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Ladies and gentlemen, thank you for standing by for CIGNA's first quarter 2004 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 star 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, Mr. Deavens.

Good morning, everyone.

And thank you for joining us today's call.

I'm Greg Deavens, Vice President of Investor Relations, and with me this morning are Ed Hanway, CIGNA's Chairman and Chief Executive Officer;

Mike Bell, Cigna's Chief Financial Officer;

John Coyle, Senior Vice President of CIGNA Health Care; and David Cordani, Chief Financial Officer of CIGNA Health Care.

John and David will participate in the Q&A portion of today's call.

The purpose of this call is to review CIGNA's financial results for the first quarter of 2004 and to discuss our outlook for full-year and second quarter 2004.

Now, CIGNA uses certain financial 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, before 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.

There are a few housekeeping items that I would like to cover pertaining to our first quarter results and other recent activities.

First, I would note that our earnings release details several items which are excluded from income from continuing operations before realized investment results and special items.

Two of these items are associated with the implementation of a new accounting standard.

As we noted last quarter, the American Institute of Certified Public Accountants issued new accounting guidance, which affects the accounting for experience-rated pension policy holder liabilities.

Specifically, AICPA statement of position 0301 requires us to record liabilities for experience-rated pension policy holder contracts based on the fair value of associated pools of assets.

The new guidance was implemented in the first quarter of 2004, and is reflected in the results that we are reporting today.

Net income for the quarter includes an after-tax charge of $139 million, representing the cumulative effect of implementing this new standard.

The quarter also includes, as a special item, an $11 million after-tax charge, representing the impact of the new standard on the current quarter's results.

It is important to note that the two charges will be essentially offset by a portion of the gain on the sale of our retirement benefits business that will be reported in the second quarter of 2004.

Further disclosures regarding the implementation of this new standard will be included in our first quarter report on form 10-Q, which we plan to file with the Securities and Exchange Commission later today.

The other special item for the quarter is a $49 million after-tax restructuring charge relating to expense reduction initiatives which Mike will describe.

Also, our restructuring actions in the first quarter and the sale of the retirement benefits business resulted in a curtailment event relating to our domestic qualified pension plan.

In this circumstance, GAAP requires the remeasurement of our pension plan assets and obligations.

In the first quarter, this remeasurement resulted in an after-tax charge to equity of $113 million.

The charge primarily reflects a 50 basis point reduction in the interest rate assumption used in measuring our pension obligation.

The new rate of 5.75% reflects current market conditions.

I would note that earlier this month, CIGNA filed a form 8-K with the Securities and Exchange Commission, which included pro forma financial statements reflecting the impact of the sale of our retirement benefits business.

This transaction closed on April 1, and the impacts of the sale, including changes to our balance sheet and a portion of the gain, will be reflected in our second quarter financial statements.

Lastly, the quarter -- this quarter, we have discontinued disclosure of premium equivalents, or paid claims, on our nonrisk business.

In lieu of providing premium equivalents, we are now disclosing in our quarterly statistical supplement revenue in our health care segment by funding type.

This information correlates our revenue sources with the nature of the underlying customer relationship.

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

We would remind that 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.

Today, we are pleased to report first quarter income from continuing operations before realized investment results and special items of $1.86 per share.

These earnings are up sequentially, reflecting a 21% increase in our health care results.

And these results are consistent with the expectations we provided in early April.

This is the third consecutive quarter of solid earnings improvement in our health care operations.

Results in our disability and life and international operations also continue to be strong.

After my remarks, Mike will provide detail on the first quarter, as well as commentary on CIGNA's capital position and expense reduction initiatives.

Mike is also going to provide our earnings outlook for the second quarter and full-year 2004.

And before I go through the highlights for the quarter, I want to talk about our strategic direction.

As you know, on April 1, we completed the sale of our retirement benefits business.

The sale was the last major step in CIGNA's transition to a focused health care and related-benefits company.

We have very strong capabilities and solid market positions in medical and specialty health care, disability, life, accident, and expatriate benefits that now constitute our core operation.

Our resources are focused on these core businesses and on improving our operating results and market position in each.

We are working aggressively to differentiate our offerings in the marketplace by establishing a meaningful medical and administrative cost advantage, by positively influencing clinical outcomes, by marketing our unique integrated product clinical information and service capabilities, and by strengthening our customer and consultant partnerships.

Our integrated solutions allow members to realize successful health and disability outcomes in a cost effective manner.

These programs also allow employers to offer innovative benefit solutions to their employees.

Our solutions not only deliver competitive costs, with industry-leading quality, but they also present the opportunity to improve work force productivity.

In my closing remarks, I'm going to provide insight into strategic areas where we are investing.

An exciting example of another successful integrated benefit solution we've developed, as well as an update on our health care improvement initiatives.

Now, let me discuss the quarter.

As I noted earlier, first quarter 2004 income from continuing operations, excluding realized investment results and special items, was $1.86 per share, up 13% sequentially, and 27% from the first quarter of 2003.

These results primarily reflect improved health care segment earnings, and solid results from our other businesses.

The strong health care results demonstrate the traction we are gaining in our improvement initiatives.

First quarter earnings were primarily driven by continued moderation in our medical cost trends, effective underwriting, and lower operating expenses.

Our disability and life segment posted a solid first quarter and the earnings here reflect good performance and competitively strong results in our disability and life businesses.

Our international operations also had a strong quarter, driven by continued growth in our life, accident, and health businesses.

We have made meaningful progress in improving our health care results, although medical membership continues to lag.

Our first quarter membership results were in line with expectations, and I do feel we are taking the appropriate actions to improve membership results.

These actions include lowering both medical cost trends and administrative expenses, aggressively communicating and demonstrating our value proposition, expanding our innovative product and service capabilities, and making targeted investments in key areas that will drive growth.

Now, I'll discuss these actions further after Mike's comments.

And I'm now going to turn it over to Mike for a review of first quarter results and our earnings outlook.

Mike?

Thanks, Ed.

Good morning, everyone.

In my remarks today, I will review CIGNA's first quarter 2004 earnings.

I will also discuss our earnings outlook for the full-year and for second quarter 2004.

I would note that the quarter reflects several items which Greg detailed in his opening remarks.

And these items and our realized investment results are discussed in our earnings release and our first quarter 10-Q.

In my discussion of consolidated and segment results, I'll comment on income from continuing operations before realized investment results and special items.

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

On this basis, consolidated first quarter earnings were $263 million, or $1.86 per share.

This is a strong improvement from our first quarter and fourth quarter 2003 results.

Our increased earnings were driven by significantly improved health care results, and continued strong performance in our disability and life and international businesses.

Turning to segment results, I'll begin with health care.

Health care earnings for the first quarter of 2004 were $185 million, compared to $153 million in fourth quarter of '03, and $121 million in the first quarter of last year.

These results are in line with the earnings preannouncement that we issued earlier this month.

The sequential improvement reflects improved medical costs, including favorable prior year development.

Together, with the impact of lower operating expenses, and strong underwriting execution, partly offset by lower membership.

Improved medical cost results reflect continuing effective execution of our medical management initiatives.

The impact of favorable prior-year development in the quarter was $30 million after tax.

Of which $11 million related to commercial HMO, and $19 million related to our indemnity business.

This favorable development reflects strong medical cost management.

Operating expenses declined significantly in the quarter, as we successfully executed expense reduction initiatives.

As indicated in our stat supplement, first quarter operating expenses for the health care business were $122 million lower than in the fourth quarter of 2003.

Specifically, operating expenses declined by 13% from $931 million in fourth quarter, to $809 million in first quarter of 2004.

I would note that the sequential improvement included approximately $30 million of pretax favorable expense items which we do not expect to recur.

Premiums and fees for the segment declined 11% relative to first quarter of '03.

With the impact of lower membership, partly offset by the impact of price increases.

And consistent with our expectations, medical membership was 11% lower than year-end 2003 levels.

Reflecting lower sales and customer retention.

Relative to the components of the health care segment results, I'll discuss HMO and then indemnity.

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

HMO earnings in the quarter totaled $146 billion versus $140 million in the fourth quarter of '03, and $106 million in the first quarter of last year.

The sequential improvement primarily reflects lower expenses, effective medical cost management, and strong pricing and underwriting discipline, partly offset by the effect of lower membership.

The year-over-year increase primarily reflects the benefits of lower operating expenses, improved specialty health care results, and favorable prior year development, partly offset by the effect of lower membership.

The first quarter commercial HMO medical loss ratio was 84.1%, essentially flat with fourth quarter of '03.

Both of these quarters benefited from favorable development.

We continue to expect our full-year 2004 commercial HMO net premium yield to be in the 12-13% range.

This is consistent with the expectations provided on our February earnings call.

Relative to commercial HMO medical cost trend, we now expect full-year trend to be approximately 11%, slightly better than our previous expectations.

The improved outlook reflects the expected continuation of favorable in-patient utilization trend.

In-patient utilization trend was negative 5% in the first quarter of 2004.

And that compares to 3% in the second half of '03, and 7.5% in the first half of last year.

The improvement reflects the continuing impact of the medical management initiatives that we've previously discussed.

Now, turn to indemnity.

First quarter indemnity results were $39 million, compared to $13 million for the fourth quarter of '03, and $15 million for the first quarter of last year.

The sequential increase reflects improved experience rate of results, higher ASO fees of renewing and inactive accounts, and lower operating expenses, partly offset by the impact of lower membership.

Indemnity results also included $19 million of favorable prior year development.

The year-over-year comparison reflects improved experience-related results due to strong underwriting execution in medical management, as well as lower operating expenses.

To recap the health care segment, first quarter earnings showed strong improvement relative to both the first and fourth quarters of 2003, reflecting significant progress in strengthening our health care fundamentals.

I'll now move on to the other segments.

Earnings for the disability and life segment were $35 million, in line with first and fourth quarters of 2003.

Premiums and fees increased 12% over the first quarter of '03, reflecting solid sales results and strong persistency.

Moving on now to the retirement segment, earnings were $46 million, which included $38 million in the earnings for the business that was sold.

As Ed indicated, we completed the sale of the retirement benefits business on April 1, 2004, and I'll provide further details on the sale in a few minutes.

Turning to our international segment, earnings were $15 million, versus $14 million for the fourth quarter of '03, and $10 million for the first quarter of last year.

The year-over-year increase primarily reflects earnings in the -- excuse me, higher earnings in the life, accident, and health business.

Premiums and fees increased 12%, primarily driven by growth in the life, accident, and health and expatriate benefits businesses.

The remaining operations, specifically run-off reinsurance, other operations, and corporate, generated an aggregate loss of $18 million.

Compared with the first and fourth quarters of 2003, results reflect lower losses in run-off reinsurance, higher compensation-related accruals, and other operations, and lower corporate expenses.

Before providing our 2004 outlook, I'll comment on the retirement sale, our capital position, and the actions that we are taking to reduce our expense structure.

First on the retirement sale, as I mentioned previously, the retirement sale was completed on April 1.

We received gross proceeds of $2.1 billion.

And we expect to realize net proceeds of between $1.6 and $1.7 billion after taxes and transaction costs.

The net proceeds range relates to the determination of the near-term and ultimate taxes, and transaction costs, given the complexities of the reinsurance transaction and movement of the related assets.

The total gain on the sale is expected to be approximately $675 million, after tax.

We currently expect that approximately $200 million of the gain will be recognized in the second quarter and treated as a special item.

Because the sale is structured as a reinsurance transaction, the remainder of the gain will be deferred and amortized into earnings over a period of approximately 10-15 years.

Over the next two years, we expect a significant portion of the retirement customers to consent to transfer their contracts to a Prudential-owned entity.

As this happens, gain recognition will be accelerated.

Turning now to capital management, overall, our capital position is strong, and our subsidiaries are well capitalized.

Our priorities for the use of capital continue to be maintaining at least $500 million in cash at the parent company group through the end of the year, maintaining our leverage ratio near the midpoint of our targeted 20-30% range, and after providing capital needed to support growth and maintain appropriate financial strength ratings, using excess capital to repurchase our stock.

While our window for share repurchase in April was limited, we repurchased approximately 520,000 shares of our stock for $36 million.

We have 536 million of remaining repurchase authority at this time.

Now, I'll quickly recap our parent company cash position and expected sources and uses for 2004.

At the end of first quarter, we had approximately $300 million in cash at the parent company group.

This compared to $160 million at year-end 2003.

Our position was further strengthened on April 1, when we received the proceeds from the retirement sale.

Our anticipated major sources and uses for the year are somewhat stronger than our previous expectations, reflecting our higher earnings outlook.

Relative to sources of cash, we expect between $1.6 billion and $1.7 billion in net proceeds from the sale of the retirement business.

And we expect to receive approximately $550 million to $600 million in dividends from our subsidiaries.

Relative to the uses of cash in 2004, we expect to pay out approximately $200 million in interest and dividends.

We expect to retire between $100 million and $200 million in corporate debt.

And we expect other net uses to be approximately $75 million.

So in summary, we expect to have approximately $2 billion available to support our parent company cash position, support growth in our business, and repurchase stock.

In addition, Connecticut General Life Insurance Company and our other insurance subsidiaries remain well-capitalized and have current financial strength ratings which are appropriate to support our ongoing businesses.

We do not currently expect to make any material capital contributions to our insurance subsidiaries during 2004.

And with regard to expense actions, during the first quarter, we implemented a restructuring program to significantly reduce staffing and operating expenses.

We recorded an after-tax charge of $49 million, consisting of $46 million for severance costs, and $3 million for real estate-related expenses.

For a combination of severance actions and attrition, we expect to reduce staffing levels by approximately 3,000 positions as we've previously indicated.

Within this total, we expect to sever approximately 2100 employees.

To date, we have eliminated approximately 1600 positions.

Consistent with our previous discussions, we expect the total impact of our cost reduction actions to result in a $300 million net year-over-year decrease in health care operating expenses in 2004.

There are likely to be some additional minor restructuring charges in the balance of the year.

We do not expect these charges to exceed $10 million after tax.

Turning now to the outlook for full year 2004.

Consistent with our normal practice, I'll provide estimates of after-tax income from continuing operations, excluding realized investment results and special items, such as the one-time gain on the sale of the retirement business.

In the health care segment, we expect earnings of between $535 million and $585 million dollars.

This is $10 million higher than the range provided in our April 5 announcement.

I'll now review the assumptions underlying our health care earnings estimate.

Our first quarter health care earnings of $185 million included $30 million of after-tax benefit from prior-year development, about $20 million after tax of nonrecurring favorable expense items, and approximately $10 million after-tax of other nonrecurring favorability.

Thus, our underlying earnings run rate in first quarter was $125 million.

In the balance of the year, we expect several puts and takes relative to this run rate.

Specifically, we expect the remaining quarters of 2004 to reflect additional benefit from medical cost and pricing improvements, and from operating expense reductions.

These favorable items will be offset by the impact of lower membership, and investments which we expect to make in enhanced product and service capabilities.

For the full year, we expect the pluses and minuses to be essentially offsetting, and therefore, we expect to earn, on average, approximately $125 million per quarter, for the remainder of the year.

With respect to the membership outlook, in the first quarter, medical membership declined 11%, compared to year end 2003 levels.

As we've said previously, we expect further downward pressure on membership for the balance of 2004.

But expect customer retention rates to improve in the second half of the year.

And this expectation is reflected in our estimate for full-year 2004 health care earnings.

Turning to the balance of our reporting segments, excluding impacts related to the sold retirement business, we expect our other businesses to contribute approximately $150 million to $160 million dollars of earnings in 2004.

This is consistent with our previous estimates, and is approximately 10% higher than the comparable 2003 result.

The year-over-year growth reflects our expectation of continued strong performance in our disability and life, and international businesses.

With respect to impacts from the sold business, our all-in estimate remains approximately $45 million.

This reflects first quarter earnings on the sold business for $38 million, plus an estimated $30-35 million of amortized gain, partly offset by about $25 million of after-tax overhead expenses.

As a reminder, we expect to fully eliminate all overhead previously associated with the sold business by the end of this year.

The sum of these estimated impacts for the sold business is approximately $45 million for the full year.

Putting together all of the pieces, we estimate that our consolidated earnings before realized investment results and any special items will be between $730 million and $790 million.

These amounts are $10 million higher than our April 5 projections, reflecting the increased health care earnings outlook.

Our earnings per share for the year will depend upon the amount and pace of share repurchase.

As I previously mentioned, we resumed share repurchase in April, and would expect to use share repurchase as the primary vehicle for returning excess capital to investors.

As we've discussed before, our approach to repurchase will be measured and subject to market conditions.

Excluding the impact of any share repurchase in the remainder of the year, our estimate of full-year consolidated earnings per share is a range of $5.15 to $5.55.

Now turn to the second quarter of 2004.

For the second quarter, we expect the health care segment to generate between $125 million and $140 million in earnings.

The midpoint of this range is modestly above our first quarter run rate, and average quarterly expectation for the balance of the year.

In discussing the full-year outlook, I indicated that we expected health care earnings in the balance of the year to average approximately $125 million a quarter, with some pluses and minuses.

As a reminder, the $125 million per quarter would be consistent with our first quarter run rate.

What we expect the pluses and minuses to be offsetting for the full year, we expect our quarterly earnings for second quarter to be modestly higher than the third and fourth quarter earnings.

This pattern reflects the impact in the second half of the year of our increased investments in product and service capabilities, as well as lower membership.

Relative to our other reporting segments, we expect that in total, they will contribute earnings of between $30 million and $45 million in second quarter.

This amount includes estimated earnings related to the sold business, of between zero and $5 million in the quarter.

This represents the impact of the amortized gain, partly offset by overhead expenses.

Summing the pieces, we expect second quarter 2004 consolidated earnings, before realized investment results and special items, to be between $155 million and $185 million.

Excluding the impact of any share repurchase in the second quarter, our estimate of consolidated earnings per share for the quarter is a range of $1.10 to $1.30.

To recap, our first quarter results improved significantly year-over-year and sequentially, and were consistent with our April 5 announcement.

Our increased earnings were driven by improved health care fundamentals, including solid medical management results and lower operating expenses, as well as continued strong results in our other businesses.

In the balance of the year, we expect to make additional progress in improving the performance of our health care business, and we expect to achieve continued strong results in our disability and life and international businesses.

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

Thanks, Mike.

Now, before taking your questions, I want to spend a few minutes on the progress we're making on our health care improvement initiatives.

Last year, we identified four key areas of focus for our improvement efforts.

The areas of focus include: reducing medical cost trend, delivering quality service, reducing operating expenses, and growing membership.

And we've made solid progress in a number of these areas.

I'm going to review the progress in each area starting with medical costs.

Our first quarter results showed continued signs of strong progress in this area.

Our actions are focused both on improving utilization trends, and slowing the pace of unit cost increases.

Our medical management model continues to drive improved utilization results and quality outcomes.

As Mike noted, in-patient utilization declined during the first quarter, and this follows solid improvements in the second half of 2003.

Relative to quality, an objective measure of clinical effectiveness for health plans is the NCQA's Health Care Employer Data Information Set, or HEDIS scores.

This year's HEDIS Effectiveness of Care results provide further evidence of the effectiveness of the partnership that exists between our clinical professionals and physicians who deliver care.

Again this year, we led our major competitors in this area, ranking highest in 8 of 9 key HEDIS categories for preventive care.

There are additional opportunities to help members improve health outcomes while utilizing health services more efficiently.

One opportunity is integration of clinical information related to medical, pharmacy, behavioral, and specialty health care services to drive higher quality and cost effective outcomes.

None of our competitors offer the breadth of products or the ability to drive integration that CIGNA offers.

Today, I'd like to highlight our ability to integrate health and disability products, and discuss our strong disease management programs.

We have outstanding capabilities in both medical management and disability management.

Integration of these capabilities can significantly benefit both employers and their employees.

Now, let me take a moment to provide you with a concrete measurable proof point that makes our value proposition unique in the market.

Recently, we reviewed 60,000 short-term disability claims filed by customers who have both our disability and medical coverage.

We validated that the disability durations were 12% shorter, and return-to-work rates were 6% higher for these customers.

Clear evidence that our integrated solutions helped lower disability costs, and increase workforce productivity.

We also offer six disease management programs, covering conditions such as diabetes and acute pulmonary disorders.

Our overall penetration with these programs has significantly increased this year.

As of March 31, 84% of our point-of-service customers were utilizing one or more of these programs for their employees, and that's up from 71% last year.

And these customers are seeing meaningful improvement in cost and quality outcome.

Customers that buy these programs benefit from a lower medical cost trend, and realize an average 200% return on their investment in these programs.

These are just two examples of how CIGNA customers are benefiting from our superior medical management, disability management, and disease management capabilities.

Turning to unit costs, we continue to implement a broad-based contracting strategy that includes a targeted facility recontracting effort, to improve overall costs as well as administrative terms, with our 250 largest hospital systems; a national vendor contracting initiative, focused on areas such as home health, radiology, laboratory services, and specialty pharmaceuticals; and other local contracting initiatives targeting professional services, ancillary facilities and other hospital systems.

We expect our ongoing medical management actions and these contracting efforts to drive cost trends lower and keep our medical costs fully competitive.

Our second area of focus is service.

Our member service metrics across the board continue to improve and are fully competitive.

The service improvements that we have delivered are driven, in part, by our newer, more efficient service and technology platforms.

In January of 2004, we added over 2.1 million members to the new service platforms.

Our recent survey of new customers and existing customers who have moved to the new platforms indicates a strong 92% satisfaction rate, continuing the positive momentum that began in 2003.

We expect our service levels to continue to improve as we complete the migration of members to the new platforms, and drive further productivity and administrative efficiency.

With respect to administrative expenses, Mike highlighted the early benefits of our expense reduction actions, recognized in the first quarter, as well as additional actions to be taken throughout 2004.

We've already made good progress in this area, and as previously noted, we expect to continue to execute our targeted head count reduction, while also driving further productivity improvement.

And moving on to membership, I'd start by saying that the fundamentals in our business, including medical cost trends, service, and administrative expenses that I just discussed, are improving.

We've said before, driving these improvements is an essential prerequisite to growing membership.

That said, medical membership remains a challenge, and will be the last key indicator of our successful turn-around.

Both sales and retention are lower than we would like, reflecting increased price competition.

As I said before, we will continue to maintain our underwriting and pricing discipline in the face of this competition.

While we have focused on improving our fundamentals as the foundation for profitable growth, we have simultaneously worked to design and launch a new and very exciting suite of products.

This new product suite is called Signature [ph].

The key elements of this new product suite include: first, modular medical management capabilities, which allow employers to match varying levels of medical management intensity with any type of network configuration or funding arrangement.

The second key element of Signature is an expanded Health Advisor program.

Health Advisor assigns dedicated nurse coaches to specific members within an employer group, providing a single point-of-contact for members to ask health and benefits-related questions.

The third key element is expanded network options, including the CIGNA Care High Performance Networks.

The fourth key element is our second generation consumer-driven plan called CIGNA Choice Fund.

The CIGNA Choice Fund allows employers to establish a single fund or multiple funds to cover specific categories of health care expenses, such as prescription drugs, preventive care, and other medical costs.

This product provides for a number of roll-over and other options that allow employers to reward employees for making good health care decisions, such as enrolling in a smoking cessation program.

And finally, Signature provides a collection of strong, effective decision support tools for individuals, such as health plan, drug, and cost comparison tools; and we'll be further enhancing these web-based tools shortly when we launch the newest version of our awarding-winning consumer portal, myCIGNA.com.

Now early feedback from current and prospective customers and consultants on these products is very positive.

For example, they've been very impressed with the depth and the specificity of our CIGNA care network capabilities and the clear measurable ability of these networks to increase quality and reduce costs.

We expect these actions to ultimately result in improved membership levels.

However, I will continue to stress that we will maintain our pricing and underwriting disciplines.

And while we do expect to see some continued pressure on membership, we anticipate improvement in retention and new business sales in the second half of the year.

In summary, we have made strong progress in the areas of medical management service and expense reductions, and we're taking appropriate actions to position the company for membership growth.

As I said before, the sale of our retirement business was the last major step in our transition to a focused health care and related benefits company.

Our efforts are concentrated on continuing to improve the performance of our health care business, and sustain growth in our disability and life and international businesses.

The strong results that we reported today are a clear reflection of the success of our health care improvement effort.

Additional opportunities do exist for CIGNA to strengthen its leadership position in the health care industry, and provide superior returns to our shareholders, and we are focused on seizing these opportunities.

Thank you for your time, and with that, I think we will now 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 phone.

If someone asks your question ahead of you, you can remove yourself by pressing star two.

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

Finally we do ask that you do please limit yourself to one question and one follow-up.

However you may place yourself back in the queue should you have another question.

One moment please for the first question.

We'll go first to Charles Boorady with Smith Barney.

Good morning.

First question is on the operating cash flow.

Can you approximate for us what the negative impact was from the tail on your lost health care risk enrollment?

And if you can give us what that risk enrollment and related premiums were, that would be helpful as well.

Charles, it's Mike.

The risk revenue is actually broken down in the stat supplement now so that the guaranteed cost premiums and fees for the quarter were $1.36 billion versus $1.43 billion in fourth quarter of last year.

So that would be a drop of $70 million in revenue sequentially.

Got it.

And the negative impact to the cash flow from paying out the tail on lost -- lost enrollment?

The -- I don't think that's material.

I don't have that number right at my fingertips, Charles.

I'm sure you can follow-up after the fact with Greg and crew.

But it was not a significant number.

Okay.

And follow-up questions on the RFP backlog, can you comment roughly what your backlog looks like in terms of number of customers and covered lives?

And also of the RFPs you're seeing, roughly what percent are from your existing book of business, versus brand new potential customers?

Charles, it's Ed.

Let me try this way.

And I'll do it really I guess in two pieces.

First would be on the national account side.

Obviously, it's early for the 1/1/05 season, but I would suggest that from a new business perspective, we actually have a bit higher number of RFP's inhouse at this point in time than we did at the same time a year ago.

But I would suggest that the next, Charles, probably 30 to 60 days are when we will really see that inventory of RFP for national accounts improve.

Relative to middle market, there, we are very focused on July 1, which, as you well know, is the next kind of major date with any meaningful membership up, and we have seen that pipeline growing very nicely over the last six weeks or so.

So we are seeing good opportunity for 7/1, and I think that's reflective of a lot of work we've been doing to get the story out in the marketplace, and certainly to promote the new product sweep.

So we've actually been pretty pleased on both national accounts and middle market.

I would say on national accounts, though, I'd just remind everyone, it's early.

And John, do you want to add?

Yeah, Charles, I would say that typically, we see inhouse at this point in time on average about 30 to 35% of our proposals in the national account sector for January 1, and if you look year-over-year, how much did we have in last year at this time, versus how much we had in this time, we're about 15% higher today than at the same point in time in comparison to last year.

Okay.

Thanks.

I'll jump back in queue.

Thank you, Mr. Boorady.

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

Yes, thank you.

Good morning.

Could you give us a little more detail on your outlook on the price competition and, you know, to the extent you might see any broad regional variation there?

And also, if you could comment in terms of price competition on ASO administrative fees versus what you're seeing on the risk side.

I'll give you a couple of broad comments, Matthew, and then I think I'll probably have David to comment on that as well.

First, I wouldn't say that there are necessarily any particularly distinctive regional patterns.

What I said in the prepared remarks is that obviously the market is more competitive today, certainly, than say it was 12 months ago or 15 months ago.

I would say in many respects it is not what I would call a completely irrational market, although I would acknowledge that from time to time you will see certain individual companies take a particular position, but I would say that is a little more anecdotal at this point in time.

David, do you have something you would want to add here?

The only item I would want to add is risk, specifically seeing in the low teens, ASO, low single digits and as we've talked about before, if there is any concentration per Ed's comment it's spread around the country, if there is any concentration we've seen a little more concentration in the tristate region.

Okay.

Great.

And on a related topic, where do you see the enrollment pressure the greatest, and you know, any flavor you can provide here in terms of again the risk versus ASO, geography, or by customer segment, particularly, you know, as you look going forward versus what you've experienced already.

Matthew, it is Mike.

The -- where we've seen the most enrollment pressure, and related point around price competitiveness, is in the insured block, and in particular the PPO enrollment pressure has been greater than on the HMO side.

And you would say again in the -- particularly in the tristate area.

Yeah, although certainly as it relates to insured business, I would say that the price competitiveness out there is reasonably consistent across the country, although David is certainly right, we're seeing a little more in tristate if you had to single out one market.

And if I could just ask one last question which is in terms of what's driving enrollment in attrition, I understand that the competitive situation, but you know, in what area do you think CIGNA has the most room to improve to offer a more competitive, you know, is it in the network rates, or something else?

Matthew, it is Ed.

I think what we -- how we analyze the membership pressure we're seeing aside from the market forces that we just talked about, is clearly, as we've said before, as we came out of 2002, and into early 2003, the service experience that we were providing was not effective, and not acceptable, and clearly, as we all know, we had some higher medical trend in the early part of last year, that obviously impacted certain markets.

As we've now addressed both of those issues, what we are in the process of doing is reconnecting, certainly in the middle market, with brokers and producers, to ensure that they see the improvements, they understand what we've done, and that they then become more confident in being willing to recommend us, and we are obviously working very hard at that, and seeing the early signs of some improvement there.

I'd also say that the new product suite that we've launched, some of which is available 7/1, and much of which is available for 1/1/05 is also a very important part of our efforts to regenerate interest in our products, and actually, as I said in the prepared remarks, we are getting very good recognition for those new products, and a lot of interest.

Great.

Thank you.

Thank you, Mr. Borsch.

We'll go next to Bill McKeever with UBS.

Yes, I had a question on the earnings per share outlook for 2004, and if I basically take the guidance you've given for the second quarter, it looks like you'll be about $3 in the first half.

The $5.55 for the upper end of the range would imply that second half earnings would be roughly $2.55.

I'm just trying to get a handle on the share repurchase.

Does that mean that the guidance that you gave us would be a bare minimum, or would you be able to buy back shares more aggressively?

Because when I look at the first call numbers, I think for '04, the number right now is $5.77.

I'm just trying to get a better understanding of that range that you gave us.

Sure, Bill, it is Mike.

The EPS numbers that I gave in the advanced comments, in the prepared comments, assume zero repurchase in the second half of the year -- actually, from here to the end of the year.

I don't expect us to have zero repurchase between now and year-end.

But we are not going to provide at this point an explicit repurchase assumption in terms of either pace or amount because the actual pace and amount will be subject to market conditions, and the other conditions that I described.

So the EPS numbers are conservative from the standpoint of assuming zero repurchase.

Okay.

So -- all right.

And then at some point, -- okay.

All right.

Let me switch gears then.

On the new platform, my follow-up question is, what's the penetration of your base into the new platform today?

And how much do you have to go?

And what sort of time frame did you think you might be at 100% penetration there?

Bill, it is David.

We currently have just around 65% which is on target where we wanted to be on 1/1/04 on the new platform.

We expected to be at a minimum 85, somewhere between 85 and 90% on the new platform by 1/1/05, which will mark the last major movement of business, 1/1 business at least, to the platform, and then the last run-out will take place throughout 2005 and potentially tail end to 2006 with small cases.

Okay.

Great.

And then just quickly, and then I'll get back in queue, the membership losses that we might see for the rest of the year, I don't know if you want to provide any guidance, but would it be something in the order of 1-2% or any thoughts there?

Bill, it's Mike.

It's premature at this point to give you a precise number.

I'll get some directional comments on the outlook and see if Ed wants to add any color.

As we've discussed, the -- our fundamentals continue to improve, specifically service is getting better, medical costs are getting better, and the feedback that we're getting back from the market verbally, as well as in the pipeline that John and Ed referenced, is getting better.

However, we do expect some downward pressure over the remainder of the year.

Both because of the competitive pressures, particularly in the middle market, and particularly in the fully-insured portion of the market, as well as the fact that the market perception in aggregate is going to lag the reality of our improving fundamentals.

But remember, 75% of our total membership renewed in first quarter.

So three quarters have already renewed.

And we do expect to see an improvement in persistency, and as Ed noted, an improvement in success rates on the new business side for the remainder of the year.

Ed, anything you want to add there?

I think, Bill, Mike got all the high points of that item.

The only thing I would say I guess is what we're very focused on is retention.

Obviously new business is very important to us, and as I already commented, the pipeline is growing well for 7/1, but we have a lot of attention being directed to retaining existing business.

We do expect those retention rates to begin to improve in the second half of the year.

And I would just say that the early signs are encouraging.

But repeat what Mike suggested, it is very early.

Okay.

Great.

Thank you.

I'll get back in line.

Thanks.

Thank you, Mr. McKeever.

We will go next to Doug Simpson with Merrill Lynch.

Thanks.

I was just wondering if you could walk us through.

You talked on the gain on sale from the retirement business to Pru.

You're going to have this $200 million item in the second quarter.

Sounds like you're going to break that out as a special item.

I'm just looking beyond that when you amortize the residual gain.

Are you going to include that in your operating income?

And I'm just trying to gauge how you think that's going to fall out over the subsequent couple of quarters.

Doug, it is Mike.

The $200 billion or so that we will report as a one-time gain on the sale of the retirement business in second quarter, we do intend to spike that out as a special item.

But what will be included in our underlying operating earnings will be the sort of normal -- normally scheduled amortized gain which will be approximately $10 million a quarter.

Now, to the extent that we have novations occur, as we expect they will, over the next two years, that will accelerate the gain, and the acceleration in the gain, as a result of the novations, we will spike out as special items.

Okay.

So the $10 million, just to be very clear, the $10 million a quarter would be included in kind of the 730 to 790 guidance you've given?

That is correct, Doug.

But if it spiked to 20, you'd break out the delta.

Exactly right.

And then just thinking about operating cash flow for the year, during the quarter I know you broke out that one unusual item, I'm just wondering, kind of X that, what should we expect for operating cash flow this year, and CapEx as well?

The -- in terms of GAAP operating cash flow, we don't make forward comments about that.

Personally, I don't think that's a very meaningful number, given all the moving parts that bounce around that get included in there.

From a parent company standpoint, I walked through -- during my prepared remarks, I'd be happy to walk through again if you would like.

The sources and uses?

Right.

And we're -- on March 31, we had a little more than $300 million of cash at the parent company group.

Obviously, that grew substantially one day later, with the closing of the retirement sale.

And over the remainder of the year, you know, we'll have repurchase, we'll get additional dividends from our subsidiaries, on the other hand we'll pay interest, and dividends, and we've got some other uses that I commented on in the prepared remarks.

Right.

And if you take kind of what you guys laid out as the sources and use, roughly it looks like something on the order of about a billion and a half net cash, if you take about $2 billion of sources, and it looks like you laid out about 500 of uses?

And I'm just wondering, is that kind of the nest egg that you have to use for buybacks or how should we think about the -- you know, is that wrong to think about the order of buybacks?

I think you can think of it as we've got approximately $2 billion available for -- to support the cash at the parent company group --

Right.

-- support additional growth in the operations.

And for share repurchase.

Okay.

All right.

Thank you.

You're welcome.

Thank you, Mr. Simpson.

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

Hi, one cost question then one enrollment question.

The 12-13% yield that you expect for full year, did you achieve something consistent with that in the first quarter?

Christine, it is Mike.

Yes, we did.

We were right in that range for first quarter.

Okay.

And then the 11% medical trend, how did you stack up against that in an aggregate basis?

You talked about hospital utilization.

Were you at 11% first quarter?

You're looking for the components for the 11% for the full year?

Yes.

And were you at 11% for the first quarter?

Are you expecting improvement from here?

I'm trying to figure out whether your expectations assume better or worse for the rest of the year.

Well, let me let David talk about the components of medical costs, and then I'll come back to your question on first quarter.

Okay.

Christine, let me speak to the medical costs for the full year.

I will go inpatient first.

Inpatient, we still expect the inpatient trend to be in the 8-9% range.

Now with the strength of the first quarter, we expect it to be at the low end of the range.

Outpatient, little improvement from our prior position, in the 13-14% range.

Professional continued to be 9-10%, pharmacy around 15%, to get us to our 11% for the full year.

After Mike speaks in a little more detail, I'd be happy to break out the unit utilization splits if you would like.

Great.

Christie, I think your other question related to the first quarter.

I cannot emphasize enough, I'm sure as you know, first quarter is heavily, heavily estimated.

Yup.

And the -- what's really important to realize is that, as David mentioned, we continue to see a very solid line of sight to the full-year 11% trend on an operating basis, meaning on an apples-to-apples basis.

And in terms of first quarter medical costs, where we have the greatest level of clarity is around inpatient utilization.

And as I mentioned, our inpatient days were -- per 1,000 were actually down 5% year-over-year and better than expected, and you know, we continue to demonstrate good traction in our case management, and utilization management initiatives that we've talked about.

So, you know, this is three straight quarters of demonstrating strong medical cost performance and we feel good about it.

If I could follow-up on that, I mean there is a comparison issue, because it was lumpy last year, year-over-year, and you know, high first half, low second half, so I guess what I'm trying to get at is, wherever you think you were first quarter, do you expect further improvement from here for the rest of the year?

Stability or deterioration?

I'm just trying to get kind of your overall sense.

Sure.

We do expect in terms of overall medical cost trends to continue to see improvement over the course of the year.

Again, I can't emphasize enough though, first quarter is heavily estimated, and what we really feel good about is the full-year numbers.

On your particular question on inpatient utilization, you're absolutely right.

Our 2003 results were lumpy.

I think that's a fair adjective.

And as a result, the minus 5% that we saw in first quarter, we don't expect to achieve a full minus 5% over the full year.

Instead we expect something more in the negative 3-4% range for inpatient utilization.

Okay.

Were you interested in further detail from David on the components?

Sure.

What a bonus this is.

Thanks.

All right, Christine.

I'll wrap up with the components.

Relative to the individual trends.

On inpatient given our strong utilization performance, the entire inpatient trend is driven by unit cost.

On outpatient 50% of it's on utilization, 50% of it's on unit costs.

On professional, 75% of it's driven by utilization, and only 25% of it driven by unit costs.

And similarly, for pharmacy, about 25% of it's utilization, with 75% of it being unit cost.

I just had one final comment on, Christine, to Mike's comment, as we talked before, the improvement year-over-year and trend was going to be driven by utilization unit costs, as well as benefit buy down, or benefit improvement.

Mike underscored the relationship of utilization.

We also expect to see some further improvement this year for the remaining block on benefit buy-down or benefit improvement as well, but we're pleased with the traction we got in the first quarter and that was also in line with our expectations and the way we are looking at the full-year trend.

Can I have one last question?

The state of Arizona, does that look like it's going to renew or not?

Hi, Christine.

It is John.

We don't really comment on account-specific activity.

So I wouldn't really venture a guess.

Okay.

Thanks.

Thank you, Ms. Arnold.

We'll go next to Josh Raskin with Lehman Brothers.

Hi, thanks.

Good morning.

Two questions, the first is you mentioned $20 million in, I guess, one-time operating expense benefit, and then $10 million in, I guess, miscellaneous other benefits.

Was wondering if you could help us understand what those amounts were for, just so we can sort of determine whether we think they're one time in nature, and then second if you could help us out with the restrictions on the buybacks in April, I think Mike had mentioned that there were some in the month of April, and wondering just how many days were you even in the market, you know, I guess, due to the separate press releases?

Josh, it's Mike.

I'll answer both those questions.

First, on the nonrecurring -- nonrecurring items in first quarter, we had about $20 million of after-tax benefit in operating expenses.

These primarily relate to true-ups of compensation and benefit accruals, including, for example, our management compensation.

In addition, we had about $10 million of other nonrecurring items.

This primarily relates, about three quarters of it, primarily relates to higher than expected ASO fees on canceled business.

So these were specifically a number of ASO customers that canceled on 1/1/04 that have agreed for us to go ahead and pay the run-out claims.

And we were much more disciplined this year at pursuing those arrangements than what we had in the past.

So both of these items help with first quarter earnings.

We don't expect those to recur through the remainder of the year.

Okay.

So that's not a higher rate for the ASO fee on those specific accounts, that's just a run-off of their claims and they're going to allow you to maintain that business, with just that sort of business disappearing?

In several cases, we are collecting the higher rate that was presented at the -- at the renewal during the run-out period.

But again, it is still nonrecurring in nature any way you look at it.

Right.

In terms of your question on share buyback, we were in the market for five days in April, we waited, of course, until a few days after the preannouncement, to begin buying back shares, and then we obviously stopped buying back shares when our window closed here, for the quarter.

And when can you effectively get back in the market?

A few days later.

I don't have the precise date right in my head.

I'm sorry, just one last question on the membership, and I know you guys are sort of avoiding a -- you know, putting an actual number on it, but I guess you know just looking back last year you lost about 740,000 lives in the first quarter and the remaining three, the number was actually a greater number, and understandably there was, you know, retention issues et cetera.

But just wondering in terms of expectations, you know, it doesn't sound as though you guys are suggesting it's going to be anywhere similar to the 1.3 million we saw in the first quarter, but I just want to, you know, either directionally there, is -- are the membership losses going to be less, or you know, significantly less?

Josh, it's Mike.

The -- remember, in 2003, we exited the Medicaid business, so that's included in the numbers that you're referencing for the latter half of the year.

As I emphasized, from an earnings standpoint, the key item is really the persistency, and we are expecting an improvement in persistency over the remainder of the year.

Am I correct -- the Medicaid, the 60,000 lives, is that what you're talking about?

It was about 70, but yes.

And so what was the retention, I guess, for the second half of last year?

I don't have that number firmly committed to memory, but it was in the -- I want to say roughly high 70s.

Okay.

And now we're seeing more in the 90s or so?

In terms of what we're expecting this year?

Or what at least we saw -- what you guys quoted for the first quarter at least, right?

We're expecting this year the persistency so be in the 80s.

In the 80s.

Okay, Thanks very much.

I'll get back in queue.

Thank you, Mr. Raskin.

We'll go next to Patrick Hojlo with Credit Suisse First Boston.

Good morning, guys.

Actually, I wondered if you could speak to the fact that your pharmacy track used to be above what we see elsewhere out in the marketplace, and whether you see that as an opportunity similar to the fashion in which you got your hospital trend down so nicely?

It's David.

I'll start on the pharmacy trend.

We had flagged a 15% or so pharmacy trend previously, and you guys pushed back on it as being outlier within the marketplace.

A couple of the drivers that we indicated were one, we already had a significant portion of our book pushed into three-tier programs, to give you a little specificity there, for our commercial, our risk book, we have about 80% of our book of business already in three-tier programs so we didn't get the trend pick up of transitioning over.

That's one item.

Secondly, the marketplace is seeing a little unit cost pressure.

We believe the 15% is reasonable.

We're comfortable with our price point, and I do not believe that the same utilization management leverage that we've had on inpatient is transferable over to pharmacy.

On a final point, I would say that we're going to continue to work on next generation pharmacy benefit designs, to be able to move forward and help customers, employers get the right balance in terms of cost sharing, or co-pay leveraging with this product, but we're comfortable with that.

A final note, you've asked previously as well around generics.

We also tended to lead the industry from a generic standpoint.

We're approaching for this block of business 50% generic penetration, and we were at a high level last year, beyond 45%, so we're not getting that big step function from a generic penetration standpoint either.

So from a price point we're comfortable.

Recognizers need to move the trend, but we'll look at new benefit designs as a means to move it.

Now, is there anything new that would be considered a step function on the inpatient side?

We've spoken in the past about the fact that you had some outlier expenses in the neonatal area, as well as too high a rate of admit on the ER side.

Anything else that was new this quarter that was a step function, or are we seeing just good medical management and the impact, to some extent, of rising co-pays.

Hi, Patrick.

This is John.

There's a couple things.

In our care management program last year, we instituted new case management program for catastrophic case management, and complicated neonatal infants.

And we're seeing a continuation of improvement as a result of those efforts.

We also instituted in select areas a case management -- I'm sorry, an on-site concurrent review program, and what we have done is kind of selected facilities where we think that there is a real advantage in doing that.

The other area I would comment on is we've expanded our disease management program in aggregate by one disease category, and we've expanded the entire program from our HMO book of business into our PPO book of business.

And as a result, we have seen significant uptick in the number of participants in those programs, and as Ed commented in his comments, we're targeting and seeing about a 200% return of investment on those activities for our customers.

And the final comment I would say is we really enhanced our predictive modeling capabilities.

And what's so important about that is we need to be able to identify individual cases where we think where we apply the appropriate resources, we get a good outcome as a result of that.

And we think that our predictive modeling capabilities that we worked on extensively in the third and fourth quarter of last year are probably some of the best in the industry, and are really showing some significant advantages which we expect to continue in '04.

So we should expect maybe flat utilization on the inpatient side for the year, based on all those -- those great initiatives, but as you said, not a continuation of the negative trend?

Well, I think as Mike had said, we had a negative 5% decline, which was -- as one of the earlier callers indicated, rather lumpy compared to year-over-year.

We expect a full-year of about a 3-4% negative utilization inpatient trend.

Gotcha.

One last question, on the share buyback.

What would perhaps cause you folks to pull back on that buyback, in terms of being blocked or being prohibited from doing it, or just deciding you wanted to sit on a little more of your cash than you plan on sitting on right now?

Patrick, there is nothing specific like that that I would comment on.

Patrick, our philosophy relative to share repurchase is what we've stated in the past.

Mike's gone through the uses of capital, and we've been very clear that we'll use share repurchase as the primary vehicle to return excess cash, and we will do it on a measured basis.

There is no change at all in that approach.

Great.

Thanks a lot, guys.

Thank you, Mr. Hojlo.

We'll go next to Joseph France with Banc of America Securities.

Thank you.

I just had two questions.

One relates to Josh's.

Maybe I misunderstood his question or your answer or both.

But if the 815,000 lives you lost in the second, third, and fourth quarters of last year only included 70,000 for Medicaid.

Excluding that Medicaid, are you expecting a decline more or less than the difference?

Or more to the point, what are you seeing so far for the second quarter enrollment decline?

Joe, it is Mike.

The -- I would expect to see less membership losses in the second half of the year this year, than what we did last year, but it's premature to give you a more precise number than that, and I again, I expect the improvement will show up in persistency in particular, which is built into our earnings estimates.

So you don't know what your second quarter enrollment's doing yet?

I think it is a little early to be honest, Joe.

What I did say before was there are early positive signs relative to the retention point that Mike made.

So we have confidence and that's what we've built in the earnings forecast, that retention in the second half of the year is going to be better, but July 1's an important date, and it's a little premature.

Probably in about 30-60 days we'll have a little bit better handle on that.

Great.

And the last question relates to the hospital trend.

You're looking, if I understand it, for 3-4% decline for the year in inpatient, but a total trend of 8-9%.

In connection with all of that, if those numbers are correct, where do you stand on the hospital recontracting to deal with the stop loss problem?

As Ed indicated in some of his opening remarks, we've targeted about 250 of our large hospital systems, which represent about 800 or so individual hospitals.

And we've been in the process of recontracting them sequentially as they come up for renewal during the course of the year.

In an aggregate basis over the course of '04, we anticipate a reduction of about 100 basis points as a result of that improvement across the entire inpatient facility unit cost.

John, this is David and I'll add one point to that as well.

As you're looking at the relationship of unit cost and utilization, keep in mind as we've had the real pronounced impact on a step-down of utilization.

In many cases we're taking out lower cost days, for example one-day stay, so for a short period of time we're going to see a little bit of uptick in term was our units cost trend that we expected to see this year because of that, that will normalize out in 2005 as well.

Thanks, David.

And then your plan is that all of those 250 systems will be done by the end of the year?

No, that -- that is not the case.

Some of them are on multi-year contracts.

We expect about half of them to be done in this year.

Interesting.

Thank you very much.

Just as a reminder, please limit yourself to one question and one follow-up.

Thank you, Mr. France.

We'll go next to John Rex with Bear Stearns.

Yeah a bit of a follow-on to the last comment.

In the past you had stated that you didn't necessarily view the depth of your provider discounts in most markets as a competitive disadvantage as you had assessed them, that there wasn't an enormous difference versus competition.

Wondering if, as you've gone through this recontracting effort, if you have an altered view on that, or if you have an altered view on then how this -- how your provider discounts look like the competition in those key markets.

John, it is Ed.

I don't think we feel any differently.

I think we've seen opportunity to improve in some areas, and as John mentioned we're looking at every of those 250 largest systems.

But in our major markets, we feel quite well-positioned and competitive, and I think we've done, actually, a significant amount of research around that, and feel good about it.

The view is still that provider discounts are not an issue for you?

I wouldn't say in every market.

Of course there are rural markets, John, where not only us, but other competitors aren't as strong, either.

But in the key markets, that support particularly our multi-site business and in our local markets where we have good local opportunity, our -- we feel good about our discounts.

It is not an issue for us.

John, it is Mike.

I would just add on that even more important than specific measures of discounts, is the absolute level of our medical costs, and we are reasonably comfortable with the absolute level of our medical costs.

As Ed mentioned, it is an area that we do a lot of benchmarking and we do a lot of analysis, particularly with the national benefit consultants, to do that benchmarking, so as Ed mentioned, we certainly isolated some areas of improvement, but overall we're reasonably comfortable.

Our view, I guess what we say to customers to be very explicit is, we are fully competitive on a unit cost standpoint, and given the significant benefit of our medical management capabilities, that we've talked about here today, and when you combine the two, we should provide them with a very strong solution and competitively superior against many, in terms of total costs.

Do you see an increasing number of customers when -- especially large case customers, when they're putting their business out to bid simply giving you their last 6, 12 months of claims data, and having you run it through your discounts to get an assessment of what it would have looked like if they had been with you?

Is that a growing trend in the last couple of years for you?

John, I would say that it's a common technique that a lot of consultants use to -- one of the techniques consultants use to evaluate different carriers in terms of their effectiveness for that particular population.

Okay.

So you get good -- you get a good read on that then in terms of how you stack up versus the competition when that occurs?

Yeah, absolutely.

As Mike said, we've done a lot of benchmarking both independent of the consultants and with the various consulting houses to try and make certain we know exactly where we are in the marketplace at any given time, and that's done not just, you know, as a result of any specific set of circumstances, but just the normal course of business.

And just quickly here, could you just give us the actual gross sales, gross member adds in the 1Q so we can just assess your effectiveness in new sales?

I'm sure there were some new sales baked into attrition and if we can just get an explicit number, that would be very helpful.

John, it's Mike.

We have not disclosed that level of detail historically.

And I would prefer not to at this point.

Okay.

Well, were there meaningful new sales?

Is there a way you can --

Yes, they were meaningful.

Not as much as we would like but they were meaningful.

All right.

Thank you.

Thank you, Mr. Rex.

We'll get go next to Scott Fidel with J.P. Morgan.

Hi, thanks.

First, I was wondering if you could just quantify what the benefit of add-ons were in the quarter, and how that broke out between the pharmacy and -- you already gave some color on that, but if you had maybe a percentage of buy-downs in terms of pharmacy compared to medical?

It's David.

The benefit buy-downs in the first quarter for the risk book are between 250 and 300 basis points, for the ASO/HMO book, are a bit over 300 basis points.

I do not have the specific pharmacy component of that number for the quarter at my fingertips.

I apologize.

Okay, that's fine.

The number I quoted is aggregate, though, just to be clear.

The number I quoted is aggregate medical costs, contributions of the buydown.

Okay.

On the risk side that was 250 to 300, right?

That's correct.

Okay.

And then just second, you already gave some good color on some of the initiatives on the hospital side.

One initiative you started piloting, probably over a year ago, was your tiered hospital networks.

Could you talk a little bit about how the progress has been there?

Whether you're starting to see some ramp up, and actually seeing some success in steerage in that program?

It's David.

I'll start with that.

I'd ask you to think about the tiered networks.

When Ed talked before about the CIGNA Cure [ph] network, our tiered network program has evolved to, what I think the industry is calling high-performance networks.

Couple comments there, we have been running in three markets, specifically, for a bit of time.

Some pretty robust tiered networks to your term, but we'll call it the high-performance networks, to some very good progress and very good success partnering with customers.

Part of our product strategy for '05 is to roll that out in several additional large geographies that we feel very confident, and our tiering process, though, to be specific, or the network, is really now targeting differentiation for a subset of the providers, where we can make a meaningful -- we can demonstrate a meaningful difference in terms of quality outcomes, that thereby drive cost reductions.

So, we've seen good progress, seen good uptake on that aspect of our network strategy, and going forward, we're seeing more demand and building toward that with expansion in 1/1/05.

Okay.

And how would you say the reaction from the hospitals and providers have been so far?

Would you say they're becoming more resigned to the fact that the health plans are going to be pushing through these programs, and there just is a lot of customer demand for them?

Yeah, Scott, I would say in the markets where we have been doing them, and these markets were chosen thoughtfully, in other words, we don't believe that these networks as currently configured can work everywhere, but in those markets where we are doing them, I would say the receptivity is good, and there's also been a sentinel effect in the facilities, often times, that aren't in those networks in terms of their improvement.

Scott, this is John.

I would add one point to that, in one of the reasons why in the existing markets that we think it has been received as well is because we get significant employer support in order to make it work.

And without that support, I don't think it would be as successful, so as we look the existing markets that we have where we have three and the expansions, we've kind of correlated around employers and employers support in order to help that process.

Okay.

Thank you.

Thank you, Mr. Fidel.

We'll take our final question of the day from Eric Veiel with Wachovia.

Thank you.

Just a quick question on the earnings guidance here.

Mike, are you including the $60 million in what I guess would be cumulative health care segment one time, or is the $30 million in PPD in the 20 and the 10.

In the full year, 730 - 790 guidance.

Eric, it's Mike.

Yes, I am.

Okay.

That's helpful.

And then just a final question for Ed at the end.

Maybe you could comment on some of the consolidation activity that we've seen in the industry and how the impacts CIGNA going forward here.

Sure, Eric.

There is obviously ongoing consolidation activity occurring, and obviously it will effect the competitive nature of the marketplace.

However, as I said earlier in my comments, we feel very, very good about the capabilities that we have.

We talked about medical costs already, I think some of the product opportunities that we have are quite strong, and so we do not believe that we are competitively disadvantaged, as a result of the consolidations that have occurred.

In many instances, we've been competing against some of these enterprises in some of these local markets already, and that basis of competition will, I assume, over time change, but I don't think we expect to see huge change in the near term, and we will continue to invest in those capabilities that make us fully competitive against what are, at this point in time, some larger competitors.

And when you say invest in capabilities, I assume you're meaning internal and not external M&A?

Is that a fair interpretation?

I think what we said about M&A is that over time, we will certainly consider opportunities if they were economic for us, if they penciled, and if they brought some strategic value.

Now, we've also been very clear that our focus is on our health care turnaround initiatives, and that's what we are committing to executing and executing very, very well as we go through '04.

Okay.

Thank you.

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