信諾集團 (CI) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's third 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.

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

We will begin by turning the call over to Mr. Tim McGarrity.

Please go ahead, Mr. McGarrity.

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

I am Tim McGarrity of CIGNA's Investor Relations department.

With me this morning are Ed Hanway, CIGNA's Chairman and Chief Executive Officer, Mike Bell, CIGNA's Chief Financial Officer, David Cordani, Senior Vice President of CIGNA Healthcare, and Jon Rubin, CIGNA Healthcare Financial Officer .

The purpose of this call is to review CIGNA's financial results for the third quarter of 2004 and discuss our outlook for the full year 2004 and 2005.

CIGNA uses certain financial measures which are not determined in accordance with generally accepted accounting principals, or GAAP, when describing its financial results.

Specifically we use income from continuing operations before realized investment results and special items which would include 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 2 of today's press release which is posted in the Investor Relations section of cigna.com for a discussion of these matters.

Before turning the call the over to Ed there are a few items that I would like cover pertaining to the third quarter results.

First I would note that CIGNA's earnings release details 2 special items which are excluded from income from continuing operations before realized investment results and special items.

The first special item is an after-tax gain of $79 million related to accelerated recognition of a portion of the deferred gain on the sale of CIGNA's retirement benefits business.

The second special item is an after-tax charge of $9 million related to derivative accounting associated with the modified co-insurance arrangements resulting from the sale of the retirement benefits business.

These items will be discussed in further detail in CIGNA's third quarter report on Form 10(Q) which we plan to file with the SEC later today.

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

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

These risks factors are discussed in the form 8(K) filed this morning with the Securities and Exchange Commission.

With that I will turn it over to Ed.

Thanks, Tim.

Good morning, everyone.

Today we are pleased to report third quarter income from continuing operations before realized investment results and special items of $1.77 per share.

This represents a 22% increase over the prior year driven by a significant increase in healthcare earnings and continued strong results in our disability and life and international segments.

The strong year-over-year improvement continues our pattern of high quality results over the last few quarters.

For today's call I will begin with some brief comments on our third quarter results.

Mike Bell will then provide details on the third quarter as well as commentary on CIGNA's capital position.

Mike will also provide our earnings outlook for full year 2004 and 2005.

Following Mike, David Cordani, our Head of Healthcare Sales and Distribution, will discuss medical membership and in particular actions we are taking to improve customer retention and sales effectiveness to drive future membership growth.

I will conclude our remarks with a brief discussion of CIGNA's strategies.

Starting with a quick overview of the third quarter results, healthcare earnings have continued to improve significantly over last year.

Year-to-date healthcare results are up 80% over 2003.

We have successfully focused on medical cost management actions that have improved both utilization and unit costs results.

We've also made good progress on reducing expenses.

Collectively these factor are responsible for our increased earnings.

I think it is also important to emphasize the quality of our earnings and book of business.

Margins in the healthcare business have improved significantly as we have taken a very disciplined approach to pricing and underwriting.

And we are achieving these results while continuing to demonstrate our leadership in clinical quality and I will discuss clinical quality further in my closing remarks.

Our service levels also remain strong and fully competitive and the satisfaction rates for customers that have moved to our new platforms are in the mid 90% range.

We have significantly upgraded our product offerings and information support tools for our customers and providers.

The market has given us strong positive feedback on the new Signature Suite of products which includes a cutting edge consumer directed option, modular medical management capabilities , a strong set of information support tools and our nurse based health coach option called CIGNA Health Advisor.

I would also add that our ability to integrate our product offerings to lower medical costs while achieving high quality outcomes is unmatched by our competitors.

These strong fundamentals are the drivers of our 2004 results and the foundation for future growth.

Having materially strengthened these fundamentals our focus is now directed on improving medical membership.

Our current expectation is that year-end medical membership levels will be down approximately 15 to 16% compared to year-end 2003 levels.

This is a modest improvement over what we expected at the second quarter call and the improved outlook is reflective of stronger middle market retention and sales results in the third quarter.

Overall for the second half of 2004 we are seeing much better retention rates, a stronger sales pipeline and improving close ratios.

For 2005 we expect a decline of 8 to 9% in the first quarter with stable membership results during the remainder of 2005 driven by continued middle market improvement.

In a few minutes David will provide more details on the membership outlook and the specific actions we are taking to improve sales and retention and ultimately grow our medical membership base.

As for our disability and life and international segments, these businesses continue to provide us with strong results and we will continue do grow these operations as part of our overall strategy.

Our capital position is strong and we are well positioned to reinvest in our Company and further build on our competitive advantages.

Now I am going to turn it over to Mike for an update on the quarter and our outlook.

Mike.

Thanks, Ed.

Good morning, everyone.

In my remarks today I will review CIGNA's third quarter 2004 earning.

I will also provide an update on our capital position and I will then discuss our earnings outlook for the remainder of 2004 and for full year 2005.

As Tim noted our third quarter results reflect several special items.

These matters are discussed in our earnings release and our third quarter 10(Q) which we plan to file later today.

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

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

On this basis our second quarter earnings were $242 million or $1.77 per share.

This is a significant increase relative to third quarter 2003.

This improvement was driven by strong earnings growth in healthcare and continued strong results in disability and life and international.

I will now review the segment results.

Healthcare earnings for the third quarter of 2004 were 206 million compared to 116 million in the third quarter of last year and 175 million in second quarter of this year.

The year-over-year improvement reflects strong underwriting discipline, favorable prior year claim development and solid specialty healthcare earnings partly offset by lower membership.

Favorable prior year claim development in the quarter was $25 million after-tax including 9 million in HMO and 16 million in indemnity.

This favorable development reflects strong medical cost management over the past 18 months as a result of strong execution of our turnaround plans.

We also experienced favorable development related to the first and second quarter's of the current year.

Operating expenses for our healthcare segment declined 8% from the same quarter last year and on a year-to-date basis operating expenses are lower by 220 million reflecting strong execution of our expense reduction initiatives.

Premiums and fees for the segment decline 10% relative to third quarter of 2003 with the impact of lower membership partly offset by price increases.

As for the components of the healthcare segment results I'll discuss HMO and then indemnity.

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

HMO earnings in the quarter totaled 131 million versus 115 million in the third quarter of 2003 and 149 million in the second quarter of this year.

The year-over-year increase primarily reflects stronger medical management, favorable prior year claim development and solid specialty healthcare results.

These drivers were partly offset by the effect of lower membership.

Excluding 40 million of after- tax prior year claim development the year-to-date commercial HMO medical loss ratio is approximately 85%.

This is 50 basis points better than our earlier estimates.

With respect to medical cost trends and premium yields for our HMO business in total which includes both ASO and commercial HMO we expect full year medical cost trend to be approximately 10.5%.

For our ASO HMO business which represents the majority of our HMO membership we expect full year trend to be approximately 10%.

This is 100 basis points better than our expectation in second quarter.

We expect commercial HMO full year medical trend to be approximately 12% and this is from a 2003 starting point that is better than we had previously estimated due to the favorable prior year claim development in the past 3 quarters.

Our improved expectations for trend primarily reflect strong utilization results driven by the effectiveness of our medical management model.

We continue to expect that our commercial HMO premium yield will be in line with medical trend for the full year.

I will now discuss indemnity.

Third quarter indemnity results were 75 million compared to 1 million in the third quarter of 2003 and 26 million for the second quarter of this year.

The year-over-year increase reflects improved underwriting and medical cost results in the experience rated and guaranteed cost businesses partially offset by the impact of lower membership.

The sequential increase in indemnity earnings is driven by stronger underwriting margins on renewed business and favorable emerging medical cost experience.

Our underwriting execution has been strong and we have materially improved the quality of the book of business.

Overall our healthcare results have significantly improved.

The improvements reflect strong medical management results and solid pricing and underwriting execution.

I will now comment on the results from our other businesses.

Earnings for the disability and life segment were 41 million as compared to 37 million in the third quarter of 2003 and 48 million last quarter.

Results reflect solid revenue growth coupled with effective expense management.

Our strong profit margins are driven by good execution on the fundamentals in this business.

Premiums and fees reflect continued solid sales results and strong persistency while maintaining our competitively superior profit margins.

Turning to our international segment earnings were 23 million versus 15 million last year and 20 million for the second quarter of this year.

Fundamental results in our international operations continue to be strong particularly in the expatriate benefits and life, accident and health businesses.

The year-over-year and sequential increases also reflect favorable reserve development in our expatriate benefits business.

Premiums and fees increase 18% versus the third quarter of 2003 driven by growth in life, accident and health and expatriate benefits.

The remaining operations, including run-off retirement, run-off reinsurance, other operations and corporate, generated an aggregate loss of 28 million in the third quarter.

Run-off retirement segment earnings primarily reflect the amortized gain on the sale of this business which was 18 million in third quarter and in line with our expectations.

As a reminder the accelerated portion of the sale gain was 79 million in third quarter and this is broken out as a special item in our reporting.

Run-off reinsurance results for the quarter included reserve strengthening from prior year development for personal accident and Workers' Compensation products.

Before providing our outlook for 2004 and 2005 I will comment briefly on our capital position and priorities.

Overall our parent Company capital position remains strong.

Our subsidiaries are also well capitalized and are able to support current business levels.

At the end of the third quarter cash at the parent Company group was $1.5 billion.

We ended the quarter with a leverage ratio of approximately 22% which is below the midpoint of our target range.

During third quarter we continued our share repurchase program and repurchased approximately 3.2 million shares of our stock for $210 million.

In October we repurchased an additional 560,000 shares for 39 million.

We have approximately 530 million of remaining repurchase authority at this time.

Looking ahead I will comment briefly on our outlook for our capital position for the balance of this year and 2005.

Since we do not predict the amount or pace of any share repurchase my comments will exclude the impact of any potential repurchase activity.

On this basis the outlook is for our cash position at the end of fourth quarter to be in line with where we ended the third quarter with fourth quarter sources and uses essentially offsetting.

Our projected year-end 2004 position is in line with our expectations.

Within the total I would note that projected subsidiary dividends are approximately $100 million lower than we had previously estimated.

This is due to a decision to defer 100 million of these dividends until January of 2005 for tax planning reasons.

We expect the impact of this deferral to be offset by lower capital uses.

Thus we will start 2005 with a strong capital position.

During 2005 we expect subsidiary dividends well in excess of projected capital uses.

So as a result we expect to maintain a strong and flexible capital position in 2005.

I will now review the earnings outlook for full year 2004.

Consistent with our normal practice I'll provide estimates of income from continuing operations before realized investment results and special items.

Now by way of overview we estimate full year 2004 earnings on this basis to be in the range of 925 to $950 million.

This range is approximately 80 million higher than our estimate in August reflecting approximately 20 million per quarter of benefit from better than expected 2004 medical costs.

With respect to healthcare, as Ed indicated, our outlook is for year-end 2004 membership to be approximately 15 to 16% below year-end 2003.

At the end of September our membership was 14% below year-end 2003.

Our full year estimate includes the impact of the cancellation of one large state account on October 1.

Relative to healthcare earnings our estimate for full year earnings is a range of 700 to $715 million.

Estimated fourth quarter healthcare earnings reflected in this full year outlook are in a range of 140 to 155 million.

I mentioned earlier that our third quarter healthcare earnings included 25 million of favorable prior year development.

We also experienced favorable development related to earlier quarters in 2004.

Overall we estimate that our underlying earnings in third quarter were approximately 145 million.

Thus our projection for fourth quarter is in line with our underlying third quarter results.

Overall we expect continued improvement in medical cost trends to offset the impact of the lower membership in the fourth quarter.

Turning to the balance of our reporting segments, we expect our other businesses to contribute approximately 225 to $235 million of earnings for the full year.

This updated range is lower than our previous estimates of 255 to 265 million, primarily reflecting the impact of third quarter reserve strengthening in our run-off reinsurance segment.

Our expectation of strong earnings growth in our disability and life and international businesses is unchanged.

So putting together all the pieces our consolidated outlook for full year 2004 is a range of 925 to $950 million.

Our full year earnings per share will be effected by the amount and pace of any share repurchase in the balance of the year.

Consistent with our past practice we do not predict the amount or pace of repurchase and our EPS estimates do not reflect the impact of any further repurchase.

On this basis our estimate of full year 2004 earnings per share is a range of $6.65 to $6.85.

Turning now to the full year 2005 outlook.

We currently expect earnings before realized investment results and special items of 745 to $810 million.

I will discuss the components starting with healthcare.

As Ed reviewed our current expectation for 2005 membership is a decline of 8 to 9%.

With respect to medical costs we currently expect 2005 medical cost trends to be between 9 and 10%.

Our estimate for full year 2005 healthcare earnings is a range of 500 to 550 million.

Now a useful way to understand the drivers of the 2005 healthcare earnings outlook is to start with our estimated fourth quarter 2004 earnings of 140 to $155 million.

Annualizing the midpoint of this range you will see a starting point of 590 million as compared to the 525 million midpoint of the 2005 range.

The estimated 11% year-over-year decrease primarily reflects the impact of an eight to 9% projected decline in membership next year.

These estimates take into account actions we plan to take to further reduce our operating expenses.

While the details of these actions are not final at this point we are considering restructuring actions that may result in severance charges in 2005.

We currently do not expect such charges to exceed 50 million and we would record them as special items.

Turning to the balance of our reporting segments.

We expect our other operations to contribute approximately 245 to 260 million of earnings in 2005.

This estimate is approximately 10% higher than our updated full year estimate for 2004 reflecting continued earnings growth in our disability and life and international businesses, and lower reinsurance losses partly offset by lower run-off retirement earnings.

With respect to run-off retirement we expect the amortization of the deferred gain to be in a range of 20 to 25 million in 2005.

Putting together all the pieces we estimate that our consolidated earnings excluding realized investment results and any special items will be in a range of 745 to $810 million.

Now our consolidated earnings per share will be affected by any share repurchase activity.

As I mentioned before we do not predict the amount or pace of repurchase and our EPS estimates do not reflect the impact of any further repurchase.

On this basis our estimate of full year earnings per share for 2005 is a range of $5.50 to $6.00.

Overall our third quarter results were strong.

The year-over-year increase was driven by solid execution in healthcare particularly in medical management and by continued strong results in our other businesses.

With that I will turn it to David who is going to provide additional commentary on the membership outlook.

David?

Thanks, Mike, and good morning.

As Ed noted our healthcare results for 2004 continue to reflect strong operating fundamentals including medical management, customer service and underwriting capabilities.

As we have said before improving our operating fundamentals is a key precursor to stabilizing our membership levels.

In addition to stabilizing these fundamentals we have also greatly enhanced our product offerings.

I'll discuss this further in a couple minutes.

I will focus the balance of my remarks this morning on our medical membership outlook and the key actions to improve our results.

Now, as Ed indicated CIGNA's medical membership is expected to decline between 15 and 16% for 2004.

This is slightly better than previous expectations.

These improved results are driven by middle market retention and sales results.

As a reminder CIGNA defines middle market as customers with 200 to 5,000 eligible employees.

In fact middle market membership grew slight in August and September and we expect the same pattern for October excluding the loss of a large state account we previously discussed.

Again, it is important to recognize that we are experiencing some meaningful improvement in our membership levels in the third quarter of 2004.

Looking to 2005 we expect a markedly better result with total membership declines in the 8 to 9% range through January, 2005.

For the balance of 2005 we expect membership to be stable.

The important point to note is that the improving middle market results support the strength of our value proposition and give us a path to stabilize membership throughout 2005.

I expect that we will build on this momentum into 2006.

Over the next few minutes I will highlight the basis for our outlook but first let me discuss the drivers of our January 1st outlook.

The primary components are as follows: for national accounts we expect a decline between 11 and 13% which is generally consistent with our 2004 results.

For the middle market we expect a decline between 5 and 6% which is a significant improvement versus 2004.

I would also note that 60% of our January 2005 middle market renewals have been finalized at this time.

Moving to national accounts, remember that about 85% of this book renews on January 1.

And as you know national account business has a long lead time or purchasing cycle for decision making.

In our case the market had not fully recognized our progress on fundamentals or validated the depth and quality of our new product offerings.

This clearly had a dampening impact on our January 2005 results.

Retention rates for the national accounts for January 1, 2005 will generally be consistent with our 2004 result, in the mid 80s.

We believe our progress on medical cost management and our new product offerings will serve us well with national accounts for the 2006 selling season.

Relative to middle market customers are reacting favorably to our value proposition which is focused on integrated, innovative product offerings, effective medical cost management, best in class clinical quality and strong consistent client management.

Regarding our product offerings for January, 2005, we launched the CIGNA Choice Fund, our consumer directed portfolio of solutions.

This suite of tools enables members to more effectively engage in managing the consumption and related trade-offs of their healthcare purchases.

It is powered by state-of-the-art decision support tools.

We also launched the Signature Product Suite which offers employers a number of benefit, medical management and network options.

Both the CIGNA Choice Fund and Signature are being well received in the market.

These innovative offerings coupled with our traditional strengths regarding funding options and the strongest collection of specialty healthcare offerings in the industry have positioned us well to meet employer and consumer needs in the marketplace.

Regarding medical cost management, since the middle of 2003 we have delivered improved utilization results, particularly for inpatient costs for our customers.

During the same time we continued to deliver best in class clinical quality.

We believe the marketplace is once again recognizing medical management as a CIGNA strength.

Now let me provide some evidence to support our confidence regarding the middle market segment outlook.

First we have seen retention levels steadily improving throughout 2004 and into early 2005.

We began with retention levels in the mid 70% range in early 2004 and have moved into the 80% range in the second half of the year.

We expect to realize low to mid 80% retention levels for 2005.

Again, 60% of the January, 2005, middle market portfolio is renewed at rates consistent with these assumptions.

Second, we have seen a significant increase in the sales pipeline for a middle market book which has increased over 40% versus the same time last year.

We are clearly getting more times at bat.

We are also having more successes per at bat specifically our close ratios have increased by over 40%.

Going forward we can and will do better in each of these key drivers of growth.

While we are encouraged by these positive indicators we recognize that there's more to do to build on this early momentum and position us further for 2006 improvement.

Key areas of focus are to continue to improve the value proposition of our products offerings and improve the effectiveness of our sales and distribution capabilities.

Regarding sales effectiveness our focus is in 3 critical areas.

First, we will demonstrate the capabilities and competitiveness of our products to effectively meet customers needs through competitive medical costs and quality outcomes, the effective use of information and technology, and competitively superior decision support tools and consumer directed offerings.

Second, we will continue to strengthen the capability of our sales force and sales management team and, third, we will more effectively manage producer relationships.

I'll comment briefly on each of these.

On the product front as I previously mentioned we launched a new suite of products that includes competitively superior consumer directed products and significant employer flexibility in the areas of funding arrangements, clinical programs, the role of the primary care physician and varied network options.

Additionally our suite of decision support tools has been significantly enhanced during 2004.

We are receiving great customer feedback on the effectiveness of these tools.

Secondly we have substantially overhauled the sales operations with new leadership at the national and middle market segment levels.

We have also enhanced the depth and breadth of sales training including a robust certification process.

Finally we will more effectively manage our producer relationships through consistent effective messaging of our value proposition including clear points of differentiation for CIGNA, through enhancing 2-way communications with producers to understand their concerns and insure they clearly understand our value proposition and through aggressively leveraging the use of our clinical insight and employer reporting capabilities.

These actions coupled with improvements in areas of medical management, product development and service give me confidence that we have the right actions in place to grow membership over the long run.

In closing I do not underestimate the challenges we face in returning to membership growth.

These challenges do include continued aggressive pricing by competitors.

However, I would emphasize that we are seeing positive signs regarding membership levels including the improving middle market trends I just sited which are higher retention levels , a stronger pipeline and a better close ratio and very good market receptivity to our new product and solution capabilities.

We are taking the appropriate action to meet our membership goals for 2005 and beyond.

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

Thanks, David.

Now before I get into my closing remarks I do want to briefly comment on the ongoing industry-wide investigations surrounding broker compensation.

We previously acknowledged that we received subpoenas from both the New York and Connecticut Attorneys General requesting information concerning our compensation arrangements with brokers.

We are cooperating fully with those investigations.

CIGNA has robust policies and business controls designed to insure compliance with applicable laws and regulations and we conduct our business with high standards of ethics and professionalism.

We view this as an ongoing responsibility and part of the way we do business at CIGNA every day.

We are thoroughly reviewing our broker compensation practices and while that review is continuing we have found no evidence of any antitrust violations or other illegal conduct.

We believe that the Attorneys General and insurance department investigations will lead to additional transparency and insure fair competition in the marketplace.

From our perspective these would be positive developments and we support them.

Beyond that I don't think it's appropriate for me to comment further on the nature of the investigations or to speculate on the potential impact on the industry.

I'd now like to make a few additional points on medical membership and then discuss CIGNA's strategy.

The fundamentals of our healthcare business, namely medical cost management, service and our product offerings, are all very strong.

And we are making clear measurable progress in the area of sales execution as evidenced by the traction we are seeing in the second half of 2004.

As we've said before membership is a lagging indicator and it is the measure that will ultimately confirm the success of our turnaround efforts.

I feel confident in the actions David has outlined and in our outlook for a stable membership base after the first quarter of 2005.

Regarding the earnings outlook that might provide it the actions we have taken over the past 18 months have significantly improved our healthcare margins and the earnings quality of our book of business.

The improved healthcare margins also clearly reflect our underwriting and pricing discipline in a very competitive marketplace.

Now David and I have spent a good portion of this call outlining our tactical plans in the area of medical membership but I believe it is also important to provide an update on CIGNA's longer term strategy.

As you look at the health benefits industry customers have a few key demands.

They expect consistent service.

They expect products that meet their evolving needs and the needs of their employees.

They expect strong technology and useful information.

And they expect competitive medical costs and quality healthcare outcomes.

On the service front our customer satisfaction and service metrics demonstrate that our service on the instate platforms is competitively strong.

On the product front we have a competitively superior consumer directed option and CIGNA already offers the broadest array of funding options available to employers through our fully insured, experience rated and ASO products.

On the technology front increased automation and improved technology will continue to support our high quality customer service and help reduce administrative costs over the next few years.

In January of 2005, we will have approximately 90% of our members on our new, more efficient claim and eligibility platform.

And our members also have access to a strong set of web-based support tools to help make informed decisions about their health.

While we will continue to excel in these areas we will differentiate ourselves in the marketplace through competitively superior medical management and clinical quality.

Employers and consumers will continue to face the challenge of medical cost inflation because aging demographics will push up utilization of medical services while at the same time pharmaceutical medical device and imaging companies will continue to develop new products and services that improve the quality and duration of life.

Consumers will not only continue to demand these innovations but increasing will bear more of the cost of using them.

We believe that future success in the health benefits industry will be defined by the ability to deliver superior medical management and clinical quality results at the consumer level.

As more responsibility shifts to the member product capabilities, decision support tools and health advisory services that effectively engage the consumer will be required to win.

CIGNA already has outstanding capabilities in these areas including the largest clinical team in the industry.

We have superior clinical protocols that provide support, advice and, where appropriate, targeted intervention for our members.

This includes specialized teams for certain catastrophic conditions which allows for members to benefit from the best practices of our clinical staff.

Our clinical excellence is confirmed by our superior NCQA health plan accreditation ratings and industry leading HITIS effectiveness of care scores.

CIGNA also has superior disease management programs with a proven track record of effectiveness.

This includes meaningful reductions in emergency room visits which lower medical costs and result in improved quality of life for participants.

CIGNA also has the unmatched ability to integrate its product offerings for better quality outcomes and results.

We integrate our core medical offerings with our full portfolio of in-house specialty healthcare products including pharmacy, behavior health and disease management programs as well as disability products.

On previous calls I've discussed the significant benefits of integrating these products.

We plan to continue to invest in these medical management and clinical quality capabilities.

This will remain a competitive advantage for CIGNA.

This strategic focus along with continued strong execution on the fundamentals of the health benefits business will result in membership growth and a leadership position for CIGNA.

Now to turn our attention back to the quarter our results reflect continued strong performance in our healthcare business and continued solid contributions from our disability and life and international businesses.

Overall our capabilities and financial position remain strong and we are confident that our healthcare fundamentals and improving sales execution will drive profitable growth.

This concludes our prepared remarks and we would now been happy to take your questions.

Thank you, ladies and gentlemen. (Caller instructions)

And we will take our first question from Josh Raskin with Lehman Brothers.

Hi, thanks, good morning.

I was just wondering if we could run through the healthcare 2005 outlook and starting with the 4Q earnings.

If I got it correctly the run rate in the fourth quarter is expected to annualize out to about 590 million, and, you know, you take down membership, call it 8 to 9%, I guess I get this towards the high-end of the 500 to 550 and wondering how would you think about the differential to get us into sort of the midpoint there and then what are the expectations in terms of cost savings or are we looking for an increase in spending, you know, on product development, et cetera?

Josh, it's Mike.

First of all your arithmetic is right in terms of the 2005 outlook as compared to the fourth quarter, 2004 run rate.

At this point we are estimating 2005 healthcare operating expenses, literally working through the budget process right now.

But what we are currently estimating is approximately a 5 to 6% year-over-year reduction in operating expenses.

Now this is an area where we've got a real good track record in 2004.

We are on track to meet the $300 million year-over-year reduction that we've talked about on prior calls despite, as you just reiterated, the fact that we are consciously funding new product and service capabilities development and also protecting our market facing areas.

So we will provide additional updates on the fourth quarter call but essentially it's the 5 to 6% operating expenses reduction that's currently in our earnings estimate is the -- is the reason that you get a slightly rounded number versus what you described, the primary reason.

I'm sorry, Mike, so that -- okay.

So the earnings -- I guess I'm just a little confused.

We are expecting a decrease in operating earnings and what amounts to a decrease in healthcare earnings that's greater than the membership drop, I guess.

I'm just confused as to what's the incremental cost, is that on the medical expense line or -- ?

Well, first of all, Josh, what I'm trying to get at here is with a 5 to 6% operating expense reduction year-over-year and an 8 to 9% membership decline, the operating expenses per member go up somewhat and that's the reason for the slight difference in your rounding.

Okay, got it.

Just a quick followup maybe for Ed.

This was, you know, on yesterday's announcement regarding the new segmentation focus on the membership.

Should we think about CIGNA moving more towards, you know, customer line focus and are there new areas, you know, it sounded like the senior market, for example, seemed like something new for you guys.

You know, any expectations for any '05 membership impact there?

Josh, I wouldn't expect meaningful membership impact in '05.

Certainly in the senior side.

And secondly in the -- in the government business, the union business and so forth, we do have a position there and I think we've had some increasing success in that area and would expect that to continue.

I think both of those segments are reflective of our interests in getting much more specifically focused on customers and insuring that the products and services that some of these segments are getting are more specifically tailored to their particular needs.

It also allows us to match up more effectively with some of the distribution channel specialties that exist.

So I think over the next several years you will see some impact from those and they are really a continuation of what we started earlier this year in breaking out national accounts, middle and small much more specifically.

Okay.

Thanks.

Thank you, Mr. Raskin.

We will go next to Matthew Borsch with Goldman Sachs.

Thank you.

Good morning.

I had a question on the pricing and cost trend outlook in your risk book for next year.

You mentioned 9 to 10%.

I'm not sure, are you -- did you say you were pricing in line or above that trend?

And a related question is just on what components you expect to drive some deceleration in 2005.

Matthew, it's Mike.

I will start on the pricing piece then I will ask Jon Rubin if he wants to provide some additional color on the medical cost components.

First on the pricing piece for our commercial HMO block.

It's a little early to have real firm estimates of 2005 revenue PMPMs since, as you know, the 2005 PMPMs will depend upon a number of different factors including benefit buy downs and mix changes many of which we would expect to have a similar impact on both the pricing and medical cost PMPMs next year.

But the -- what we've built into our 2005 earnings estimates at this point is a 9% revenue yield increase 2005 versus 2004.

And that combined with expected medical cost trends of 9 to 10% would mean that the estimated MLR for this year for that block of business is -- would go from 85% to next year approximately 85.5%.

I would also point out just tying back to Josh's question from a minute ago, we do expect an improvement in the expense ratio next year so that we would expect approximately a 50 basis points improvement in expense ratio next year versus this year since the price -- the yield increase of 9% would be greater than the operating expense increase per member.

Finally, I would remind you that the commercial HMO revenue at this point is approximately 800 million per quarter so even the 50 basis point swing in -- a potential 80 basis point -- excuse me 50 basis point swing in margins would only be worth approximately $10 million for the full year.

On your other question on the medical costs trends let me give a headline and then I will turn it to John.

The overall headline in terms of reduction costs would be broadly speaking about half of the deceleration would be from a greater level of benefit buy downs and approximately the other half would be an improvement in unit cost trends, particularly in facility and physician.

Jon, you want to provide any additional color there?

The only additional color I'll provide, Matthew, is in breaking down next year's trend by components, I'd break it down as follows: in inpatient about a 9% net trend, out-patient 11%, professional between 6 and 7% and pharmacy approximately 11%.

Okay.

Great.

And if I could just ask one followup.

You mentioned improved results on your run-off businesses in 2005.

Can you give us a little color on that and what's driving it?

Sure, Matthew, it's Mike.

What I'm referencing there is in the run-off reinsurance block, which obviously has been in run-off for awhile, we did experience some higher run out claims here recently and as a result we decided to strengthen the reserves for the Workers' Comp and personal accident block in third quarter by approximately $48 million after-tax.

And again that reserve increase provides for the higher level of expected run out claims that we now ultimately expect to see.

Essentially there's an improvement built in, we would not expect that level of charge next year.

I mean, obviously, there's uncertainty with this block of business but with the current reserve strengthening we believe that our current reserve balances are appropriate and include the provision for what we now expect in future claims.

Great, thank you.

Thank you, Mr. Borsch.

We will go next to Charles Boorady with Smith Barney.

Thanks, good morning.

Also on '05 guidance just conceptually by starting with fourth quarter '04 run rate and I think you, at least partially or mostly, explained this in response to the last 2 questions but by starting with the fourth quarter run rate and adjusting it for the enrollment and taking admin cost and savings into consideration I just want to be clear are you sending us the message that you are satisfied with where your gross medical underwriting margins are at this point and your pricing to maintain those margins?

Or are you pricing for and targeting over the long run something better than that?

Charles, it's Mike.

My view is that we've done a good job this year in 2004 of increasing our earnings, increasing our profit margins, increasing our earnings per member and we now have a higher quality book of business that's benefited from those underwriting actions.

Our plan for 2005 is not to sacrifice that pricing and underwriting discipline and instead look at the improvement in fundamentals that we've seen.

We expect those improving fundamentals to drive the improving middle market membership outlook that David outlined even with the competitive conditions.

Now, the other point I would make is that in terms of an overall competitive position and where we need to be for the long-term, we knowledge that our operating expenses are still higher than we would like and higher than some of the competitive benchmarks.

And we do expect over time to get the benefit, in particular the benefit from stabilizing and then ultimately growing our membership and then also getting the operating expense benefit by completing the transformation work including, as we've talked about on prior calls, you know, shutting down the legacy claim systems, increasing our auto adjudication rates, increasing our productivity rates on the new instate systems, those kinds of things.

We would expect those benefits to accelerate over time and ultimately get us back to a position where the overall profit margins are -- are in line with the competitive benchmarks.

And with 90% on that instate platform as of January, for that remaining 10% can you give us a ballpark of how much is being spent to get that last 10% on and also what the savings would be from shutting down all the legacy systems once that final 10% is off?

Okay.

Charles, the 2005 preliminary operating expenses that I described in answer to Josh's question are still in the early stages.

So at this point I'm not prepared to breakdown for you our 2005 healthcare operating expenses, you know, by department or by category.

I would tell you that the -- I don't think we are going to get a significant amount of savings in 2005 as compared to 2004 from transformation.

I mean, we will get some from the improved productivity and some from further improvement in auto adjudication.

Where we will really get the savings will be in the out years as we actually shut down, you know, the multiple legacy claim systems that we -- that we have.

And at this point we do not expect that to show up in 2005 to any material degree.

David, you want to add anything?

Charles, it's David.

The one question you had as well is the cost to facilitate the remaining 10% of the migration.

I suggest you think about that as the remaining 10% of the migration or so will take place throughout 2005 on anniversary dates and a small block taking place on 1/1/06.

So the work will take place in 2005 and that cost is included in the expense estimates that Mike referenced that we are working through.

Similarly the costs for migrating business for 1/1/05, those costs were incurred in 2004 and you should think about them as part of any cost estimates we're giving to facilitate that last 10%.

Charles, let me -- this is Mike, let me give you one other piece of color here.

If you look at our healthcare earnings for 2004 and 2005, we are expecting to make about $60 after-tax per member over that period of time excluding the unusual favorable prior year development that we've had in 2004.

If you compare that to our benchmark competitors we acknowledge that that estimated result is approximately 20 to 25% below the profit margins from some of our benchmark competitors and candidly below our own potential.

Over time we would expect to get that kind of improvement from completing the transformation work and getting the benefits that we just referenced.

Terrific.

Thanks.

Thank you, Mr. Boorady.

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

Good morning, guys.

Could you just give -- you've been through this in some detail but I still am a little hesitant to assume in my model that you folks are going to lose 800,000 plus members in the first quarter of '05 and then be flat the rest of the year.

Should I just take comfort from the fact that your middle market's improvements have been so noticeable and rapid over the last couple of quarters that that's going to be enough to stabilize things in the second quarter?

Is there anything else that I should be thinking about there?

Patrick, I will start then I'll let David pile on.

I think the things I would point you to are 3 fold: We've said very consistently that we would expect to see, first, our retention rates in middle market improve as the market recognized the strength of our fundamentals.

We would then begin to see a increasing flow of new business and then we would see success rates in that flow of new business improve.

We have certainly seen that through the third quarter and actually expect that to continue through the fourth quarter as well.

So the underlying metrics that we watch are behaving very consistently with what we should expect at this point in our turnaround.

I think the last piece that I would give you is the product portfolio that we have now that is being fully marketed in the marketplace at this point in time is being very well-received.

So the fundamentals are strong.

The product capabilities are very strong.

And we are seeing that showing up in the underlying three key metrics that we track as being indicative of what's going to happen certainly through the balance of this year but then through next year.

David, you want to add to that?

Patrick, I would just highlight a few points.

One, as I said in my prepared remarks, for the national account portfolio about 85% of the available business takes placed on 1/1, so you have a large concentrated event there that takes place both within our book, the renewal activity and new business opportunities as well as speaks to what's -- what's left for the remaining portion of the year.

Secondly as we indicated we are seeing good progress and good traction in the middle market book in the third quarter with retention levels exceeding 85% in the third quarter.

Now the third quarter profile is a little different than the first quarter profile. 60% of our book is renewed for 1/1, middle market in the low to mid 80% retention levels.

And again, the momentum in the pipeline activity and close ratio is indicative of the improved fundamentals and the quality of our product portfolio.

So really for the remaining portion of 2005 the middle market and small segment will carry the weight for the operation as we prepare for a heavy and successful 1/1/06 for national accounts and mid market.

Fair enough.

Now had you a nice jump or nice add in the non-risk managed care side of things this quarter over last quarter.

Is that one particular big account or just some regained momentum there in general?

Patrick, it's Mike.

I would suggest that you focus on the overall net membership as opposed to the HMO indemnity split, you know, the traditional product lines HMO versus indemnity, it really blurred over the last few years and our new product suite, in particular, allows for some additional modularity to mixing and matching.

So, we are currently looking at revising our reporting splits potentially but in the meantime I'd suggest you focus on the net membership.

Fair enough.

Thanks a lot, guys.

Thank you, Mr. Hojlo.

We will go next to Christine Arnold with Morgan Stanley.

Good morning.

A couple questions.

Could you give us the trend components for this year that comprise the 12% medical trend.

Jon, do you want to cover that?

Sure.

Christine, this is Jon Rubin.

As Mike mentioned earlier we are expecting our commercial HMO medical trend to be approximately 12% for the full year 2004.

Now I think it's important to put this in context as our commercial HMO book only represents about 10% of our total membership.

Having said that, for the commercial HMO book in-patient trend is expected to run about 9% for the year, out-patient trend in the 14 to 15% range, professional 10% and pharmacy 17 to 18%.

Okay.

So is that 12% comparable to the 9 to 10 that you expect next year or is the 12 really lower because of the prior period development, have you adjusted that?

Christine, it's Mike.

We have adjusted out the prior year development.

So the numbers that we've described and Jon just gave you additional detail on are based on a run rate operating basis excluding the prior year development.

Okay.

So it looks like in out-patient you are expecting 14 to 15 to go to 11 and then professional you are expecting 10 to go to 6 to 7.

Could you talk about what gets you there?

Is that contracting?

Is that utilization?

Christine, it's Mike.

Broadly speaking it's a combination of benefit buy downs and improvements in the -- in the unit cost trends based on the contracting that we are expecting to complete for 2005.

Jon, you want to add any color there?

No, Mike, I think that's a good synopsis.

I will just add that the contracting improvements are split between facility and professionals.

So we are seeing it in in-patient, out-patient and professional categories and similarly in terms of our benefit buy down strategies they should favorably impact professional, out-patient and pharmacy.

Okay.

So, can you get more specific about kind of how much you expect the unit costs to decelerate just because these are pretty big decelerations in medical trends?

We would expect, Christine, that the unit cost improvement on the facilities side will be approximately 100 basis points of deceleration in 2005 versus 2004.

And then doctor?

I don't have that number committed to memory.

Ballpark comparable kinds of numbers.

But the physician piece is one -- is more one where we look at throughout the year based on competitive benchmarks on our fee schedules versus what else we see in the market.

So it looks like most of this is benefit changes.

Is it a mix shift to the new product suites?

For the most part it's increases in co-pays, as John mentioned, particularly on the pharmacy side, increasing our co-pays, moving more of our commercial HMO customers to co-insurance.

I think we've described on prior calls that with the benefit of hindsight 2004 was behind where we wanted it to be in terms of benefit buy downs for pharmacy and that's a significant priority for us for 1/1/05.

Okay, and last question.

That 9% yield, is that a 9% a full year or is it higher entering the year because of national and then lower with mix shift?

How do we think about the progression through the year of that 9% yield?

Christine, the 9% is for commercial HMO.

So for the most part, at this point, our commercial HMO block is primarily middle market and I would expect the 9% to be reasonably consistent throughout the year.

Again, there are a lot of moving parts there including exactly what benefit buy downs we sell and what kind of mix we have local market to local market, but I would not expect a material change.

Now obviously we are very cognizant of the pricing environment and so it is something that we look at.

It's fluid at the local market level.

It's something that we watch very closely.

But at this point in time I would expect the 9% to be reasonably consistent throughout the year.

Great, thanks.

Thank you, Miss.

Arnold.

We will go next to Eric Veiel with Wachovia Securities.

Hi, just to help us get some of the thought on membership in perspective can you give us what you're expected year-end 2004 national accounts membership is and what your expected year-end 2004 middle markets membership is going to be?

Eric, it's David.

Don't have the exact number in front of me.

I'd ask you to think about the split of our book of businesses.

Essentially 50% national accounts, 50% middle market and small with the vast majority of that being middle market based on the concentration.

But our profile is really a 50/50 profile.

Okay.

And then second question for you, Mike, can you just walk us through in a little bit more detail sources and uses of cash in 2005 that you're expecting?

Eric, it's a little bit early to give you firm estimates of 2005 sources and uses so let me give you some color and then at the fourth quarter call I will give you some additional detail.

I will give you an update at that point.

First let me take the easy side.

On the uses side our current preliminary estimate for 2005 is to have something in the neighborhood of 150 to $200 million of planned uses.

That's mostly the interest on our debt and shareholder dividends.

And there's likely to be some other miscellany pluses and minuses netting to a small net use.

On the 2005 sources, at this point I think the best way to think about it since I can't yet give you a firm estimate of subsidiary dividends, if you think about our GAAP earnings for a second for 2005, we are estimating GAAP earnings for 2005 take the midpoint of 780 million for 2005.

If you think about then adjustments to that 780 million you could add something to the 780 million for parent Company interest since that's not in the subsidiaries.

You need to subtract something for GAAP earnings that don't have a comparable statutory earnings component.

And if you net those out that would be the amount available for dividends as well as to support the growth of our subsidiaries.

Now, as I mentioned in my prepared remarks, there is also this additional $100 million of subsidiary dividends that we postponed to early January for tax planning purposes but that gives you sort of a range to think about in terms of subsidiary dividend for 2005.

And again, we will provide some additional data on the fourth quarter call.

Just for clarification, Mike, does the 150 to 200 million of planned uses include your capital expenditures?

The capital expenditures would come out of the subsidiaries.

So that would not be included in that number but capital uses in the subsidiaries that we don't get full statutory credit for would serve to reduce the amount of dividend capacity from that subsidiary.

I would not expect that to be significant at this point.

Again, there are several moving parts here.

I will give you more color at the fourth quarter call.

Okay.

Thank you.

Thank you, Mr Veiel.

We will go next to Doug Simpson with Merrill Lynch.

Good morning, everyone.

Just 2 reinsurance related questions.

I guess one, it looked like, if I'm reading this correctly, Q3 saw a little bit of a bump up in the loss in that business, the run-off, and then also could you just update us as to what was behind the $2 billion sequential decline in the recoverables?

Was some of that collected or -- ?

Sure.

Doug, it's Mike.

In terms of the losses in reinsurance in third quarter that is primarily reserve strengthening for our Workers' Comp and personal accident business.

We stopped reinsuring Workers' Comp programs in 2000 so this book has been in run-off for a while.

But what we've experienced recently are run out claims that have been higher than the reserve assumptions had estimated.

So, as a result we decide to strengthen reserves in third quarter by $48 million after-tax and so the reserves now provide for the higher level of expected run out claims that we expect.

That's the primary driver in the -- in the third quarter higher reinsurance loss.

Your question on the reinsurance recoverables is virtually exclusively related to the divestiture of the retirement business.

As business go through the novation process and moves off of our paper and on directly to Prudential's paper we see a drop in the liability for that -- for that divested retirement business and we see a commensurate drop in the reinsurance recoverables from Pru for -- for that business.

And what that in affect ends up doing is accelerating our GAAP earnings on that transaction versus what we expected and we spiked the acceleration out as a -- as a special item.

Okay.

And no change -- any update to efforts to try and maybe hive(ph) off the run-off reinsurance business?

No update at this point, Doug.

Is that something you guys -- I presume you are still interested in trying to do it?

If you could do it under the right terms?

We certainly would if we could do it under the right terms, Doug, but there's no new developments on that at this point.

Okay.

And then I don't know if you have this number, the 197 of recoverables, do you have what the -- the allowances against that number?

I don't have that number fully committed to memory, Doug.

Rather than giving you a ballpark number why don't I let -- why don't I followup with you off-line for something on that.

Okay.

Thank you.

Thank you Mr Simpson.

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

Good morning.

Wanted to turn back to the component cost trend for just a minute.

The inpatient trend factor that you reported seems to have been pretty volatile in the last couple of quarters.

I think it was Q1 8 to 9, jumped up to 12% in 2Q and it sounds like we are back to 9%.

I wonder if you can explain what's been going on in that component to create that kind of quarter-to-quarter volatility?

It just seems a bit unusual.

John, it's Mike.

I will start in and then I'll ask Jon Rubin to provide additional color.

First, as we've discussed now on a few different occasions, the commercial HMO book is now a relatively small portion of our overall HMO block.

And so in terms of understanding underlying medical cost trends I would suggest to you that a much more meaningful number is to look at the overall HMO block as opposed to just of the portion in commercial.

I would also remind you that the commercial HMO block has declined significantly and it's declined in some local markets much more than others.

So as a result there's a significant mix change going on.

Now, in terms of the specific comparison of third quarter versus -- the third quarter outlook versus the second quarter outlook we have seen a reduction in severity in the commercial HMO block that is -- that is reducing that trend.

But rather than being focused on quarter-to-quarter volatility of a commercial HMO block that is moving around significantly I would urge you to look at the more fundamental trends of the overall HMO block.

Jon, you want to provide any additional color there?

Mike, I think you hit the major points.

Specifically, we, in the first 2 quarters, originally saw indications of high severity in inpatient claims.

That is to say abnormally high prevalence of high dollar claims amounts with a benefit of another quarter we've now seen the inpatient severity return to more normal levels and have further seen the first 2 quarters develop favorably.

Now, again, as Mike mentioned, our commercial HMO book only represents 10% of our total membership which can result in this type of volatility especially when you look at the individual components from quarter-to-quarter and if you look at our total HMO trends inclusive of our ASO business the components of the trend levels are much more stable, albeit they are still improving.

So, if you look beyond the volatility we are continuing to achieve strong medical management results.

Okay.

And then turning to the indemnity earnings in that segment, can you help us understand kind of what we should think about for a run rate for that segment?

Obviously, there was a big increase kind of from recent historical quarters, it's a pretty decent earnings number?

I just wonder what would you expect we should think about is a normalized number for that segment?

John, it's Mike.

In terms of indemnity we have seen, as you noted, a significant increase, a significant improvement in our indemnity earnings and more than half of that is driven by improvements in the experience rated profit margins and that's driven by strong underwriting actions including purging some bad business, effective pricing discipline, some strong medical management results, all of that has improved the profit margins on that block.

What I would suggest that you do is think about the year-to-date results, back out something for the higher than normal levels of favorable prior year claim development that we've had, and then in effect project that kind of level into 2005, probably with a little bit of a decrement for the projected membership decline in 2005.

I think that would be the right way to think about it.

Okay.

And have you -- I mean internally how should we think about what you've established as where you think your operating margin should be in the health segment?

What do you think is kind of the longer term achievable margin for that -- for that segment?

John, just at a high level and then Mike can comment on the specifics.

Mike made a comment before relative to the earnings level that we see of competitors and I think made the comment that, you know, if we are at 60 and we are maybe 25% behind and we expect over time to be able to close that gap.

There's no reason that we can't be at fully competitive.

In fact we would think stronger margins in this business over time as we get the dividends from improvement in our infrastructure, as we get the transformation and new legacy platforms completed, and as we continue then to stabilize and grow the membership, over time we should have fully competitive and we would expect very strong margins in this business.

I think the demonstration of that is the improvement we've made over the last probably 4 to 5 quarters in significantly improving the margins based on underwriting and pricing.

Now the key is to continue to get the efficiency improved and to stabilize and grow the membership.

Mike, you want to add to that.

Actually, Ed, what you said was exactly the way I would characterize it.

So.

So from a normalized level, maybe 25% above kind of what you're seeing now?

Correct, John.

Okay.

Now, again, that's not going to be 2005, obviously, but we would expect to be able to get there.

Great.

Thank you.

Thank you, Mr Rex.

We will go next to Michael Ewing with Banc of America.

Hi, good morning.

Just one quick question.

You said you had cash of about 1.5 million at the parent how much of that is unrestricted cash?

Michael it's Mike.

That is all unencumbered cash.

Okay, great.

Thank you very much.

Thank you, Mr Ewing.

We will go next to Scott Fidel with JP Morgan.

Yes, hi, thanks.

Good morning.

First question just had to do with you just made an announcement that you are looking at starting a new distinctive government segment business.

Obviously this morning we've had some political development.

It looks like the republicans should be strengthened and under control in Congress and Bush is retaining the White House.

So, probably adds more of a sustainable environment for medicare reform, here.

So, just in that context can you talk about your thoughts now on potentially expanding it to Medicare and just generally your government segment initiative?

Yes, Scott it's Ed.

I will start.

First of all, I wouldn't suggest that we have made final decisions to reenter the Medicare choice space.

I think what the establishment of that segment reflects for us is a recognition that there's a significant portion of the population that is moving into that over 55 age bracket.

We need to look at how best we meet the needs of those pre-retirees as well as post-retirees.

And there are a lot of different alternatives and options for us to consider within that.

We will take a look at the Medicare space but we've made no decision at this point in time to reenter that space in an aggressive way.

We want to be sure we understand how that program is going to work for the long-term.

But we are definitely going to look at the development of product and service for that post 55 age group.

And particularly as you look at a more consumer directed type of product that portion of the population could be very attracted to that and we have good capabilities in that area.

So it's simply a way to insure that we understand what the developing needs of that group are, whether they are government sponsored programs or programs that we would build on our own.

David.

Scott, I would just -- this is David, I would highlight a few points.

One we think about the segment as seniors broadly whether it's employer based or governmental based or individually senior opportunities to the final Medicare legislative terms in terms of what the rules of the road are going to be will be hashed out towards the latter part of this year and spilling into next year.

That will dictate a little bit of how attractive we believe the opportunity is.

Third, a point that Ed made reference to, just to highlight as well, our employer based customers are dealing with a need for evolved solutions for their pre-retirees and retirees.

This presents an opportunity for focus for us.

And then a final note is as we look at our core capabilities, take medical management as an example, the seniors present a real nice opportunity for us to potentially expand our use of medical management services either for targeted employer based solutions or targeted solutions for governmental based opportunities.

So we are exploring all of those different channels as we speak.

Okay, that's helpful.

And then just a followup question, just in thinking about the '05 guidance particularly on the risk segment in terms of the middle markets, the 5 to 6% decline.

Can you talk at all about how you expect any variation in regional performance to be there?

Then just also just in line with that, you know, clearly there's been a lot of industry consolidation recently and if you can talk about how some of those developments are impacting the competitive environment, maybe spiking out the Oxford United merger in New York maybe as an example there.

Okay, it's David.

I will start on your geographic question then I will kick it back to Ed.

Relative to the geographic profile, first for 2005 relative to our outlook we are seeing meaningful improvements in all of our regions, which is quite important to note, whether it's on the retention lever, pipeline lever or close ratio lever.

Relative to 2004's results we did see some more varied geographic performance and as we've, I think, acknowledged before some of our biggest improvement opportunities were either in the west and southwest while our Mid-Atlantic and southeast region were performing a bit better.

So, 2005 meaningful improvement in all geographies, not the same improvement but meaningful improvement. 2004 , a bit more of a lumpy or varied result.

Ed.

Yes -- and relative, Scott, to the consolidation question.

I wouldn't suggest that we are seeing significant impact from that at this point in time.

And I would say that's true for the 3 or 4 regions I can think of where that consolidation has occurred.

Clearly we've got some players with greater concentration.

But I would say the marketplace in general continues to be pretty competitive.

I wouldn't say necessarily irrational and I wouldn't say that we would relate any of it at this point specifically to some of those more recent combinations.

Okay.

Thank you.

Thank you, Mr Fidel.

And our final question for the day will come from Ed Kroll with SG Cowen.

Good morning.

Mine is really brief.

I'm just wondering for the EPS guidance for '05, what share count did you assume -- I'm sorry, I have that -- the tax rate that you assume for that, the consolidated tax rate?

Ed, it's Mike.

I would not expect the tax rate to be materially different 2005 versus 2004.

Now, in 2004 I would note the reinsurance loss here at third quarter related to the London Workers' Comp and personal accident book is -- we don't get a full tax deduction for that, so the -- there would be that change.

But otherwise if you assume essentially consistent kinds of tax rates that's essentially what's imbedded in our estimates.

Okay, great.

Thank you.

Ladies and gentlemen, this does conclude CIGNA's third quarter 2004 results review.

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

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

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Thank you for participating.

We will now disconnect.