信諾集團 (CI) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. (technical difficulty) CIGNA's second-quarter 2006 results review.

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

We will conduct a question-answer session later during the conference, and review procedures on how to enter queue to ask questions at that time. (OPERATOR INSTRUCTIONS)

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

We will begin by turning the conference over to Mr. Ted Detrick.

Please go ahead Mr. Detrick.

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

I am Ted Detrick, Vice President of Investor Relations, and with me this morning are Ed Hanway, CIGNA's Chairman and CEO;

Mike Bell, CIGNA's Chief Financial Officer;

David Cordani, President of CIGNA HealthCare; and Jon Rubin, CIGNA HealthCare's Financial Officer.

In our remarks today, Ed will begin by discussing highlights of CIGNA's second-quarter results.

Mike will then review the financial details of the quarter and provide the financial outlook for both the third quarter and full year of 2006.

David will then discuss our medical membership results and outlook.

He will also make remarks about CIGNA HealthCare's improving competitive position and our value proposition as it relates to consumerism and health advocacy.

Ed will then conclude our prepared remarks by commenting on our prospects to profitably grow our HealthCare business.

We will then open the lines for your questions.

Now as noted in our earnings release, CIGNA uses certain financial measures which are not determined in accordance with generally accepted accounting principles, or GAAP, when describing its financial results.

Specifically, we use the term labeled "adjusted income from operations," which is income from continuing operations before realized investment results and special items, with special items being unusual charges or gains, as the principal measure of performance for CIGNA and our operating segments.

A reconciliation of adjusted income from operations to income from continuing operations, which is the most directly comparable GAAP measure, is contained in today's earnings release, which is posted in the investor relations section of CIGNA.com.

Now in our remarks today, we will be making some forward-looking comments.

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

Those risk factors are discussed in today's earnings release, which was filed this morning on Form 8-K with the Securities and Exchange Commission.

And with that, I will turn it over to Ed.

Thanks, Ted.

Good morning.

I'm going to start today's call, as Ted noted, with a few brief comments on our results.

Then Mike is going to provide some more details on the second quarter and our 2006 outlook.

Dave is going to comment on how we are differentiating ourselves in the marketplace, which is resulting in a leadership position for us in the area of consumerism and health advocacy, thereby enabling solid progress in achieving our membership growth goals.

In my closing remarks, I will provide my perspective on the opportunity to profitably grow our HealthCare business.

Overall, our second-quarter results were much better than expected, resulting from good earnings contributions from all three of our health and related benefits businesses, as well as the favorable effect of our share repurchase program.

The earnings reflect solid HealthCare results and continued strong results in our Group Disability and Life and International businesses.

Second-quarter adjusted income from operations was $270 million, or $2.31 per share, well ahead of our expectations.

Our HealthCare earnings, excluding prior year development, were within our expected range and reflected strong operating expense management and experience rated results, which offset modestly lower guaranteed cost results.

We are executing well on our guaranteed cost pricing strategy and our pricing and underwriting actions to improve the profitability of the guaranteed cost book during the second half of 2006 are on track.

We continue to manage medical costs very effectively, which benefits both our customers and us, as indicated by our full-year medical cost trend outlook of 7% to 7.5%, which is improved from our previous expectation.

We also continued to make solid progress toward reducing HealthCare operating expenses.

Our overall results to date position us well to achieve our full-year 2006 goal of organically growing our medical membership by 1 to 2%.

And in addition, we recently executed two transactions that provide additional profitable growth opportunities.

Specifically, we acquired Star HRG, which provides us with leading capabilities in the areas of voluntary and hourly benefits.

And we have enhanced our market presence in Arizona through an arrangement to take over a book of business from a major competitor.

In addition, we continue to see very positive signs for the 2007 National Accounts selling season, including some early National Accounts sales success which David will discuss in a moment.

Overall, we remain confident about our full-year HealthCare earnings and membership outlook.

Also our Group and International businesses continued to deliver very strong profitable growth.

Our group insurance business reported earnings of $64 million, with solid revenue growth and an after-tax margin that remains industry-leading.

Our International business reported strong earnings of $36 million on 22% growth in premium and fees.

This is the 11th straight quarter of double-digit earnings growth in International.

Both our Group and International operations have strong market positions with good growth opportunities.

We also continue to be active with share repurchase.

Year-to-date through July, we've repurchased about 1.5 billion of our stock and we currently have $800 million of stock repurchase authority available.

So overall, our second-quarter consolidated results are strong and we are well-positioned to achieve our full-year earnings and membership goals.

Mike is now going to cover the specifics of the second-quarter results and our outlook for the full-year 2006.

Mike?

Thanks, Ed.

Good morning, everybody.

In my remarks today, I will review CIGNA's second-quarter results.

I'll also discuss our outlook for the full year and for third quarter of 2006.

In my review of consolidated and segment results, I'll comment on adjusted income from operations, which is income from continuing operations, excluding realized investment results and special items.

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

Our second-quarter earnings were $270 million or $2.31 a share compared to $260 million or $1.98 a share in the second quarter of 2005.

The quarter's consolidated results were better than we had previously estimated, reflecting solid HealthCare results and strong performance in our Group and International businesses, as well as favorable results in Corporate.

I will now review the segment results starting with HealthCare.

Second-quarter HealthCare earnings were $159 million.

This result included favorable prior-year claim development of $16 million after-tax, of which $12 million was related to our guaranteed cost book.

Excluding prior year claim development, HealthCare earnings were within our expected range.

HealthCare earnings in the quarter reflected stable membership, strong operating expense management and favorable experience rated earnings, partly offset by modestly lower guaranteed cost results.

The guaranteed cost medical loss ratio, excluding prior year claim development, was 87.6% for the first half of 2006.

We expect guaranteed cost results to improve in the second half of the year, resulting in a full-year 2006 MLR of approximately 87%.

I will discuss this further when I cover the outlook.

Membership at the end of second quarter was stable and consistent with the expectations that we discussed on the last call.

We continue to expect membership to grow 2% to 3% in the second half of the year, in addition to the benefit of the Star HRG acquisition.

Our estimate for full-year organic membership growth continues to be 1% to 2%.

Medicare Part D results were breakeven in the quarter compared to an $11 million loss in the first quarter.

We expect to see further improvement in Part D profitability in the second half of the year.

Relative to operating expenses, year-to-date results demonstrate good progress.

Our stat supplement breaks out the impacts of transformation amortization and of our pharmacy Medicare Part D and disease management growth initiatives.

Excluding these items, our operating expenses for the first half of the year declined $56 million relative to the first half of 2005.

This result reflects continued progress in our efforts to improve productivity, including achievement of operating efficiencies in our service operations.

On the same basis, we now expect full-year 2006 operating expenses to be approximately $100 million lower than 2005, which is $25 million better than our previous estimate.

I would also note that looking beyond 2006, we continue to expect an additional $200 million of annualized productivity improvement in our service and technology organizations.

We expect to improve productivity while continuing to deliver strong customer service.

HealthCare premium and fees in second quarter were up 7% year-over-year, excluding the loss of a large prescription drug program which we discussed last quarter.

The increase primarily reflected higher guaranteed cost medical membership and rate increases.

So to recap, our HealthCare earnings, excluding prior-year claim development, were within our expected range, primarily reflecting stable membership, strong operating expense execution and favorable experience rated earnings, partly offset by modestly lower guaranteed cost results.

Now to discuss the results of our other segments.

Group Disability and Life increased revenue and earnings in the quarter.

Earnings were $64 million, up 8% from the prior year.

These results included a net favorable impact of $6 million after-tax related to the effect of a reserve study on a life insurance product, partly offset by severance charges.

Our results in this business remain very strong competitively.

Our International business generated earnings or $36 million.

This result reflected strong top-line growth as well as some favorable claim experience, which we do not expect to recur in the balance of the year.

Our Group insurance and International businesses continue to be important contributors to our results.

Our remaining operations, including Runoff Retirement, Runoff Reinsurance, Other Operations and Corporate, had combined earnings of $11 million for the quarter, which was better than our expectations due primarily to favorable expense and tax items in Corporate, which we do not expect to recur in the balance of the year.

Now I'll comment briefly on our capital position and our 2006 capital outlook.

Our parent company capital position, continues to be strong and our subsidiaries remain well-capitalized.

At the end of the second quarter, cash and short-term investments of the parent were approximately $550 million.

During the second quarter we continued our share repurchase program and repurchased approximately 9 million shares of our stock for $876 million.

In July, we repurchased an additional 1.8 million shares for $178 million.

We currently have approximately $800 million of repurchase authority, which includes an additional $500 million authorized by our Board of Directors last week.

Our capital management priorities remain consistent with our prior communications.

Our first priority is to maintain appropriate liquidity at the parent company and to ensure that our subsidiaries remain adequately capitalized to support growth and maintain and improve their credit ratings.

Relative to parent company liquidity, we currently consider an appropriate target to be approximately $250 million.

Our second priority for excess capital is to consider acquisition opportunities.

We routinely review a range of acquisition opportunities that would enhance our strategic position and meet our return on investment goals.

Recent acquisitions include Star HRG and a smaller acquisition in Arizona.

We do not know when or if we would find additional opportunities that would meet our criteria, and absent these items, our priority would be to buy back our stock.

Looking ahead to year-end 2006, our full-year outlook for parent company liquidity is stronger than we had previously estimated.

We now expect to receive subsidiary dividends of $1.3 billion for the full year.

This is $300 million higher than our previous expectation of $1 billion, reflecting the strength of our subsidiaries' capital positions.

We've received approximately $800 million in subsidiary dividends to date, and at this point expect approximately $500 million in the balance of the year.

We expect other net uses of parent company cash to be approximately $150 million in the second half of the year, and this includes the cash outflow for the Star HRG acquisition, but excludes any further share repurchase and any additional M&A activity.

Thus, we currently expect parent company liquidity to increase approximately $350 million from the June 30th level of $550 million, apart from any further share repurchase or additional M&A activity.

In summary, we continue to have a strong capital position and good financial flexibility.

I will now review the earnings outlook for the full year and third quarter of 2006.

For the full year of 2006, we are raising our estimate of consolidated adjusted income from operations by $40 million relative to the expectations we communicated last quarter.

Our updated range of $960 million to $1.02 billion reflects a stronger outlook in HealthCare, Group Insurance, International and Corporate.

I'll now discuss the components, starting with HealthCare.

For the full year 2006, we continue to expect organic membership growth of 1% to 2% in addition to the benefit of the Star HRG acquisition.

We expect this result to be driven by continued success in the regional market, as well as recent national account wins.

With respect to Star, we expect the acquisition to add approximately 200,000 members in the third quarter.

Our current estimate is that it will be neutral to earnings in 2006 and begin contributing in 2007.

We now expect full-year medical cost trends for our total book to be in the range of 7% to 7.5%, which is 50 basis points better than our previous estimates.

Our estimate for full-year 2006 HealthCare earnings is a range of $615 million to $665 million.

This range is $15 million higher than the estimate we provided in May to take into account our favorable prior-year claim development in the second quarter.

It assumes no additional prior-year development in the balance of the year.

Our full-year HealthCare outlook implies that earnings, excluding prior-year development, will increase in the second half of the year compared to the first half.

The three primary factors driving the improvement are a better guaranteed cost medical loss ratio, stronger Medicare Part D results and organic membership growth.

Now, relative to guaranteed cost, we expect the guaranteed cost MLR to improve in the second half of the year due to two factors.

First, we expect rate increases to exceed medical cost trends for the second-half renewals.

And second, we expect a modest deceleration in medical cost trend in the last six months of the year.

Early indications from the July 1 renewals are that our actions to improve guaranteed cost results are on track.

We continue to expect persistency of 75% for the guaranteed cost accounts that renew in the second half of the year.

July 1 persistency appears to be somewhat better than 75%, and the profitability profile for the renewing accounts was better than for the canceled accounts.

Now relative to Medicare Part D, we expect earnings in the second half of the year to be approximately $10 million to $15 million versus the loss of $11 million in the first quarter and a breakeven result in the second quarter.

With respect to membership, we expect to see earnings benefit from the 2% to 3% organic growth in the second half.

We also expect experience-rated earnings to continue to be strong in the second half of the year, although at a lower level than in the first half.

All-in, our full-year estimate for HealthCare earnings is now a range of $615 million to $655 million, excluding any potential prior-year claim development in the balance of the year.

Turning to our other reporting segments, we expect our remaining operations to contribute approximately $345 million to $355 million of earnings in 2006.

This is $25 million higher than our previous estimate.

Our revised estimate reflects our better-than-expected second-quarter results, partly offset by lower investment income in Corporate due to our recent repurchase activity.

So putting together all the pieces, we estimate that our full-year 2006 consolidated adjusted income from operations will be in a range of $960 million to $1.02 billion.

Our consolidated earnings per share will be affected by any share repurchase that occurs in future periods.

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 activity.

On this basis, we have raised our estimate of full-year 2006 EPS by approximately 10% to a range of $8.30 to $8.80 per share.

This reflects the outlook for increased earnings and the benefit of share repurchase activity since May.

Turning now to the third quarter of 2006, we currently expect consolidated adjusted income from operations of $225 million to $245 million.

Third quarter HealthCare earnings are estimated to be in the range of $155 million to $165 million.

We expect the balance of our reporting segments to contribute approximately $70 million to $80 million of earnings.

And excluding the impact of future share repurchase, our estimated third quarter 2006 EPS is in a range of $2 to $2.20 a share.

For the recap, our consolidated second-quarter earnings were above our expectations, reflecting solid results in HealthCare and a strong performance in Group Insurance and International, as well as favorable Corporate results.

With that I will turn it over to David.

David?

Thanks, Mike, and good morning, everyone.

I'd like to open my comments this morning by reinforcing the remarks made by Mike and Ed.

CIGNA HealthCare is on target to meet our growth and earnings goals for 2006.

We are also well-positioned for success in 2007, and we are earning recognition as a leader in consumer-directed healthcare.

With that context, I plan to highlight five critical areas where we continue to make meaningful progress.

They are membership, fundamental operating capabilities, emerging markets, our value proposition and our people.

First membership, our medical membership totaled 9 million at midyear, which was consistent with our expectations and essentially unchanged from first quarter.

We are on track for net growth of 1% to 2% for full-year 2006.

And that result excludes the membership added through our recent acquisition of Star HRG, which I will discuss in a few minutes.

Moreover, we anticipate that our consumer-directed health plan membership will triple year over year, a growth rate that outperforms the overall industry results.

Our earliest estimate of July membership results gives us reason to expect a strong performance through the rest of this year in both our regional and national account segments, fueled by strong membership retention and sales execution.

In the regional segment, our membership at the end of the second quarter increased by 5% over year-end 2005.

This reflects improved retention, solid sales efforts on a strong pipeline and an improving close ratio.

Our full-year expectations of growth in this segment remain in the mid to upper single digit range.

In National Accounts, membership at the end of the second quarter is in line with our expectations.

As we discussed on prior calls, we expect to see additional sales traction for the second half of 2006 effective dates.

We're also seeing strong retention results on our existing book, with a 500 basis point increase in persistency rates, from 86% to 91% for full-year 2006 versus 2005.

Now the 2007 National Accounts selling season is well underway and we continue to gain ground.

On January 2007, National Account new business pipeline is up significantly from what it was a year ago, reflecting both increases in RFPs and higher average case size.

It is also important to note that less of our business is going out to bid for 2007.

While the National Accounts season is not yet complete, we have experienced exciting success already in terms of early case wins.

Based on these leading indicators, we currently expect to see further improvement in our persistency rates in 2007 as well as stronger sales results.

Relative to the regional segment, it's obviously too early for January results, but we continue to see good progress in the second half of 2006 and we expect that progress to continue into 2007.

I'll now turn to my second topic, operating fundamentals.

Our progress with membership is a direct result of improvement in fundamentals of our business and the strength of our value proposition.

Our capabilities in consumerism and health advocacy are gaining recognition and generating positive momentum.

Let me provide some further insight regarding the operating fundamentals;

I plan to touch on three -- pricing discipline, service, contracting and network management.

First, pricing in the marketplace remains very competitive, but it is not irrational.

We are getting the rate increases we need while achieving expected persistency levels.

We are pleased with the progress of our renewal strategy for our guaranteed cost book of business, where we are achieving our targeted rate increases while delivering expected persistency levels.

As Mike mentioned, this outcome will improve our risk earnings in the second half of 2006.

Now to my second point.

We clearly recognize the importance of having service excellence as part of our fundamental capabilities.

On May 30th, we were delighted to announce that CIGNA HealthCare was the first national health carrier to be recognized for call center customer satisfaction excellence under the JD Power and Associates certified call center program.

This distinction acknowledges the strong commitment by CIGNA HealthCare to provide an outstanding customer service experience for our members.

This is also an important affirmation of the progress we are making to becoming a trusted adviser for our members.

The third business fundamental I will comment on is network and contracting.

In addition to the very good progress we have made with organic network expansion and competitive positioning, we continue to make strategic acquisitions and alliances to enhance our provider network and gaining meaningful presence in targeted markets quickly and cost effectively.

This strategy has yielded strong results, and I'll provide a few examples of the many.

First, our acquisition of Managed Care Consultants a year ago brought us a competitive provider network with more than 3600 physicians, 31 hospitals and an array of ancillary providers.

This expansion has helped us both meet the needs of our existing Nevada-based customers, but attract new ones in this exciting growth market.

We can attribute several significant January 2007 account wins directly to our acquisition of MCC.

Second, our affiliation with Health Alliance Plans, where we offer national, open-access products in midsize and large employers with the sites in Michigan and other states, was a key success factor in closing a prestigious automotive account for January 2007.

Third, our alliance with Tuft's Health Plan in New England has been instrumental in helping to secure important business, including a prominent regional banking client, for January 2007.

And finally, our alliance with HealthPartners in Minnesota, while just recently completed, has also directly resulted in sales success for 2007.

As these examples convey, our strategy is proving effective and we're pleased with our results to date.

Having said that, we are continuing to pursue additional opportunities to further enhance our network footprint.

This brings me to the third area I'd like to highlight this morning, emerging markets.

To sharpen our focus here, we recently established a new emerging market segment where we will develop and managed nontraditional and emerging business opportunities that hold the greatest growth potential for us.

In addition to our network alliances, one of the businesses that is managed through the emerging market segment is our recent acquisition of Star HRG.

Star HRG is a leader in low-cost medical, pharmacy, dental, vision, and employee assistance programs for the voluntary group health market.

With more than 1000 corporate clients and approximately 200,000 members, Star HRG provides us with the immediate market-leading capabilities in a market that has substantial long-term growth potential.

Our near-term focus is to coordinate and combine sales efforts and leverage best practices across the operations.

We are targeting select sales opportunities for early 2007, and anticipate increasing momentum in the second half of 2007 and in 2008 as we bring healthcare solutions to previously uninsured members of the population.

Looking forward, we will continue to drive targeted expansion in the emerging market space.

I will now turn to my fourth topic, our value proposition.

CIGNA is dedicated to improving the health and well-being of our members, while lowering cost for employers.

We do this by delivering effective care through consumer-focused solutions, health advocacy and information.

We implement this approach through a wide range of programs and service offerings, all designed to enhance our members' health.

For example, we've long since been advocates for quality and cost transparency, and today we are a leader in developing tools in delivering that transparency.

To date, we have focused on providing resources to help consumers understand the value they may expect from a service, understand alternative services that may be available, and to support navigation where appropriate of the healthcare provider landscape.

Our portfolio of industry-leading clinical quality and cost transparency capabilities enables our members to make informed decisions relative to pharmacy pricing, physician quality and efficiency, hospital quality and efficiency, as well as a variety of dental procedures.

One of our latest additions in this area is a new online tool that provides effectiveness data for 15 outpatient surgical procedures.

The second new tool compares the relative costs of three high-tech radiology services.

Now initially available only on a pilot basis in two markets, we are already logging over 2000 hits a day to these sites.

These tools will be expanded nationally prior to the end of this year.

We are also leaders in developing health advocacy and wellness coaching programs to help individuals lead healthier lives, while helping employers manage costs and productivity.

For example, we have two new coaching programs set for implementation this year.

The first is our oncology condition management program, which helps to facilitate prevention and early diagnosis for members, as well as provide personalized case management for those undergoing cancer treatment.

This program also provides ongoing support for those undergoing maintenance regimens or who have recently completed their treatment.

The second program is our healthy pregnancies/healthy babies program, which aims to minimize complications and premature births, which cost employers 15 times as much as full-term deliveries, not to mention the untold costs, both emotional and financial, that is created for the families.

Employers that use CIGNA's programs realize substantial savings versus the average medical costs associated with these targeted conditions.

For example, more than 5% for asthma, 8% for diabetes, almost 15% for low back pain and about 10% for heart disease.

And we're so confident with the returns to these programs that we include each of them for a fully-insured membership.

This is driven in part because our health advocacy participants typically have higher-than-average compliance that measures necessary to provide the prevented the onset or worsening of these chronic conditions.

So quality goes up and costs come down.

The result is better overall quality in healthcare, as evidenced by the fact that CIGNA has scored higher on average than our key national competitors in many heated effectiveness of care measures, better than our other national carriers in the majority of key measures of prevention and chronic care for four years in a row.

Now perhaps the ultimate proof that CIGNA's value proposition delivers what it promises comes from our nationwide case study of first-time users of the CIGNA ChoiceFund consumer-directed programs.

Through both the six-month study I referenced in February and our nearly completed analysis with the 12-month data, our results show that CIGNA ChoiceFund improves quality and cost outcomes.

Total medical costs for CIGNA ChoiceFund members declined year over year and were 12% to 16% lower than costs for those enrolled in traditional plans, with lower costs noted in inpatient, outpatient and professional services.

Pharmacy costs increased slightly, but were substantially lower than those for traditional plan members.

Generic utilization increased and CIGNA ChoiceFund members demonstrated increased compliance of medications that manage chronic conditions.

And ChoiceFund members are actively engaged in managing their own health.

Preventive care visits increased over prior year and were significantly higher than for members in traditional plans.

We believe our value proposition positions us for growth in key market segments through the rest of this year and in 2007.

We expect to leverage our capabilities to win greater market share from mid and smaller-tier players.

I'd note that these smaller regional and local benefit providers, as well as third party administrators, collectively provide benefits for almost half of the nation's total commercial population today.

Now let me turn to my fifth and final topic, our people.

All of this would not be possible without the right people.

As a health services company, we win by having the best talent in the industry.

And to that end, CIGNA continues to retain, attract and invest in outstanding talent.

Let me give you three varied examples from the last few months, which are all in addition to the tremendous success we've had over the last 15 months attracting proven leaders to join CIGNA.

First, we recently named Matt Manders, a proven CIGNA executive with an impressive track record of customer relationships and business results, as the overall leader for our Employer segments, which includes national, middle and small segment businesses.

Second, more than 1000 of our market-facing personnel recently completed upgrade skill training, with a focus in consumer-directed solution capabilities, and the keys to success for members and employers to realize the true value of these solutions.

Third, we graduated the first class of sales talent from our comprehensive sales force mastery initiative.

As the breadth of these actions illustrates, we are committed to enhancing the power of the competitive advantage afforded to us by our people.

So in sum, we continue to make exciting progress in membership, fundamental operating capabilities, our value proposition, expanding our markets and most importantly, our people.

This progress positions us better than ever to deliver the industry's best solution that results in improved health, better quality of life and lower costs for our members and more productive employees who generate lower costs for employers.

My team is extremely proud of the partners we've made in the first top of 2006, and we are excited about the prospects through the remainder of 2006 and the outlook for 2007.

With that, I will turn it back to Ed.

Thanks, David.

I went to reemphasize a couple of David's points.

First, the pricing environment, while very competitive, is not irrational.

Second, we are winning business from our competitors based on our increasingly differentiated product and service capabilities.

These points, combined with continued solid execution of the fundamentals, give us confidence in our ability to profitably grow our business.

Now before we respond to your questions, I want to share with you a few thoughts on our longer-term growth strategy and our vision of the future of the healthcare sector.

Our long-term growth strategy focuses on the following major areas.

First, our primary focus for growth will remain the employer-sponsored healthcare arena.

The ability to take market share, particularly from the local and regional healthcare competitors and third party administrators, is real and offers us significant opportunities for growth.

We expect to realize significant improvement in our National Accounts business in 2007 based on the positive early signs for the January 1 renewal period.

In addition, we will look to further expand our business with existing healthcare customers by selling them more of our broad array of specialty healthcare products and services.

And this includes our award-winning disease management and health advocacy programs.

We expect to continue to expand our presence in the small employer, Taft-Hartley and government markets, each of which is seeing good growth today.

We expect our regional market segment overall to achieve attractive growth this year and, importantly, growth will occur in each of our specific geographic regions.

We are actively developing healthcare solutions to address the senior population, with a particular emphasis on the fastest-growing segment, which is the 55 to 64 age cohort.

Within that group, we are especially focused on providing products and services to the employer-sponsored non-Medicare eligible seniors, and we've written several new accounts in this area this year.

As we noted, we recently completed our acquisition of Star HRG, a leading provider of low-cost health plans for hourly and part-time workers, which extends our line of healthcare offerings into the individual and voluntary markets.

We are also developing new capabilities to address the emerging need for other voluntary health coverages that complement our strong employer group position.

And finally, we will also continue to grow our Group and International businesses while maintaining their competitively strong margins.

In summary, I believe that our opportunities for profitable organic growth are significant and will be achieved through solid execution of the fundamentals as well as continued product and service innovation.

I'll now spend a few minutes discussing our vision for the future of the healthcare industry, where we believe consumerism will be the prime catalyst for growth.

Consumerism will dramatically change the way healthcare services are delivered.

And in order for healthcare payers to be successful in this new marketplace, they must be able to provide the consumer with the tools necessary to make informed decisions about their healthcare.

Successful payers must also become trusted advisers for their members through proactive outreach and health coaching.

We are making significant investments to ensure we are uniquely positioned to capitalize on this market shift, and we are taking a holistic approach to consumerism which focuses on providing integrated solutions to our customers.

These integrated solutions are achieved through the interaction of health advocacy and clinical quality, as well as the use of actionable information.

These elements are the cornerstone of CIGNA's differentiated value proposition.

We also believe that integrated solutions will allow us to deepen existing relationships with our customers and ultimately lead to greater persistency and enhanced margins.

In closing, our second-quarter consolidated results were strong and exceeded our expectations.

Our HealthCare results were solid and we expect additional improvement in the second half of 2006.

Overall, we remain confident in our ability to effectively execute on our 2006 priorities to achieve our full-year earnings and membership goals and to position our Company for profitable growth in 2007.

Now this concludes our prepared remarks and now we'd be glad to take your questions.

(OPERATOR INSTRUCTIONS) John Rex with Bear Stearns.

Good morning.

I was wondering if you could speak a little more specifically to the yields you achieved on your July renewing business, maybe in terms of what your expectation for the full second half and how that compares to the yields you were seeing in the first half, of course relating specifically to the guaranteed cost business.

And then kind of as a follow-on to that, is your '07 pricing strategy for that business targeting still improved underwriting margins in that piece?

That is, you would expect pricing to exceed your expected cost trend.

John, it's Mike.

Good morning.

Regarding the yields that were seeing thus far for the second half of the year, the first point I would make is the exact yield that we end up yielding, if you will, for the second half of the year will depend upon the exact mix of accounts and numbers that renew.

So I think probably the more meaningful thing to look at for the second half of the year is the fact that we expect yields to be 1 to 2 points better than medical cost trends.

And the early signs for third quarter, which you specifically asked about, are consistent with that expectation, that we are seeing at this point high single-digit yields on the third-quarter accounts, approximately 2 points better than the expected trend.

And that is obviously meaningfully better than we saw in the first half of the year.

In terms of 2007, it's a little bit early to give you real specific guidance.

But at this point, we do expect that our medical loss ratio will be better in 2007 as compared to 2006.

We're just not ready to give you a specific number yet.

Okay, great.

And could you just describe what resulted in the deceleration in cost during this quarter -- maybe kind of talk to the components?

Yes, John.

The deceleration that we're seeing in medical costs can be looked at in two different ways.

First of all, on a rolling 12-month basis for the total book of business, the medical cost trend is approximately 7%, which is better than what we had experienced on a rolling 12 basis a quarter ago.

And we're now expecting the calendar year 2006 trend for the total book to be approximately 7% to 7.5%; that's improved 50 basis points from our previous expectation.

The improvement in the outlook is driven primarily by our continuing success in moving more of our book of business to our more effective clinical management programs.

And so in terms of components, that would show up primarily in inpatient and outpatient.

Do you have the specific components there you could just give us?

Jon, do you want to cover that?

Yes, at a high level, the components of the 7% to 7.5% range are as follows -- inpatient, high single digits; outpatient 7% to 9%; and professional and pharmacy, both in the mid single digits.

Great, thank you.

Matthew Borsch with Goldman Sachs.

Thank you.

You intimated at this, but I wanted to ask on National Accounts for 2007, are you expecting that that enrollment segment will be up going into next year?

And can you just touch on -- I know that the RFPs that are coming into you are up significantly from the year before.

What do you think the environment looks like in terms of account switching relative to recent years?

Matthew, it's David.

So I will address the outlook.

As you might recall, we will give you specific numerical guidance in the third quarter, but let me speak to the '07 outlook.

First, from a retention standpoint, as I mentioned in my prepared remarks, our retention results in 2006 improved by about 500 basis points.

We are very pleased with that moving to 91%.

Based upon the percent of our book of business out to bid as well as the performance there, we expect to see further improvement there, although more modest of a step function than we saw going from the 86 to 91.

That is point one.

Two, the pipeline is up significantly both the quality, the size and the volume of it.

Our early wins are quite exciting.

The trends we are seeing are both wins in what I will call very significant CDHP plays, consumer-directed health plan plays, as well as traditional programs.

We're seeing success in broad geographies and, very importantly, were seeing success broadly in the employer sectors.

So going from the entertainment sector to financial services.

Last comment I would make, Matthew, to your question.

The buying behavior is very consistent with what we've laid out before.

First, focus on the fundamentals, the ability to prove a good total cost and good service proposition.

And then just an increased intensity on what we view as the differentiators, the broad consumerism capabilities and the health advocacy capabilities that really are winning the day, day-in, day-out, for the customers we're moving toward.

Ed?

David, the only thing I would add is, Matthew, I have spent a fair amount of time with senior executives here.

And what is very, very clear is while the fundamentals, as David pointed out, are extremely important, there is a clear shift here to CEOs being focused on how do I change behavior and how do I get improved health status for my population?

That is the only way I'm going to make a meaningful reduction in trend and the only way I'm going to get productivity up for my own workforce.

And what is quite obvious to us and what has supported some of the early successes that we've had is that our value proposition, particularly the strength of our clinical program and our ability to provide effective, actionable information to consumers to make smarter choices, is resonating very, very effectively and creating a significant amount of early success for us and we expect that to continue.

Great.

And if I could just ask a follow-up on that general topic.

One is if you could just touch on the Arizona opportunity you referred to earlier.

And also in Nevada, is it primarily self-insured employers in that market where you are picking up new accounts?

Matthew, David.

I'll take the point.

On the Arizona opportunity, I think you're specifically referencing the book of business acquisition that we have?

Is that correct?

I'll assume that.

So we have an opportunity that we've been quite public on to assume over time a book of business in a part of Arizona that we're quite excited about.

We have a strong position in Arizona and this further strengthens our position in a portion of Arizona.

You can redirect the question if I've missed that point.

Relative to Nevada, we viewed first and foremost Nevada as an exciting growth market for us; hence, why we have pursued a proprietary footprint there.

We are seeing success there now, obviously for 2007; it's primarily National Account wins so far.

That is ASO business, to the point.

But we see tremendous opportunity there in the regional segment which will transcend all funding mechanisms.

But the early wins are National Accounts, so they are essentially ASO opportunities.

And again, we see more opportunity down the road in the regional segment.

It's Mike.

Just one other add-on, Matthew, to your question.

The Arizona opportunity is worth 50,000 members to use.

Those 50,000 members, though, are not yet counted in our membership, in our stat supplement.

We will count then as they renew over to our paper.

Douglas Simpson with Merrill Lynch.

Michael, maybe this is a question for you -- wanted to wrap your comments about growth on the book around just health care costs, medical claims payable.

That line has been drifting for a while.

When should we expect that to start to turn back up?

I'm sorry, Doug.

What did you say has been drifting for a while?

The $740 million in HealthCare claims payable has just been -- I think it was down $10 million in the quarter, about $60 million year to date.

I'm with you.

I just didn't hear your words.

That is fine.

Yes, you're absolutely right.

We have seen a sequential decline and a decline since year end relative to the medical claims payable.

There are a couple of one-off things going on here on a six-month basis.

First, the one you are already aware of.

We have had year-to-date prior-year development worth $49 million pretax or $32 million after-tax.

So obviously that is impacting the roll forward.

The piece that you may not be aware of, we have paid out a significant amount to the state prescription drug program that canceled as of December 31st.

And as a result of that account canceling and the amount that we've paid out, the reserve has come down just for that account by $56 million.

There is no impact on the earnings on that payout, but it does factor into the roll forward.

If you net those two items out, the balance is actually increased for the six months this year.

And it's for the reasons that you were alluding to -- we have seen growth in our guaranteed cost membership; we also seen some trend.

And that has more than offset the enhancements that we've had in claim processing, as well as the favorable experience on experience-rated.

So again, a lot of different factors there.

But if you factor out the state prescription drug program and the prior-year development, it would actually be up.

Okay, and then maybe just as a follow-on, I think you talked about $1.3 of dividends for '06 up to the parent.

And you did show sequential uptick in cash flow.

Just wondering kind of the second half of a GAAP basis, should we expect GAAP cash flow to come more in line with that income or what are your thoughts there?

Well, first of all, as we've talked about before, we'd really urge you not to overweight the importance of the GAAP cash flow from our operations number.

We think the parent cash flow number is much more meaningful.

And the reason for us in particular is that cash flow from operations often includes one-off things that are nonearnings items, as well as items related to prior quarters.

So actually, just to give you some more specificity there, in second quarter as an example, Doug, we paid out $119 million in in-rate credit liabilities to experience-rated customers, and approximately 60% of that is to the state prescription drug program.

This is where experience-rated customers had favorable experience and we're returning that experience to them in cash.

So there is no earnings impact there.

I would point out that on the state prescription drug program, we still have a balance of $100 million in this rate credit liability that will be paid out in the future.

And the timing of exactly when we return that $100 million is not yet clear.

So I'd really like to avoid trying to give you a specific projection here for the remainder of the year.

But the point is, those kinds of items don't have an impact on earnings, they don't have an impact on parent company cash, and they're the kind of example of the one-offs that really drive me to urge you to use restraint in terms of evaluating that metric.

Scott Fidel with Deutsche Bank.

Thanks.

Good morning.

My first question just has to do with now in the National Accounts season what type of benefit buydown activity interest you're seeing from employers.

And maybe if you can help quantify what you expect the buydowns to look like on a percentage basis for 2007 relative to 2006.

Scott, this is Jon Rubin.

For 2007, it is really too early for us to give any specific commentary on benefits buydowns, as the final details of the benefit plans really play out over the next quarter or so.

At this point, I would not expect any meaningful change from what we're seeing in 2006, which at a high level is about 3% in benefit buydowns across our entire book.

Okay.

And then just relative to Part D and yet a slight tick-up in enrollments for the second quarter, but obviously not a huge amount of enrollment in that business.

Just interested in your thinking about the strategy for 2007 and whether you are looking to grow that business next year or really just focusing on maintaining some profitability there?

Scott, it's David.

I'll address the Part D question.

First, relative to Part D, our entry into Part D had a primary objective of making sure we had the solutions for our employer, customers first; and then secondarily entering the individual PDP space.

So in 2006 what we feel quite good about is the ability to consult with and facilitate all the subsidy needs of our employer-sponsored customers.

Those who wanted employer-sponsored PDP, we're able to facilitate that.

Secondly, a first step into the individual PDP program.

And as you noted, we saw a slight uptick in the second quarter.

Looking forward to 2007, we still see this as being a part of our business portfolio.

We see some growth opportunity here and we will continue to focus on ensuring that we serve the needs of the employer customers and then make another step forward in the individual PDP program.

Mr. Boorady with Citigroup.

Thanks.

Hopefully there is only one of me out there.

Kind of an unusual question, but stop loss insurance, can you characterize roughly how big is stop loss for you and how that business has been trending this year?

Sure, Charles, this is Mike.

Good morning.

First, we do have a significant stop loss book that covers our ASO and experience-rated customers.

So ballpark on an annualized premium basis, it's approximately 550 million and it shows up in the stat supplement under Other Medical premiums.

Now Charles, this is an important part of our value proposition, particularly to ASO and experience-rated customers.

And really what is key to making it work is strong medical management results as well as good underwriting.

In terms of how we're doing thus far this year, the loss ratios have been running in line with our expectations and in line with 2005.

And just as a point of clarity, we don't include that in our guaranteed cost medical loss ratio.

The guaranteed cost medical loss ratio is simply the ratio of medical cost to premiums for our 1.1 million fully-insured guaranteed cost members.

So it is not embedded in that number.

But overall, the stop loss -- back to the heart of your question -- stop loss is a good product for us and it's an important part of our portfolio, particularly for ASO and experience-rated customers.

And in the year where you're seeing -- you saw an increase in the guaranteed cost and loss ratio year-over-year, did you see a commensurate increase in the loss ratio for your stop loss?

We did not, Charles.

The stop loss loss ratio has been in line with 2005.

Have you seen unusual pricing activity by competitors?

For example, you see companies using low-priced stop loss as a way of luring in and winning group business.

Charles, the phenomenon you are describing is not a particularly new one.

I wouldn't -- there hasn't been a sea change in terms of the pricing dynamics for that market thus far in 2006.

Carl McDonald with CIBC.

Thanks.

It sounds like you're being more disciplined in pricing in the guaranteed cost book.

Should we expect a reduction in enrollment to reflect that or have you guys seen an improvement in the competitive environment relative to what you experienced earlier this year?

Carl, it's Mike.

I will start.

It's early to give you precise confidence around the overall pricing environment and the impact on persistency.

We are encouraged by the fact that our July 1 renewals have in fact been better than our expectation of 75% of persistency.

And at the same time, we have been able to secure average rate increases on those renewals in excess of the rate of trend.

I'd also point out, Carl, that consistent with our overall game plan there, the medical loss ratio in the cases that we've renewed has been better than those that have canceled.

So all that suggests that we're doing better than we had expected a quarter ago, and I think part of that is our stronger capabilities in the market and part of it is market conditions.

Mike, I would only add that the membership forecast that we talked about here this morning of 2% to 2%, exclusive of the Star HRG and Arizona acquisitions, incorporates our expectations relative to membership in the guaranteed cost area.

It looks like the operating expenses in the HealthCare segment are going to be sort of flattish to maybe down 20 million or so this year.

Do you agree with that assessment and can you give us any direction on the dollar spending, operating expenses in 2007?

Sure, Carl, it's Mike.

First, in terms of our expectations for HealthCare operating expenses for full year 2006, for my perspective, the most important line item that I'd suggest that you'd focus on is on page 8 of our stat supplement, what we're referring to as Other Health Care operating expenses.

So I would take out the expenses related to Part D, take out the expenses related to our disease management and other pharmacy growth initiatives.

So excluding that, which I think is a little bit of a different animal, we do expect at this point full-year HealthCare operating expenses to be down $100 million in '06 as compared to the comparable number in '05.

Now in terms of 2007, we're still looking at various budget options.

In 2006, for example we've actually increased our spending on enhancing our market-facing capabilities.

We've actually taken our technology budget for market-facing capabilities up from $100 million this year now to $150 million.

And that is still embedded in the year-over-year reduction that I just alluded to.

But the point is we're going to make some conscious decisions around the amount of money that we spend in market-facing capabilities as well as infrastructure.

And we're just not ready to lock into a 2007 number yet.

Now I still, as we've talked about before, we still expect the benefit of the additional productivity improvements in our service and technology organizations.

Just how it all plays out for 2007, we will wait and give you more specific guidance next quarter.

Bill Georges with JPMorgan.

Thanks, good morning.

I was wondering first of all if you could just size the price cost spread in the quarter.

I think last quarter you had talked about yields trailing cost trends by about 200 to 250 basis points.

What did you see in the second quarter?

Bill, it's Mike.

First of all, I'd urge you not to overweight the precision here.

Remember, the guaranteed cost book is a small book of business for us.

A very small portion of that book renews in second quarter, literally less than 15%.

So it a relatively small book and it's a relatively small group of accounts that you are talking about.

So on a year-to-date basis, which I think is the more meaningful number, the medical loss ratio has deteriorated excluding prior-year development by 270 basis points, six months of '06 to six months of '05, for all the reasons that we talked about last quarter.

Now, again, as we talked about earlier to John Rex's question, in the second half of the year we do expect that to improve.

We're pricing in excess of trend.

We're getting a better profitability mix in terms of our renewals.

So I would expect at this point that the medical loss ratio excluding prior-year development would come down to 87% for the full year.

So a better result in the second half.

Just a quick point of clarification on the 87% guidance; how does that compare to -- if I recall correctly in the first quarter was guidance of 86.5% on that metric.

Are you expecting a slight increase from what you guided to in 1Q?

Bill, it's Mike.

That is correct.

Again, I'd urge you not to overweight the precision here.

I mean 50 basis points on this book of business is not a significant amount of money.

Remember, it's only 1.1 million members.

On a year-to-date basis it's literally -- this book is 10% of our consolidated earnings, so it's not that big a deal.

I'd also emphasize, given the mix changes in this book of business, the MLR is still heavily estimated.

So I wouldn't overweight the importance of a 50 basis point swing.

Joe France with Banc of America.

Thank you.

Mike, I wanted to follow up on Charles' question earlier about the stop loss business.

I know it's not in your MLR, but could you just give us some idea of whether in general stop loss business tends to be higher MLR or a lower MLR than traditional commercial business?

Sure, Joe.

The short answer is significantly lower medical loss ratio for stop loss versus a traditional guaranteed cost business.

Our stop loss loss ratio right now is running in the 60s.

So again obviously, lower than the guaranteed cost.

And it doesn't require a whole lot of capital;

I assume it is significantly less than the traditional risk business?

I would characterize it, Joe, as in line with the amount of capital that we have backing our traditional guaranteed cost 1.1 million members.

Christine Arnold with Morgan Stanley.

Good morning.

I apologize if you already answered this; just let me know, because I had accidentally logged off.

What are your net gains for 2007 right now, recognizing there is still a lot to go versus the year ago in terms of gains versus losses, National Accounts?

Christine, it's David.

Good morning.

We have not laid out our net gains versus net losses.

So I'll give you a little bit of the color we did describe.

First, while our retention rates moved up significantly '05 to '06 --

I'm sorry.

I got all that.

Are you going to give any numbers with respect to --?

We will not give specific numbers until the third quarter.

Suffice to say we expect to see meaningful improvement from our 2006 performance to our 2007 performance, and we're happy with the net sales were seeing and the net retention we're seeing thus far.

Okay.

And in terms of the less experience-rated earnings second half versus first half, could you size that for us?

Sure, Christine, it's Mike.

At this point, we expect the second half of the year experience-rated earnings to be approximately 10 million below the first half of the year.

And both numbers exclude prior-year development.

Joshua Raskin with Lehman Brothers.

Thanks.

Quick question on the consumer-directed plans;

I think you mentioned it tripling in members.

I was wondering what the absolute number was on that.

And then just a follow-up on the cost trend.

It sounded like you are expecting a decline in the second half of the year, and I was wondering what the key drivers to that decline in the trend was?

Josh, David.

I'll take the first part of your question.

So relative to consumer-directed members, first this is the specific definition of HSA and HRA membership, which is a narrow definition in consumerism.

Absolute numbers we're seeing is 90,000 to 100,000 growing, pressing up against 300,000 members, again, for those two fund-based programs.

So I'm excluding FSA membership, I'm excluding high-deductible health membership; and it's pure HRA and HSA membership.

That is where the tripling comes in terms of the absolute growth, HRA and HSA.

I'll let Mike answer the second question.

Sure, Josh, regarding the cost trends, as we talked about, we are now expecting an additional 50 basis points of deceleration on the medical cost trends for the total book.

And the improvement is driven by the success that we've had in moving more of our book over to our more effective clinical management programs.

And as Jon Rubin talked about, that tends to show up in the inpatient and outpatient categories in particular.

In terms of the impact on our guaranteed cost results for the second half of the year, what we have factored into our estimates is a combination of rate increases in excess of trend, but also an expectation that we will get some benefit in terms of further deceleration in medical cost trends in guaranteed cost, because the accounts that we've renewed have had better claim experience than those that have canceled.

Which in effect will show up as specific -- our expectation is it will show up as specific deceleration of medical cost benefit to the guaranteed cost book.

Jon, did you want to add?

The only other thing I would add is we are expecting some moderation in pharmacy trend over the balance of the year as well, which is driven by a couple of major items.

One, the benefit of the patent expirations of Zocor and Zoloft.

And we've also implemented a PPI step-edit program in July which we expect will significantly increase the use of generic omeprozal over the balance of the year.

Thanks.

Justin Lake with UBS.

Thank you.

Just a couple of questions.

One in regards to cash flow to the parent.

I took notes for it, but I think you said $1.3 billion for '06?

That is correct, Justin.

Can you tell us how much of that is kind of the sustainable run rate versus some of the things you've been doing at the subsidiary level, kind of ring out some of those reserves?

Sure.

Just to be clear, we are still evaluating options there.

As we've talked about before, the upgrade to CG Life is important to us and we've got our normal rating agency meetings scheduled here over the next several months.

And we are still looking at the various moving parts here.

But to answer your question specifically, you can break down the 1.3 billion into three buckets.

First, remember, our adjusted income from operations this year we expect to be approximately $1 billion.

You can add to that approximately $100 million of after-tax realized gains on the book.

Again, we reap some of the benefits in our real estate portfolio in particular, and that has created realized capital gains,, which has also contributed to the stronger subdividends.

And then in addition, which I think gets at the heart of your question, we've extracted approximately $200 million of excess surplus from the subsidiaries.

And again, we're still evaluating options in terms of the overall surplus levels there going forward.

Okay, that is very helpful.

In regards to your second half outlook for National Accounts, maybe you can -- you had talked about five big wins, and I think it was a little over 50,000 lives, as far as gross adds.

Can you give us any update there as far as your July 1 starts, and can you tell us the net number as well, as far as what kind of net additions you have there.

Justin, it's David.

So relative to the second half of 2006, you are right, we've been very consistent that we expected to see some increasing traction in the second half of the year.

We've previously mentioned about five accounts; there's a few more than that and the membership is a bit higher than that.

So If you want to pin me down on a number, that 50 to 60 is more in the 70, 75,000 range.

What we expect to see in National Accounts in the second half of the year, because of the real good execution of our National Account team, is a net improvement in the National Account membership, second half versus first half, of 1 to 2 points, which is factored into our outlook of 1% to 2% overall growth for the portfolio for 2006.

Ed Kroll with Cowen & Company Investments.

Good morning.

I think it was Ed that made some comments about future growth opportunities on the government side.

Is that pretty much Medicare/senior related or do you have any new thoughts on the Medicaid privatization of the states, which seems to have a fair amount of traction at this time?

Ed, I did make that comment and it's not related to what I will call public support programs.

It's more -- it's a segment that we have established that looks to state and local governments, as well as education.

So it is, for example, earlier this year we talked about the state of Tennessee, where we wrote a major portion of that program.

What we are seeing is that our medical management and the types of programs and delivery we can make in that area is becoming increasingly attractive to government entities, to school boards, to local municipalities, who are seeing the same kinds of cost pressures that commercial employers are seeing.

So the value proposition as compared to two or three years ago is much more attractive to those particular entities.

Ed, it's David.

So to add onto that, specifically that segment in our focused targets, city, county, state and higher education opportunities.

And we're seeing some real good traction there, as Ed said.

The aspects of our value proposition are more attractive there.

Last comment I will make here is, as you noted, many states are kind of stepping back and reconsidering the structure of their Medicaid programs.

There's potential opportunity for us down the road as we look toward some of our solutions there.

But to date, our focus is really in the city, county, state and higher education.

Got it.

And those government entities basically as employers, is that --?

That is correct.

Got it.

Okay and then not to belabor it, but then opportunities down the road, would that be more your consumer-focused perhaps reaching out to some uninsured people in certain states, if those states do things like Massachusetts is doing, trying to move people that have the resources to purchase coverage?

Ed, it's David.

So for example, several opportunities that could exist here depending on where the state programs are moving.

One is support with clinical programs, as some states are considering wrapping clinical programs around their offerings.

Two, as you might know, we launched a brand new set of capabilities known as Custom Benefit Builder.

That creates a lot of modularity, and some of the more innovative states are asking questions in terms of whether or not they could use some of that to differentiate some of their programs.

And then three, we see potential extension of what the industry knows today as voluntary capabilities.

It's a broader product portfolio that could potentially play in against some of the state programs.

A lot of these [captures] are to be written, but good opportunity going forward.

The only other thing I wanted to add on the government point is -- and David referred to it in his prepared remarks I believe -- is that the government accounting requirements have changed, and retirees are a much more significant issue than they have been.

We have a real focus on that 55 to 64 age cohort, and we see good opportunities within the government sector there as well.

So it's not just as an employer; it's also as covering retiree benefits, particularly early retirees.

Paul Newsome with AG Edwards.

Thank you and congratulations on the quarter.

I wanted to ask a quick question on the Group Disability and Life business.

The mortality results have been favorable for quite some time.

And are you at the point now that you've had about, I think, at least six quarters where you may think about changing your assumptions as to what the underlying mortality would be, and so you would ratchet up the earnings to the point where you wouldn't have -- the current level would be considered your normal level of results?

Paul, it's Mike.

First of all, our Group Disability and Life operation has continued to post real good results; we're very proud of that operation's results.

Now I would point out to your specific question, if you look at the underlying premium growth in that book of business, more than 100% of it has come from disability.

And that has been a conscious area of focus for us; we have been consciously, particularly our middle market disability business, because that is where our capabilities are the strongest and that is where our value proposition plays the best.

In terms of Life Insurance results, the premium is down approximately 4% year to date.

Margins have been slightly lower than a year ago, if you exclude the reserve adjustment that we had this quarter.

And that doesn't surprise me, given that the mortality was running usually well last year, and it's not surprising that the mortality has been more normalized in our Life Insurance book this year.

But in terms of the overall prospects for the Group Insurance business, again, excluding the non-recurring items that I talked about on the call, we really expect a continuation through the remainder of the year, again adjusting out for that non-recurring item.

Thank you.

Ladies and gentlemen, this concludes CIGNA's second-quarter 2006 results review.

CIGNA investor relations will be available to respond to additional question shortly.

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

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

The passcode for both numbers is 970-9409.

Thank you for participating.

We will now disconnect.