute on the fundamentals in our healthcare business, including strong medical cost management, disciplined underwriting and pricing, delivery of quality service, and effective expense management, and by doing these things we will improve healthcare margins in 2004 and beyond. We will also continue to profitably grow our Disability and Life and International businesses, and we will effectively manage the company's capital base to increase return, enhance shareholder value, and maintain financial flexibility.

We have a strong franchise with excellent capabilities, and we've made good progress in our healthcare improvement efforts. Our third- and fourth-quarter '03 results reflect this progress. As we execute our plans and achieve our objectives we will establish a leadership position in the healthcare industry while we enhance shareholder value.

And with that, we would be pleased to take your questions.

Thank you. Ladies and gentlemen, at this time if you do have a question please press star one on your touch-tone telephone. If someone asks your question ahead of you, you may remove yourself from the queue by pressing the pound key at any time. Also, if you are using a speakerphone please pick up your handset before pressing the buttons. One moment please for our first question. We'll go first to Charles Boorady with Smith Barney.

Hi, good morning. Just a few follow-ups on the healthcare segment. In terms of enrollment did you give the exact January 1 enrollment data, or could you if you didn't?

Charles, it's Mike.

Hey, Mike.

When you say exact membership enrollment data --.

What was your enrollment January 1?

It was down 10.5% relative to year-end 2003.

Gotcha. And does your guidance which is the same as your previous guidance for the healthcare segment assume the full $300 million of savings, or is the $300 million a run-rate level that you expect to achieve by the end of the year?

Charles, the guidance includes a $300 million year-over-year reduction in operating expenses for the healthcare business, so it's a calendar year '04 versus a calendar year '03 number, so the annualized savings would be something north of 300.

I see. What would a year-end run rate level be, or maybe a fourth quarter over a fourth quarter assuming that these cuts are going to take some time to implement?

We're still working through the specific details, the specific budgets for each of the departments and the specific reductions. I would say that the approximately, you know, 150 or so million greater than the calendar year savings would be the annualized savings.

I see. And just to understand the idea of keeping guidance where it was, if you're going to pick up $300 million on the admin line, and it looks like you're still pricing ahead of the cost trend, and you did mention improvements in underwriting in the health business, obviously offset by enrollment declines, many of which were already anticipated before, I'm just curious, it looks like the healthcare guidance is below where I would have expected in light of those admin cuts and underwriting improvements. Can you comment on that in terms of if I'm missing some offset, or did you wind up losing more profitable enrollment than you expected, for example?

Charles, I don't think you're missing any particular offsets. You are right that we are continuing to expect to get the kind of pricing and underwriting and medical cost improvement in 2004 that we've talked about on previous calls, so that has not changed.

I would say that our 2003 starting point in terms of medical costs is a little better than what we would have said three months ago. On the other hand, the overall membership situation as compared to our operating expenses is a little bit worse, and those two things essentially wash out as it relates to calendar year 2004.

Gotcha. And the cost trend guidance you gave for '04, the 11 to 12%, is still above where the rest of the industry appears to be. Can you just bifurcate what would you see as sort of a same member trend for the book of business that you had in '03 that's going to continue with you in '04 versus any impact to that trend from things like mix or other issues that may be driving up your trend?

Charles, I'll start and I'll ask David Cordani if he wants to add anything. In terms of the mix of business 2004 versus 2003, the only significant mix change on the commercial HMO business that I'm specifically aware of would be as a result of the targeted underwriting actions on the unprofitable business, and I would say that has maybe about a 50 basis point favorable impact on utilization trend in 2004 over 2003. Other than that it would not be material.

So the improvement in the medical cost trend year-over-year would be fundamentally the medical cost management actions that Ed talked about a couple minutes ago and that Ed and John Coyle talked about on the third-quarter call.

I see.

Charles, it's Ed. I would just add one thing. You referenced this in an earlier question. That is, as we come into 2004 we are quite pleased with the quality of the book of business. I made that comment, I think, in my prepared remarks. We believe we have improved in '03 the underlying quality of the book of business and that that will continue in '04.

Okay. So when I look at what you just said, in the context of where the rest of the industry's cost trend is, which is significantly lower than the 11 to 12% that you're pricing even above that level and you're guiding to expect 11 to 12% in your results, it sounds to me like 11 to 12 might be too high of a number to be baking into estimates still.

If your book of business, if you're pleased with the book of business that you kept and the overall industry cost trends are more than 9 to 11 range, do you see a potential for your 11 to 12 to come down as the year progresses and you start to get more claims data in?

Well, Charles, first off, we are comfortable with the 11 to 12% guidance that we described. We do expect to continue to improve medical cost management over time and would expect that to show up in the financial results.

What I would emphasize to you is, rather than comparing year-over-year trend rates in any given calendar year, us versus what our competitors are saying, I would emphasize to you that the more important issue is the overall competitive position of our medical costs, and we're comfortable with the overall level, the absolute level, and the competitive level of our overall medical costs.

It's an area that we monitor very carefully, very thoroughly. It's an area that we get a lot of specific feedback from national benefit consultants on, and the analysis and feedback supports our view that while we certainly had some isolated issues and some isolated areas of improvement out there we're comfortable with our overall position.

I can't comment on how our competitors are measuring this trend, what their business mix is looking like, what their geographic mix is looking like, what their plan designs are looking like. What I can tell you is we're comfortable with how we measure it and how we report it.

Just to close then, do you mind giving us the components that build to the 11 to 12 in terms of the hospital, physician and drug component? That's my last question.

Charles, it's David. I'll give you the breakout of the components. For 2004 inpatient trend is expected to be in the 8 to 9% range, outpatient 14 to 15%, professional in the 9 to 10% range, and the pharmaceuticals 14 to 15% range.

The one tag-on I'd give to Mike's comments as well, Charles, for your comparator to the industry trend, is the difference in terms of what we're anticipating in terms of benefit buy-down or benefit leanness, if you will.

So to the extent we secure leaner benefit buy-downs than are currently baked into in our estimate here, our medical trend would go down and our yield would go down correspondingly. But this trend in the 11 to 12% range represents what we believe we're going to secure relative to benefit buy-downs and the corresponding great execution as well.

What level of buy-downs is that now reflecting?

In the 250 to 300 basis point range.

Gotcha. Thank you.

Thank you, Mr. Boorady. We'll go next to Christine Arnold with Morgan Stanley.

Good morning. I'd like to follow-up on this line of questioning. Could you give us by component what you think the utilization versus price per unit is going to be? It sounds like you're doing better than you expected on the hospital recontracting in terms of getting those unit costs down.So could you give us the utilization versus unit costs? And I have a follow-up.

Christine, it's David. I'll give you the breakout by component. For inpatient, the breakout of the trends that I referenced before, essentially it's all unit costs, zero on utilization.

On the outpatient side, the trend I gave you is broken 50/50 between utilization and unit costs. In the professional side, 75% of the trend is driven by utilization with just 25% driven by unit cost. And in the pharmaceuticals, only 20% of it is utilization, 80% of it is in the unit cost side.

The follow-up comment I would say on the inpatient contracting side we would suggest we're on target relative to our objectives, relative to the inpatient recontracting and securing the unit cost reduction targets that we were seeking for 2004.

Okay. So just to follow up on Charles' question, because I'm not getting this. Why is it that with the charge, which is going to lower your admin costs, your earnings guidance is the same, and yet the components seem to be kind of the same on the medical cost side? Is it the mix of the business, even though you got rid of some underperformers you're still stuck with more underperformers than you thought?

Christine, it's Mike. The major difference that you're not accounting for in that description is the impact of the membership decline on 1/1/04 and what we're anticipating for the full year 2004 as compared to the operating expense reduction that we'll achieve in '04. The operating expense reduction will come in, will merge over the four quarters of the year, and obviously the 1/1/04 membership, you know, puts us in a small deficit relative to where we need to be.

Christine, it's Ed. I think, I'm really repeating what Mike said. I think it's just a relationship of as we take the expense reduction actions throughout the year and see that benefit build through the year, we're starting with a little bit lower membership base than we anticipated, so those two things really offset.

Christine, it’s Mike again. You can see that if you compare the first-quarter earnings estimates for healthcare, as compared to the full-year estimates. You can see the fact that over the course of the year, we will get, we expect to get additional medical costs, underwriting and pricing benefit as well as the positive impact of additional operating expense reductions.

Okay. And then as a second follow-up question here, as we go through kind of incoming cash and outgoing cash could you delineate kind of all the pieces for us? It sound like you're getting $500 million in from the subs. Is that net or gross?

That's gross.

That's gross.

Yes, just to walk through the pieces.

Yes.

We're beginning the year 2004 with $160 million of cash at the parent company. That's excess liquidity, obviously in addition to the liquidity, the fully capitalized operating subs that we have. So we start with 160, we're expecting $500 million in dividends from our operating subsidiaries over the course of calendar year 2004. We'd expect about $75 million to be spent on other net uses, including a little bit of infusion back into a couple of the operating subsidiaries.

We would expect to pay out, well, it depends upon when the retirement transaction closes, but assuming a first=quarter close for retirement, we would have half a year at the old shareholder dividend rate and half the year at the 2.5 cent a quarter rate that Ed described. So therefore we'd expect shareholder dividends and interest to our bond holders to amount to about $200 million over the course of the year. And then we would expect an additional $1.7 billion in net proceeds from the closing of the retirement transaction. So overall that would give us a little less than $2.1 billion of available liquidity, if you will.

Now, as we've talked about before, we do plan to maintain at least $500 million in liquidity at the parent company level. Another high priority for us is to support the growth of our businesses. We also ultimately expect to use a portion of the amount to retire a certain amount of debt to keep our leverage ratio close to the midpoint of the 20 to 30% range, but that's the overall capital picture.

So let's say those things add up to, I don't know, $700 million conservatively. You've got $1.4 billion to repurchase shares. Why wouldn't you just do a big block trade, get the share count down, still have all the capital you need, and enable kind of the EPS to be kind of in a reasonable range? Why aren't you guiding for that? How do we think about that in terms of the timing?

What you ought to think about in terms of share repurchase is, as we've said, we're going to take a measured approach, a measured pace of stock repurchase, it will depend upon the market conditions, and it will depend upon demonstrating continued progress in improving our healthcare results.

So you look at where the stock is relative to what you think the value is, and that will determine your aggression? That makes sense. Thanks.

Yes.

Thank you, Miss Arnold. We'll go next to Matthew Borsch with Goldman Sachs.

If I could just follow up with a couple questions on the medical cost trend outlook. Just in looking at the numbers that you just gave compared to what you guys were seeing for 2004, on the prior quarter conference call, it looks like you're looking for inpatient utilization to be a little bit higher and professional utilization to be a little bit higher as well. Is that spillover some of that flu-related, or, you know, where is that coming from?

Matthew, it's David. I'll start with it. The inpatient utilization we're not expecting to be higher.

I essentially said of the drivers, 0% of it is utilization, 100% of it is unit cost. Specifically we actually expect inpatient utilization to be flat to negative in 2004, and our position there has not changed. It was really, I think, as I communicated with the zero on utilization, you might have concluded that was an uptick. So no essential change there.

In the first quarter we will potentially see a little bit of upward pressure on utilization as the flu runs out. Similarly, your conclusion on professional is there as well, where we're seeing the flu utilization in Q4, some of it's carrying into Q1, it is in professional as well as patient utilization, so that's a primary change. Otherwise our expectation on utilization is consistent looking into '04.

Great. And if I could ask on the 8 to 9% total trend on inpatient seems like a key assumption there, and I understand a lot of that is coming from your recontracting effort. Can you talk about where you are in the recontracting process? Are you halfway through, or are you three-quarters done? Just to get a feel for that.

Hi, Matthew, this is John Coyle. We have focused, as Ed mentioned, on the top 250 hospital systems, and they renew during the course of '04. We anticipate recontracting with those top 250 hospital systems, up to accomplish about half of them over the course of 2004, and we're anticipating about 100 basis point improvement during the course of the year.

Okay. Great. Thank you. The last question, if I could, is on a different topic, which is, if you could just give us a little more color on the competitive environment that you alluded to. You know, are you seeing that on the non-risk side as well as the risk side? If there's any color that you can give us regionally on that we'd be very interested.

Matthew, it's Ed. One, I think the marketplace is competitive for all products. We've certainly seen it in certain areas be competitive for the fully insured blocks of business. I wouldn't say it is irrational, but I would say it is -- certainly the level of competition has certainly accelerated. John, I don't know if you want to add anything to that.

We've seen predominantly this in the middle market area, and what we've seen is that as we looked at our overall pipeline, our overall pipeline has been relatively consistent, and we've seen a little bit lower close ratio which then impacted the middle market segment. I think that as we did the deep dives on that that we thought it was predominantly driven by the competitive pricing environment.

And as Ed and Mike have mentioned on a number of occasions we are maintaining a very prudent and underwriting pricing discipline and feel that as a result we're driving towards a higher quality outcome for our book of business.

If I could just ask one follow up on that. Are you seeing any distinction that you could make between the pricing that you're seeing from for-profit versus not-for-profit competitors?

You know, it geographically varies from place to place, so it's hard to derive one national conclusion from that.

Okay. Thank you.

Thank you, Mr. Borsch. We'll go next to Josh Raskin with Lehman Brothers.

Hi, thanks. Just one clarification point on the $300 million of expected savings on the healthcare segment. Is that all an incremental change in guidance from previously, or was some of that absolute dollar reduction actually projected as well in the November guidance that you gave?

Josh, it's Mike. It is. A portion of that $300 million was included in the guidance that we gave in the fall. We've obviously had to go deeper on operating expense reduction than what we had talked about in October, as a result of the lower than expected middle market memberships.

Okay. So that helps explain a little bit, it's not a complete $300 million of additional change. So that should help explain why the offset today, the rest of the healthcare segment is not changing. Is that a fair way to look at it as well? That will be one of the factors there?

Yes, Josh, that's a fair way of looking at it.

Okay. That's great. Second question, just one for modeling purposes, tax rate for 2004 and how we should think about that, and are there any impacts from the sale on the retirement business?

I would suggest that you essentially use 2003 full-year tax rates as a reasonable estimate for 2004 taxes. I'm not aware of any unusual tax impact as a result of retirement.

I think we've talked about in the past that out of the $2.1 billion of purchase price proceeds that we'll get from Prudential in cash we expect to pay taxes of about $350 million. So you can factor that into your modeling if you want.

But for the ongoing business I would essentially suggest that you think about full-year 2003 as being the best predictor for 2004.

I guess I was thinking a little bit more about the amortization of the remaining gain over the next couple of years. Is that a tax deductible?

I understand your question now. We pay the taxes right upfront. I'd have to think about, and we're still modeling through the specific accounting of the amortized gain, so I'll give you additional detail on first quarter.

But from an economic standpoint, we get the cash all upfront, we pay the taxes all upfront. There may be some deferred tax items related to the amortized gain. It's just one of the moving parts that we're working through.

Okay. And then last question. you had mentioned the sort of upcoming RFP activity on the large group. I assume you're getting some of those RFPs in now as well and will be responding. Just wondering in terms of maybe a new strategic focus what are some of the initiatives that you guys are laying out in order to help the brokers understand some of the differences that you guys have made and obviously a little bit more about the success that's been seen in the second half of last year?

Josh, it's Ed. As you can expect we're doing a significant amount. We actually started what I would call our premarketing for the largest accounts in the end of 2003.

So we became very proactive with the larger consulting houses, reviewing with them the progress we were making in our various initiatives; and both John Coyle and I were part of many of those discussions. And I would say that the result of those is an acknowledgement from most of those houses that they are seeing the progress that we are making.

I think more importantly I referenced some new product capabilities that are quite meaningful and are getting quite good reception with those consulting houses and so forth. They include things like modular medical management. We have, if you will, delinked some of our medical management capability from specific product, and so you can have different levels of that for either a PPO frame (ph) product or an HMO. That's very attractive.

The second generation of health advisor is also quite attractive, and we've actually initiated that on a couple of accounts already. It provides much greater use of our integrated clinical database as well as our predictive modeling, and particularly larger employers are looking at that quite positively.

And as I also mentioned, we will be announcing very shortly a next-generation consumer-directed product. I would say that the interest in that has increased. Whether there will be a dramatic movement of membership in '05 to that is less of an issue than employers wanting to be positioned with competitors who have good capability when and if they do decide to move.

So I think a combination of those, and there are a few other things that we're pursuing, make us a very solid, very attractive alternative in the large account marketplace.

Just to follow-up on that. It sounds as though, especially through the modular medical management approach and maybe some of the specialty offerings, et cetera, not integrated, sounds like your core fee that you'll be quoting should theoretically be a little bit lower if you're delinking some of these excess services. Is that sort of a fair assumption to say that the baseline RFP rate request would be a little bit lower?

No, I wouldn't, Josh, at all. In fact, I think the way we structured this is in such a way that we can demonstrate very solid returns from investment in some of these capabilities.

There's been a lot of discussion about some of these things in the marketplace for a while. There has been, in my opinion, fairly thin proof statements in terms of what the return is to employers. We have those proof statements, so we don't intend to see necessarily a shrinkage here in fees, rather we expect to demonstrate to employers what the return for them is in their medical cost as a result of implementing some of these things.

I see. Okay, thanks.

Thank you, Mr. Raskin. We'll go next to Eric Veiel with Wachovia Securities.

Thank you. First question on enrollment. Can you give us some indication on how much of it, it looks like approximately 1.2 million members coming off 1/1, how that splits between guaranteed costs/experience rated business, and how much of that was ASO?

Eric, it's Mike. In terms of the breakdown by product, actually David, I'll ask you to add color here, but the breakdown by product, the losses were higher, the membership losses, the membership declines were higher for our guaranteed cost and experience rated block than for the ASO block. The ASO was a smaller decline. David, do you have that detail handy?

Of the 1/1 total, the HMO guaranteed cost and experience rated was pushing up towards the high teens versus the ASO being, call it mid to high single digit in terms of the losses. That also tracks with higher losses in our regional segment versus our national account segment. The regional segment tends to have the percentage of the guaranteed cost and experience rated block. Lastly I would say it links back to our targeted renewal, and if you will, our purge strategies.

Linking back to that I think your guidance in the last call had been about 1 to 2% of what I think was then something like 6 to 8, I'm sorry, about 8%, or 6 to 7% enrollment growth, 1 to 2% would be those targeted losses. Can you give us a little bit more granularity as that moves forward now to 10.5 in total?

Eric, it's Mike. First we had about 2% membership decline due to an outright non-renewal of some accounts, although as John Coyle pointed out a few minutes ago, we did see more price competitiveness on our renewing accounts. So we had other accounts that were below breakeven in 2003 that we did offer renewal positions and we did offer rate increases; and as a result of the competitive pricing environment, a greater proportion of those accounts left as opposed to renewing at the higher rates.

Okay. So it sounds like accounts that maybe were marginally profitable in '03 under the new rate environment in '04 you felt like would have slipped into the non-profitable segment, so you walked away from them.

That's correct.

That's correct, and that goes back to the comment, Eric, that we made about feeling good about the quality of the portfolio as we now move through '04.

Okay. Thanks. And just to get a better sense of the visibility on the 12 to 13% pricing, can you also put into characterization -- just sort of update us on how much of that 12 to 13% is renewed now as we look into '04?

Eric, it's Mike. Fifty-five percent of our commercial HMO book renewed on January 1, 2004, and we saw net premium yields on the accounts that renewed in line with our full-year guidance.

So you're basically expecting the other 45% to also renew at that 12 to 13% rate?

Yes.

Then the second line of questioning, I just wanted to get a little bit of a clarification here. As we think about the improvement and the difference between medical cost and pricing, and looking back over the last five years it looks like the commercial loss ratio on your book sort of at its best was at about 84%. Is there any change now in your business mix that would cause, you know, sort of that, if we want to call it, in quotes, the optimal loss ratio to be either higher or lower? Since we've had significant account attrition here and the mix is obviously going to be somewhat different.

Eric, when you say optimal loss ratio, I might suggest an optimal loss ratio would be sort of as low as the market will bear.But we've not had a material change in the mix of that particular business, and as a result of the price increases in 2004 as compared to the expected medical cost trends, we would expect the commercial HMO medical loss ratio on an operating basis for 2004 to be approximately 85%.

Okay. Great. I'll jump back in the queue. Thanks.

Thank you, Mr. Veiel. We'll go next to Ellen Wilson with Sanford Bernstein.

I was wondering if you could give a little bit more insight on the $300 million in SG&A saves this year? Specifically, could you give me a sense of how much of that you have, what I'd call kind of in-the-bag full visibility on today in terms of identified job cuts, what have you, versus what portion of that are you still in the process of identifying?

Ellen, it's Mike. Of the operating expense reductions for full-year 2004, I would characterize it as three-quarters clear visibility, some of that being through attrition, some of it being through improved productivity as we get the additional gains from the new transformation service platforms, and some of it through layoffs and the first quarter restructuring charge that we talked about, including consolidating, as Ed described, the traditional corporate holding company and the operating division management structures.

I'd say about three-quarters there's specific visibility, and we're working through the finalization of the actions and the revised budgets for each of the departments; and we'll give some additional detail on the next call.

So that process you would expect to be essentially complete by the time of the next quarter call, then?

That's correct.

One more related to that. Could you kind of give me a general sense or break it down between what falls into the bucket of headcount, how much of the dollars are real estate, sort of some sense of how that breaks out that way?

Ellen, first just to back up to something you said at the beginning of that question, I just want to be clear, we'll give you updated detail on the first-quarter call. That doesn't mean all the actions will have taken place in first quarter, just to be clear.

Yes, sure, sure.

On the headcount versus real estate and outside savings, I'd prefer to have the specific plans nailed down and the revised budgets nailed down before answering that question. I just don't want to give you misleading estimates.

Okay. Thanks.

Thank you, Miss Wilson. We'll go next to Bill McKeever with UBS.

Good morning. On the membership losses do you have any sense for what you might do for the rest of the year and when do you think the inflection point might be when you are in position to show sequential growth in membership?

Bill, it's Ed. I think what our current expectation is, that there's going to be some pressure for the balance of the year. We've already referenced the competitive environment that we're seeing.

I think as a combination of the improvement in the fundamentals that we talked about as well as some of the new product suites that we've launched, we do expect to see what I will call trend improvement in the second half of the year. And, obviously, we are very focused on the 1/1/05 national account season. So I think we expect to see some momentum turn in the second half of the year and in 1/1/05.

Okay. Thanks for that. You mentioned that you were pleased with the quality of the book. Would I take from that, that in 2003 you were getting rid of a lot of bad business, so that that process is now over, so there are no big accounts where you're losing substantial funds that you believe you have to get rid of, so that process is done. Is that a fair assessment?

It's Mike. I would say that it is done in terms of the large accounts. We still have some additional targeted underwriting actions that go beyond the January 1, '04, renewals. For example there a couple of accounts in second quarter that come up again, not in the jumbo category; but there will be some additional earnings improvement past first quarter as a result of these targeted underwriting actions. But most of the impact is behind us at this point.

Okay. And then on the pharmacy, just looking at the cost trends, at 14 to 15%, I'm just wondering what the penetration is of your three-tier pharmacy is, and if you plan on using that as a tool to reduce that pharmacy trend and increase generic substitution; or is that just one of many approaches?

It's David. That is clearly one of the tools. Our penetration for our three-tier program is actually pretty attractive, and it's one of the reasons why we don't see a year-over-year trend dampening because of that, because we have well greater than two-thirds of our business in the three-tier program.

We also have a very good generic penetration rate right now, in excess of 45%. We do believe, though, that there's some opportunities to dampen this further to the extent the renewals that are not 1/1 renewals are in benefit plans that shift to copays yet further.

And the last switch I would flag for you is, I think it remains to be seen what the impact of some of the new drugs that are going over the counter are; like Prilosec which could provide a little further dampening.

So headline s, good penetration in the three-tier program already, looking to expand the tier-two, tier-three copay leverage, good penetration in the generic, and that's again, a little dampening effect on our trend versus our absolute cost performance.

My last question is on the cash available for the share repurchase. You mentioned spending some money to support growth. Probably doesn't seem like a big number. The retiring of the debt, could you give any guidance there, or is that something you're working on?

It's Mike. It is something that we're working on. Given that we are targeting a leverage ratio close to the midpoint of our 20 to 30% range, you can do the arithmetic, and ultimately what you'd see is a range of, call it 100 to $300 million of debt that we expect to retire.

Again, that's a preliminary number. We've got a number of moving pieces still to work out, but if you go through the arithmetic and assume zero for supporting growth of our existing businesses, you'd get something in that range.

Okay. Thanks, that's helpful. So just to sum up then on the cash position, it seems that you've got substantial funds, one could estimate somewhere between the 1.3, $1.8 billion to buy back your stockas kind of a wide assessment. Is that something you disagree with or any comment on that?

No, that's exactly. I think, Bill, that as you walk through Mike's analysis that that is accurate.

Okay. Great. Thanks again.

Thank you, Mr. McKeever. We'll go next to John Rex with Bear Stearns.

A few points of clarification. First of all, I wanted to get a bit more specific on enrollment; and what in your earnings guide and for the full year health segment, what membership trend are you incorporating when you build to your model, in terms of how much more attrition as you go for full year, because obviously that incorporates some kind of unit number in there?

John, it's Mike. At this point it would be premature to give you a specific point estimate for 2004 given the uncertainty around the market conditions. I think it's fair to say, though, in the range of earnings that we gave you, we assumed, as Ed said, some additional pressure on membership.

Based upon our improving fundamentals in both service and medical cost we do expect to improve persistency and improve new business hit rates over the course of 2004, but built in is some additional pressure. I think it would be premature to give you a specific point estimate.

In terms of what you've built into your model on the unit side, you can't break out for us essentially the range that that incorporates in terms of year-over-year decline?

John, it's Mike. It would connote false precision to give that to you.

Okay.

Practically speaking, new business, for example, does not contribute a significant amount of earnings in the first year by the time we look at case setup costs and commission costs, et cetera. So really it's a question of persistency; and suffice it to say we expect persistency will improve over the remainder of 2004. But it is a wild card to sort out what we would expect specific market conditions to be.

Okay. Just wanted to get a bit more clarification on your G&A target for the healthcare segment, make sure I'm on the same base that you're using for '03. So you think $300 million net off of savings in '04, off of your '03. So you're essentially modeling a $3.9 billion spend in other operating expense for the health segment in '04; is that correct? Just want to make sure I'm on the same page.

Your $3.9 billion, I assume you're taking the stat supplement number and adjusting it $300 million down?

Yes.

The only issue with that, and we added a footnote in this quarter's stat supplement to reflect it, the stat supplement operating expense number does include the cost of goods sold from our pharmacy operation. What I'd suggest that you do is you exclude that, because we've had good growth in our pharmacy operations over the last couple of years. We expect that growth to continue in 2004. That's passed back, though, back to the customer through the pharmacy management process, so I would exclude that amount. But if you back out the Tel-Drug expenses it is what you're describing.

So just exclude that from my year-over-year change, essentially?

That is correct, John.

As I look at this that was up about $110 million year-over-year in '03, and you expect that to continue to grow, is that correct, at that similar rate?

Yes, we expect the pharmacy business to grow. It would be false precision to give you a specific estimate on Tel-Drug growth in 2004. But if you back out the Tel-Drug expenses that are in the footnote, we expect calendar year '04 operating expenses in healthcare to be $300 million lower than the 2003 calendar year expenses, and obviously we have inflation built into the number, we have the product development work that Ed talked about built into that number, so the sort of gross amount of savings if you will is something higher than that.

In terms of what I see on my G&A line I would not expect necessarily then to see $300 million because of this rolling through there, I'd expect it to be something less than $300 million, am I thinking of that correctly?

No, John. What you would expect to see, we would expect to see $300 million for calendar year '04, a $300 million decline relative to calendar year '03. What's built into that 300 though is a bigger number of reduction partially offset by normal inflation and the product development expenses that Ed talked about.

Thank you. And then just one last, could you break out the impact of the prior period reserve development between the indemnity and the HMO books?

The $25 million that I described is all commercial HMO.

All commercial HMO. Thank you.

Thank you, Mr. Rex. We'll take our next question from Dan Johnson with UBS.

Thank you very much. Would you mind talking a little bit about the 3,000 FTEs that are being reduced? What are these folks doing today and how are you positioning this news with the distribution channel to give them some level of comfort that the service issues of before do not come back again? Thank you.

Dan, it's Mike. In terms of the 3,000 heads, consistent with Ellen's question, or my answer to Ellen's question earlier, I'd like to wait on giving specific detail on the precise departments that make up the 3,000 reduction in headcount until after we've finished the actions and finished the budgets.

But I can tell you broadly as we've talked about before we expect to get a portion of it from increased productivity, mainly as a result of the improving productivity in the service operations in healthcare, and a portion of it through layoffs and the restructuring, including the consolidation of the management layers that Ed referenced earlier.

Maybe put another way, what would you say is the rough split of the 3,000 of people who are today what you would customer facing, either that or provider facing?

Well, Dan, let me say this. We specifically protected most of the provider-facing operations. And even thinking about the service operations for a second, we purposely made sure that we did not make the same kind of mistakes that we made two years ago in terms of prematurely reducing those operations. So I would say that that is a smaller percentage of the overall reductions than what that is of the expense base.

Dan, just a couple of things. One, if we look at the experience in '03, we had a material reduction in positions in '03, and I think managed that particularly well, if you look at our service statistics, which improved significantly throughout the year.

I wouldn't underestimate, Dan, the productivity improvement associated with the new platforms. And as we've gotten now what is it, I think 65% of our membership on those new platforms, that gives us the ability to deliver much better service at much lower cost.

So while there are some service positions clearly, many of which will be eliminated simply through attrition, we're very confident with the service delivery capability of the organization as it now sits and as we make those eliminations throughout '04.

And just the last piece on this is, the $300 million includes real estate and other savings as well; or is that purely related to the 3,000 positions?

Dan, it's Mike. That does include real estate and other reductions in outside spending.

And can you just broadly sense, is it 50/50, two-thirds, something along those lines towards the compensation component?

Dan, we'll give additional detail when we finalize the actions and the budgets.

Thank you very much.

Thank you Mr. Johnson. We'll go next to Patrick Holo with Credit Suisse First Boston.

Good morning, guys. I'm hoping you can give me a little more granularity on how exactly your HMO MLR showed such sequential improvement when it sounded to me like, or sounds to me unless I missed something, that your cost trend, in fact, didn't do much sequentially. Is that accurate?

Patrick, it's Mike. The fourth-quarter MLR, reported MLR for commercial HMO was 84.0%. That included about $25 million of after-tax prior-period development, most of which goes back to second quarter and third quarter of 2003.

Adjusting for that $25 billion, you'd get an overall MLR of about 88%. Now as Ed said that includes an additional accrual for the harsher than expected flu season. And it is an estimate, and as actual claims emerge, we'll describe any variances relative to that estimate.

Understood. Now, you also talked about the fact that your gross reduction in expenses for '04 will, in fact, be higher than even the annualized $300 million because you'renetting some development expenses out of that. What's the gross amount of reduction, cost reduction, going to be?

We're still working through that specific detail; and rather than giving you some premature estimates I'd like to wait until the next call for that.

One last question. Are you expecting to take another look and true up your reserves for the prepaid death benefits on a schedule this year similar to last year?

You're referring to the VADBe book?

Exactly.

Our VADBe experience is in line with expectations over the last couple quarters of the year. We do look at the VADBe experience every single quarter. In terms of a detailed end-to-end review of the book we don't have one specifically scheduled at this point.

I'm sure we will have one at some point, you know, in the reasonably near future; but I wouldn't expect that say in first quarter. Again, the underlying experience metrics that we look at are in line with expectations, so as a result, it's not imminent.

And the hedge losses this quarter, what should we expect in that regard over the next couple of quarters?

Well, the hedge losses for the quarter were essentially offset by the change in the reserve. So in terms of what the hedge losses will look like, or hedge gains, for that matter, will look like in 2004 it's dependent upon which direction the market moves in.

But the good news is that the hedge continues to work consistently with our expectations, so any hedge losses are offset by favorable reserve movement and hedge gains have been approximately offset by reserve increases.

So there's no change in your hedge position, that was my real question.

That's correct.

Thanks.

Thank you, Mr. Holo. We'll go next to Doug Simpson with Merrill Lynch.

Thanks. Just trying to understand what seems to me like a disconnect in the healthcare segment. You had $84 million of segment earnings in last year's fourth quarter and that went up to 121 in the third quarter and 153 in the fourth quarter. I'm just trying to understand why the 450 to 500 forecast for next year? If you made comments you're seeing good cost trends and you expect this pretty large amount of expense reduction, also $100 million charge. I'm just trying to understand why if you're at a 612 run rate today and you're going to get all these things you think it's going to drop that precipitously.

Doug, it's Mike. First, embedded in that $153 million of earnings for fourth-quarter 2003 as we talked about is $25 million of favorable prior period development. So I would suggest as a starting point you probably want to take the 153 and back out $25 million that belongs primarily to second and third quarter of the year.

If you take that then as a starting point and multiply it by four to annualize it, what you'd see is some favorable year-over-year gains from the underwriting actions that we've talked about on the blocks of unprofitable business.

Okay. If you annualize that, I just want to connect the dots, if you annualize that, that would be 500.

Exactly. So as compared to the 500, you'd want to add in the favorable impact of the targeted underwriting actions, the favorable impact of medical cost management results being better than the increases on our insured block of business, you'd want to factor in fee increases on the ASO business.

The sum total of those three items are slightly less than -- the sum total is slightly less than the negative impact of the membership decline which is partly offset by the operating expense reduction but not fully offset.

Okay. So, see, that just, I guess that doesn't make sense to me, I'm trying to understand it. But, I mean, how bad is the enrollment, you know? Most of that cost structure is variable, so how bad do you have to get dinged on enrollment to bring down that number? I mean, are you guys forecasting a 25% reduction in enrollment? Those are big numbers.

Doug, we're not forecasting 25% decline in enrollment. We told you that the membership decline on 1/1 was 10.5%. We obviously had a membership decline in 2003 over the course of the year. We're getting the full annual impact of that in 2004.

I would disagree with your assertion that most of the expenses are variable. Over a short period of time, expenses are reasonably fixed. Obviously as we talked about we've got some specific work and specific actions underway to reduce both fixed and variable expenses, but that is not an item that turns on a dime at first-quarter 2004. At least without impacting service, which, again, we're protecting the service organization, we're protecting the medical management organization, we're protecting the distribution organization.

It just seems like a really big number given that you also have those expenses coming through. And what was the tax rate in the healthcare segment in the fourth quarter?

Let's see. It can be calculated from the public disclosures. I don't have it right at my fingertips, but I would say it was in the high 20s; and for the full year I believe it was 34.5%, if I recall correctly.

I can dig that up. What about you guys talked about post retirement sale, you're going to have, I think it was $25 million, I think you called them residual expenses. And then there was going to be a $25 million, a roughly offsetting amortization of the one-time gain related to that sale. Could you just talk a little bit about what's in those residual expenses, if I heard you correctly?

Yeah, the residual expenses are corporate expenses that traditionally have been allocated to the retirement business. So as an example, Ed and Greg and I are all in that number. We're not the bulk of the $25 million, obviously, but a portion of us is included in that number, including other corporate expenses.

As part of our expense review we are committed to eliminating that residual overhead by the end of '04. But for the last three-quarters of the year, assuming it closes at the end of March, for the last three-quarters of the year there will be that $25 million after-tax drag from that overhead.

And then the other thing is, it's going to be an amortization of the gain? Is that right?

That's correct. Again, there are a lot of moving parts here, but our current estimate is that the amortization of the $500 million after-tax gain on sale, that the amount that will be amortized over the last three quarters of the year will be $25 million after tax.

So in terms of looking at our full-year 2004 outlook for earnings, excluding realized investment results and special items, the residual overhead is essentially expected to be offset by the amortization on the gain.

Okay. And is there any different treatment?Are you splitting the gain in terms of, it sounds like you're taking some up-front and some you're amortizing maybe. What's the difference there?

Yes. There are very complicated accounting rules, as I'm learning, with divestitures that use reinsurance to form the transaction, and as a result we get a portion of the gain at the time of closing. That portion, for example, includes the immediate impact of unrealized capital gains on the underlying assets, as an example. So there's a portion that we'll record right at the time of sale, but we're expecting at this point the majority to be amortized over the next many years.

Okay. Thanks.

Thank you, Mr. Simpson. We'll go next to Joe Franck (ph) with Banc of America. Mr. Franck, your line is open. Please go ahead with your question. I hear no response. We'll go next to Jim Lane with Argus Partners.

I'm just trying to work through this math that a couple of people have been caught up on, and I was hoping you could correct where the logic isn't working for me, anyway. It looks like we're at about a $600 million run rate in earnings in the fourth quarter in the healthcare segment, you know, huge improvement year-over-year, and we're also going to pick up $300 million of incremental cost savings that aren't in that $600 million run rate.

So I was wondering if you could just tell us what are you factoring into the guidance for the negative earnings leverage of the membership that you're losing at the beginning of 2004? I think that would connect things up for us. Thanks.

Jim, it's Mike. First of all, I would suggest that you not annualize the fourth-quarter results by taking the 153 and multiplying it by 4. I think you first want to back out the prior period development, the emergence of favorable claim expenses that had service dates back in second and third quarter of 2003. So I'd suggest that you take $153 million of reported earnings for fourth quarter, subtract 25, that gives you 128, multiply it by 4, let's just say to keep the arithmetic easy, let's call that a $500 million starting point.

You could add approximately $150 million to that number from a combination of targeted underwriting actions, favorable medical cost management results as compared to what we're targeting in terms of insured pricing increases and fee increases on our ASO business.

Going in the other direction would be the fact that membership decline will more than offset the favorable good news on operating expenses, calendar year over calendar year. That latter, the net impact of the membership decline, including the residual impact of the 2003 membership decline that gets fully annualized in 2004, that combination of the membership decline more than offsetting the operating expenses hurts year-over-year earnings by about $175 million after tax.

And so if you take 500 plus 150 from the positive actions I just described, back out 175 for membership more than offsetting operating expense, you get the midpoint of the range, 475.

Okay. I'll go back through it. Thanks.

Thank you, Mr. Lane. We'll go next to Scott Fidel with JP Morgan.

Yes, hi, thank you. Just wondering now that we've gotten the new rates released out of Medicare if you could just update us on your thoughts about the program? And then also specifically whether you plan on entering any new markets in 2004?

Scott, it's Ed. I would say remember first of all that we are only active in one market in Medicare today, and that's Arizona. We have a unique situation there that makes it attractive for us to participate.

We are looking at the legislation. We will be interested, obviously, in the regulations as they come out; so we will study how we think this business is going to develop and whether or not there is any opportunity there for us.

But I would tell you our focus in '04 is continue to improve our existing medical costs, stabilize and grow our membership and so forth. So I would not expect to see us have any significant change in Medicare participation in '04. We will study it, and we will understand where longer term there may be opportunities for us, but our focus for '04 is very clear.

Thank you.

Due to time constraints, that was our final question. Ladies and gentlemen, this concludes CIGNA's fourth-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 ten business days following this call. You may access the recorded conference by dialing toll-free 888-203-1112, or 719-457-0820. The passcode for both numbers is 533352. Thank you for participating. We will now disconnect.