信諾集團 (CI) 2007 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by for CIGNA's third quarter 2007 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 the 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'll begin by turning the conference over to Mr.

  • Ted Detrick.

  • Please go ahead, Mr.

  • Detrick.

  • - VP Investor Relations

  • 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 Health Care, and Jon Rubin, CIGNA Health Care's Financial Officer.

  • In our remarks today, Ed will begin by discussing highlights of CIGNA's third quarter and year-to-date results.

  • He will also make some comments regarding our growth prospects for 2008.

  • Mike will then review the financial details of the quarter, and provide the financial outlook for the full-year 2007 and for 2008.

  • David will discuss our medical membership results and outlook.

  • He will also make some comments regarding our consumer engagement capabilities, which is improving the health and well being of our members.

  • Ed will then conclude our remarks by briefly commenting on health care reform as well as the opportunities on which we are focused to deliver profitable growth for our Health Care 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, the special items being unusual charges or gains, as the principle 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 was filed this morning on Form 8-K with the Securities and Exchange Commission and is also 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.

  • Now before turning the call over to Ed, I will cover a few items pertaining to our third quarter results and disclosures.

  • In CIGNA's earnings release we have included a $23 million after-tax benefit related to the completion of an IRS examination.

  • This benefit is reported as a special item and therefore is excluded from adjusted incomes from operations in today's discussion of both our third quarter results and our full-year 2007 outlook.

  • In addition, CIGNA's third quarter results include after-tax income from discontinued operations of $2 million related to the completion of that IRS examination.

  • Now, regarding our disclosures, I would note that in 2006 the Financial Accounting Standards Board issued Statement No.

  • 157 entitled, "Fair Value Measurement" which clarifies the measurement of and expands the disclosures regarding the fair valuing of certain assets and liabilities.

  • Companies are required to implement Statement No.

  • 157 effective with the first quarter of 2008.

  • Based on our current evaluation, we believe that Statement 157 changes the assumptions we use to fair value the assets and liabilities of our guaranteed minimum income benefits business within our run-off reinsurance segment.

  • The initial implementation of Statement 157 is expected to have an adverse impact on CIGNA's results, and this impact may be material to consolidated results of operations but we do not expect it to materially impact CIGNA's financial condition.

  • Also, because changes in the fair value of these assets and liabilities will be recorded in net income, CIGNA's future results for the run-off reinsurance segment may become more volatile subsequent to the adoption of this Statement.

  • Lastly, I would also note that in the earnings outlook for 2008, which Mike Bell will discuss in a few minutes, our outlook excludes any potential volatility related to adoption of this Statement.

  • With that, I'll turn it over to Ed.

  • - Chairman, CEO

  • Thanks, Ted.

  • Good morning, everyone.

  • I'm going to start today's call with a few brief comments on our third quarter results and I will then discuss the highlights of our 2008 outlook.

  • Mike will provide more details on the third quarter results and our 2007 and 2008 outlook.

  • After that, David will comment on our medical membership results and review the 2007 and 2008 membership outlook.

  • He will also discuss how the strength of our consumer engagement capabilities, which are improving the health and well being of our members, have helped up achieve very good membership growth in 2007 and why we believe we are well positioned to successfully achieve our 2008 growth goals.

  • In my closing remarks, I will comment on the health care reform debate and also briefly identify the opportunities we are pursuing to profitably grow our business for the long-term.

  • Overall, our consolidated third quarter results were strong and above our expectations.

  • The results reflect growth in Health Care earnings and strong contributions from our other health and related benefits businesses.

  • Third quarter adjusted income from operations was $323 million, or $1.14 per share, and represented 37% earnings per share growth relative to the third quarter of 2006.

  • Year-to-date adjusted income from operations was $866 million, or $2.98 per share, and represented 30% earnings per share growth relative to 2006.

  • On a year-to-date basis, Health Care earnings excluding prior year development, have increased by 11%, or $50 million compared to the same period last year.

  • The Health Care results reflect aggregate medical membership growth, disciplined execution of our guaranteed cost renewal pricing actions and strong contributions from our specialty businesses.

  • Year-to-date Health Care membership, excluding members gained from the Sagamore acquisition, has grown approximately 5.1%.

  • Our year-to-date 2007 Health Care results demonstrate disciplined pricing which we plan to maintain in 2008.

  • Our Group Disability and Life and International businesses continue to deliver strong results.

  • Year-to-date, our Group Disability and Life business reported earnings of $191 million, with premium and fees growing year-over-year at an attractive rate of 13%.

  • Our after-tax margin in this business continues to be very strong.

  • Our International business has reported year-to-date earnings of $129 million on 17% growth in premium and fees.

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

  • We also continue to be active with share repurchase.

  • To date in 2007, we have repurchased approximately 24 million shares, or $1.16 billion.

  • To reiterate, our third quarter consolidated results were strong and we have increased our full-year 2007 consolidated earnings outlook.

  • Now, regarding our 2008 outlook, we expect full-year membership to grow organically by 3 to 5%.

  • We expect approximately 2 to 3% growth will be achieved in the first quarter.

  • As Mike will discuss in detail, we expect Health Care earnings, excluding prior year development, to grow in the low double digits in 2008, similar to the earnings growth we are achieving year-to-date in 2007.

  • This earnings growth, coupled with a second consecutive year of meaningful membership growth, validates that our capabilities related to the consumer engagement area are resonating well in the marketplace.

  • We expect continued good earnings and revenue growth in our Group and International businesses in 2008.

  • Overall, we are pleased with our prospects for membership and earnings growth across our ongoing businesses in 2008.

  • Mike will now cover the specifics of the third quarter as well as our outlook for 2007 and 2008.

  • Mike?

  • - CFO

  • Thanks, Ted.

  • Good morning, everyone.

  • In my remarks today I'll review CIGNA's third quarter results, also discuss our outlook for full-year 2007 and for 2008.

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

  • This is also the basis on which I'll provide our earnings outlook.

  • Our third quarter earnings were $323 million, or $1.14 a share compared to $268 million, or $0.83 a share in 2006.

  • I'll now review each of the segment results beginning with Health Care.

  • Third quarter Health Care earnings were $173 million.

  • This result included after-tax favorable prior year claim development of $5 million.

  • Excluding prior year development, year-to-date Health Care earnings are $50 million higher than the same period in 2006.

  • Aggregate membership growth and lower per member operating expenses contributed to our earnings growth, as did execution of our guaranteed cost pricing actions over the last 12 months.

  • The year-to-date results also include earnings growth from our specialty businesses.

  • These factors were partly offset by lower mail order pharmacy volume and a $6 million after-tax charge related to the CMS disease management pilot.

  • Health Care membership through nine months was 5.1% higher than at year-end 2006, excluding the 357,000 members related to the Sagamore acquisition.

  • In the third quarter, experience rated membership grew sequentially while guaranteed cost membership declined.

  • The latter reflected our focus on maintaining pricing discipline in an environment which continued to be quite competitive.

  • We currently expect full-year membership growth to be 5 to 5.5%, excluding Sagamore.

  • The upper end of this range is modestly lower than our previous expectation, reflecting the guaranteed cost competitive environment.

  • Our year-to-date guaranteed cost MCR was 84.3%, excluding favorable prior year development and excluding the results from our voluntary business.

  • This result is 210 basis points better than the comparable 2006 MCR, reflecting strong execution of our renewal pricing actions.

  • The guaranteed cost MCR improved in the third quarter relative to the first half of the year and we expect to achieve a full-year guaranteed cost MCR, excluding prior year claim development and voluntary, of 84 to 84.25%.

  • Health Care premiums and fees through nine months were up 11% versus 2006 reflecting medical membership growth, rate increases and growth in Medicare Part D.

  • Relative to operating expenses, our results through nine months continued to reflect productivity improvements, partially offset by investments that we're making in our growth initiatives.

  • Overall, excluding prior year claim development, our year-to-date Health Care earnings are $50 million, or 11% higher than in 2006.

  • Now I'll discuss the results in our other segments.

  • Third quarter 2007 earnings in the Disability and Life segment were $63 million.

  • This result reflected favorable mortality in Group Life and Accident, effective operating expense management and competitively attractive margins in Disability.

  • This segment's third quarter earnings included a $3 million favorable after-tax impact of reserve studies.

  • In our International segment, third quarter 2007 earnings of $47 million reflected competitively strong margins and continued growth in our life, accident and health and expatriate benefits businesses.

  • Group and International continue to be important contributors to our consolidated results.

  • Earnings in our remaining operations including run-off reinsurance, other operations and corporate were $40 million for the quarter.

  • Run-off reinsurance earned $39 million and this result reflected favorable items which we do not expect to recur, including settlement activity and favorable claim experience on run-off personal accident business.

  • Before discussing our earnings outlook for the full-year, I'll comment briefly on our current capital position and our 2007 outlook.

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

  • At the end of the third quarter, cash and short-term investments at the parent were approximately $450 million.

  • We continued our share repurchase program in third quarter, repurchasing 4.6 million shares of our stock for approximately $235 million.

  • To date in 2007, we've repurchased approximately 24 million shares for $1.16 billion.

  • With respect to the outlook, we continue to expect full-year 2007 subsidiary dividends to be approximately $1 billion.

  • Our parent has received approximately $750 million of subsidiary dividends through September.

  • We expect other sources and uses of parent company cash for the fourth quarter to sum to a net source of approximately $100 million.

  • And this estimate excludes any further share repurchase and any additional M&A activity.

  • We continue to have a long-term target for parent cash of approximately $250 million.

  • Our capital management priorities remain consistent with our prior communications.

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

  • 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.

  • 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.

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

  • I'll now review our earnings outlook.

  • For full-year 2007 we currently expect consolidated adjusted income from operations of $1.1 billion to $1.16 billion.

  • This range is higher than the estimates we provided in August, primarily reflecting the strength of our third quarter results.

  • I'll discuss the components starting with Health Care.

  • Our estimate for full-year 2007 Health Care earnings is a range of 670 to $710 million.

  • The upper end of this range is modestly lower than the estimate we provided in August and this reflects the facts that I noted in discussing our third quarter results.

  • Specifically, the lower mail order pharmacy volume, the charge related to the CMS disease management pilot and lower guaranteed cost membership are expected to be partly offset by a higher outlook for specialty earnings including stop loss.

  • With respect to other key factors in the Health Care outlook, we expect medical cost trend for our total book of business to be in a range of 6.5 to 7.5% for the full-year.

  • This is unchanged from the estimates we provided in August.

  • We expect guaranteed cost pricing yields to exceed trend and we expect the guaranteed cost MCR, excluding prior year claim development in the voluntary business to be in the range of 84% to 84.25% for the full-year 2007.

  • All-in, we currently project full-year 2007 Health Care earnings to be in a range of 670 to $710 million.

  • Turning to the balance of our segments, we expect our remaining operations to contribute approximately 430 to $450 million of earnings for the full-year 2007.

  • This is higher than the outlook we provided in August, reflecting the strong third quarter results.

  • For the full-year, we continue to expect high single-digit earnings growth in Group.

  • Our full-year earnings growth expectation in International is now approximately 20%, which is higher than our previous estimates.

  • Putting together all the pieces, we estimate that our full-year 2007 consolidated adjusted income from operations will be in a range of $1.1 billion to $1.16 billion.

  • As I've discussed before, we do not predict the amount or pace of repurchase and our estimates for earnings and EPS do not reflect the impact of any further repurchase activity.

  • On this basis, our estimate of full-year EPS for 2007 is a range of $3.80 to $4 a share.

  • Turning now to the full-year 2008 outlook, we currently expect consolidated adjusted income from operations in a range of $1.155 billion, to $1.215 billion.

  • I'll discuss the components starting with Health Care.

  • As Ed noted, we currently expect that our medical membership will increase by 2 to 3% in the first quarter and 3 to 5% for the full-year 2008.

  • We expect over 90% of the first quarter membership growth to be in ASO.

  • We currently expect medical cost trend for our total book of business to be in the range of 6.5 to 7.5% in 2008.

  • We expect guaranteed cost pricing yields to modestly exceed trend and we estimate that the full-year guaranteed cost MCR, excluding prior year claim development in our voluntary business, will be approximately 83%.

  • Our estimate for full-year 2008 Health Care earnings is a range of 740 to $780 million.

  • This range is $80 million, or 12% higher than our projected earnings range for 2007, excluding prior year development.

  • Our expected earnings growth in 2008 reflects several key factors.

  • First, we expect that revenue growth, including the impact of increased membership and higher penetration of our specialty products, will deliver approximately 50 to $70 million of additional after-tax earnings.

  • Second, we expect guaranteed cost pricing actions in excess of medical trend to improve the MCR by 100 to 125 basis points.

  • And we expect this improvement to contribute approximately 25 to $35 million of after-tax earnings growth.

  • Third, we expect to invest approximately $10 million net on an after-tax basis in our segment expansion initiatives in the small group, individual and seniors markets.

  • And while dilutive in 2008, we expect these initiatives to be accretive to earnings starting in 2009.

  • And finally, we expect 2008 experience rated margins to be approximately in line with full-year 2007.

  • So in total, we expect 2008 Health Care earnings to be in a range of 740 to $780 million.

  • Turning to the balance of our segments.

  • We expect our remaining operations to contribute approximately 415 to $435 million of earnings in 2008.

  • We expect our Group, Disability and Life and International businesses to continue to grow revenue while maintaining strong margins.

  • Specifically, we expect low to mid single-digit earnings growth in Group and low double-digit earnings growth in International.

  • Earnings for the balance of our operations, which include run-off businesses in the parent, are expected to be lower year-over-year, mainly due to the absence of the 2007 non-recurring favorability in run-off reinsurance.

  • I would reinforce Ted's comment that our 2008 outlook does not include potential additional volatility resulting from the implementation of the new fair value accounting standard as it relates to run-off reinsurance.

  • Putting together all the pieces, we estimate that our full-year 2008 consolidated adjusted income from operations will be in a range of 1.155 to $1.215 billion.

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

  • On this basis, our estimate of full-year EPS for 2008 is a range of $4 to $4.20 a share.

  • Now, in thinking about our expected EPS growth it's useful to consider the impact of the favorability in the run-off reinsurance business which is included in our 2007 outlook and which we do not expect to recur in 2008.

  • In addition, our 2008 EPS estimates represent a compound annual growth rate of approximately 14% relative to 2006.

  • A relative to capital management, we expect to maintain strong dividend paying ability in our subsidiaries in 2008.

  • As we previously stated, we expect to have extracted most of the excess liquidity from our subsidiaries by the end of 2007.

  • And in 2008 we would expect subsidiary dividends to be at a more normal level of approximately 75% of consolidated earnings.

  • We'll provide more specifics relative to our 2008 capital management expectations in February.

  • For the recap, assuming no further repurchase, our current outlook is for full-year 2007 EPS to be in a range of $3.80 to $4 and our EPS estimate for 2008 is a range of $4 to $4.20.

  • Our outlook for 2008 reflects attractive earnings growth in Health Care and continued strong performance in our Group and International businesses.

  • With that, I'll turn it over to David.

  • - President, CIGNA Health Care

  • Thanks, Mike.

  • Good morning, everyone.

  • As you've already heard this morning, we continue to expect CIGNA Health Care to achieve strong earnings growth for 2007.

  • In addition, we anticipate continued membership and earnings growth in 2008, while also making investments in important growth areas.

  • Later this month at our investor day we will discuss our long-term growth strategy in some detail.

  • Today my remarks will be focused in three areas.

  • First, membership growth for 2007 and 2008.

  • Second, what's driving our success.

  • And third, our strategy which focuses on health advocacy and consumer engagement.

  • Our medical membership grew the third quarter by approximately 67,000 members.

  • Year-to-date that's 5.1% growth excluding the acquisition of Sagamore.

  • We saw growth in both the regional and national segments in the third quarter.

  • Our expected membership growth for full-year 2007 is currently at 5 to 5.5%, which reflects national segment growth of over 3%, and regional segment growth of over 6%.

  • Turning to 2008, during the first quarter we expect total membership growth of 2 to 3%.

  • For full-year 2008 we expect 3 to 5% increase in membership.

  • In the national segment we're able to win because of the strength of our value proposition, which includes our ability to consult with and provide appropriate cost effective solutions for employers, and engage our members to improve their health and well being.

  • Turning to the regional segment, we expect membership growth in a range of 2 to 3% for the first quarter of 2008.

  • We are winning in this segment primarily based on cost and access, the value of our consultative employer sales and client management capabilities and our health advocacy programs.

  • Combining both segments, we expect most of our first quarter growth to be in ASO funding arrangements.

  • Relative to pricing, the market continues to be very competitive, particularly for guaranteed cost programs.

  • Additionally, across all funding arrangements, the buying decisions are occurring later this year versus prior years.

  • Now let's move to another key factor in our business, medical cost trend.

  • Year-to-date 2007 net medical cost trend for our book is in line with expectations.

  • For full-year 2007, our trend will be in the 6.5 to 7.5% range.

  • We expect the overall 2008 trend to be in a range of 6.5 to 7.5%, consistent with our '07 outlook.

  • Now I'll turn to my final topic for today, our strategy which focuses on health advocacy and consumer engagement.

  • This is a topic I'm particularly passionate about.

  • It encompasses what's beginning to work today and the trend for the future of our industry.

  • It's why we talk about moving from traditional insurance view which pays for sick care, to becoming the leading health services company where we engage members to improve their health.

  • While some have questioned the value of consumer directed plans, our experience is that appropriately designed consumer directed programs with health advocacy and consumer engagement programs do generate real and positive impact.

  • We believe our approach is different and our results are demonstrable.

  • In fact, our combined programs have delivered a meaningful reduction in medical costs over two years.

  • Last month we announced the results of our two-year study of actual health claim experience of more than 430,000 CIGNA consumer directed and traditional HMO and PPO members.

  • The medical cost trend for the first year of consumer directed members was more than 12% lower than traditional plans.

  • The comparable second year trend was 5% lower than traditional plans.

  • More importantly, the use of preventative care increased and medication compliance improved.

  • Prevention and compliance went up, yet costs decreased.

  • This is clear evidence that smart consumption of health care can reduce costs while improving health.

  • The key is effective plan designs that result in total cost reduction without reducing care or shifting cost to members.

  • To support these plan designs there's a growing interest and need for products and services that engage, educate, and enable individuals to improve their health and well being.

  • The national segment employers have been early adopters.

  • Having said that, interest is now increasing across all segments.

  • Today we are committed to investing in product, service and technology capabilities to support this growing need.

  • The effectiveness of our approach to consumer engagement is a reflection of the depth and quality of our clinical programs where we have received national recognition.

  • In September the National Committee for Quality Assurance for the sixth consecutive year showed CIGNA Health Care scores to be higher than both quality compass national average and our main competitor's averages in the majority of preventive and chronic care measures used by NCQA in accrediting health plans.

  • All of our 23 NCQA accredited HMO and point of service health plans have excellent accreditation status.

  • In addition, our health advocacy programs include targeted outreach to members who haven't received preventative care where established clinical guidelines exist.

  • Examples include outreach to over 500,000 women for pap tests or mammography's, outreach to nearly 300,000 families for important childhood and adolescent immunizations, and our colorectal cancer screening initiative that we've expanded to include over 320,000 members in 13 markets.

  • Finally, not only do we use health risk assessments and biometric screenings, but our exclusive use of the University of Michigan's trend management algorithms allows us to identify, engage and coach the healthy at-risk segment of the population.

  • This is significant.

  • It means we can now begin to intervene before members get sick and help them reduce key risks and ultimately avoid illness.

  • So these are some of the ways we are distinguishing ourselves, through effective plan designs delivered by our consultative sales professionals, deep knowledge of employers and the individuals we serve, and help advocacy capabilities that truly improve health and well being.

  • With these capabilities we are seeking to expand our segments and thereby increase the number of people we serve.

  • Last quarter we discussed the importance of our expansion into the senior and retiree segment.

  • I want to provide a bit more detail on some of our expansion initiatives.

  • As you know, the baby boomers represent a massive demographic and it's a population that's very different than previous retirees.

  • Their desires are different, thus their needs are different than previous generations.

  • The communication and rules of engagement are different and our value proposition lines up well to fulfill those needs.

  • We're launching a Medicare private fee for service plan for 2008 on a national basis for employer groups and in 13 states for individuals.

  • These programs will complement our continued growth of our Medicare Part D program with national individual and employer coverage.

  • Additionally, we will expand our offering of Medicare Advantage plans in Arizona to include both private fee for service and Medicare HMO plans for January 2008.

  • So to wrap up, we're pleased with our 2007 results.

  • We maintained good pricing and underwriting focus and strong medical cost management that has supported over 5% net organic membership growth.

  • Our value proposition is strong and the results delivered by our health advocacy and consumer engagement capabilities, evidenced by increased prevention, increased clinical compliance and declining medical cost trends, are very real.

  • Before I hand the session back over to Ed, let me just say that I look forward to talking with you in person at our investor day later this month.

  • With that, I'll turn the call back to Ed.

  • - Chairman, CEO

  • Thanks, David.

  • I want to underscore several points.

  • First, our consolidated results for the third quarter were strong and reflect growth in Health Care earnings as well as strong contribution from our Disability and Life and International businesses.

  • Second, the earnings in membership growth we are achieving in our Health Care business in 2007 validates the strength of our value proposition in the marketplace.

  • Third, we will make significant investments in segment expansions in 2008, which will drive future profitable growth and enable us to achieve our mission to become the leading health and related benefits company.

  • Lastly, I believe we have strong market position that we can leverage to achieve our membership and earnings growth goals for 2008.

  • I'll now make a few remarks on the health care industry from a public policy perspective.

  • As you know, the U.S.

  • health care environment has been challenging in recent years and will likely remain so for some time.

  • CIGNA is actively invested both in the debate around the future of our health care system, as well as pursuit of new and enhanced capabilities required to succeed going forward.

  • At CIGNA, we believe that every American should have access to affordable, quality health care.

  • We also believe that a coordinated public and private partnership of all health care stakeholders is critical to creating a value driven market which will expand coverage to the uninsured and improve the health of all Americans.

  • It is important to note that current health care reform proposals of both parties are based on maintaining the employer-based health insurance system which we view as positive.

  • At CIGNA, we are preparing for the evolution of health care in the U.S., and we believe this evolution will create opportunities to support long-term growth for our Health Care business.

  • Our focus for Health Care growth will continue to be the employer-sponsored arena where we will seek to grow membership through ongoing introduction of innovative products and services and effective consumer engagement.

  • In addition, we are adding capabilities and resources to expand into segments where we see significant growth opportunity, some of which may be enabled by health care reform, such as the small group, individual seniors and voluntary segment.

  • We expect to capitalize on opportunities to complement our core medical product with specialty disease management and disability and life products.

  • In summary, our prospects are attractive to organically grow our business on a sustained basis.

  • While we are focused on pursuing these growth opportunities, we will also consider supplementing our organic growth with acquisitions, should we find opportunities that meet our criteria.

  • Overall, we expect our ongoing businesses to grow earnings in 2008 by approximately 10%, excluding prior year development and that's consistent with our long-term strategic goals.

  • We will provide details related to our expectations for 2008 and our long-term growth goals at our annual investor day in New York City on November 16th.

  • In closing, our consolidated results are strong and we expect this momentum to continue into 2008 and beyond.

  • I'm confident that CIGNA has strong market position in each of our health and related benefits businesses and that we will leverage these positions to continue to create value for the benefit of our customers and shareholders.

  • This concludes our prepared remarks.

  • We would be glad to take your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) One moment, please, for the first question.

  • We'll take our first question from Scott Fidel at Deutsche Bank.

  • - Analyst

  • First question, just on the 2008 guidance.

  • Maybe if you could help us think a bit about the [glide] passed on reserve development expectations for next year.

  • And then, Mike, you did touch a bit on share buybacks but how you think the activity might trend out because, obviously, those are two pieces that have come in higher than the guidance in the last couple of years.

  • - CFO

  • Sure, Scott.

  • It's Mike.

  • In terms of the 2008 guidance, you know, I walked through in the prepared remarks the main drivers of the Health Care earnings growth year-over-year and it's really a combination of revenue growth and further improvement in the guaranteed cost MCR.

  • In terms of your particular question around prior period, or prior year development, I would point out that prior year development has been relatively immaterial in 2007, for all the reasons that we've talked about.

  • I mean, we haven't surprised that it's been lower than prior years because the drivers of the prior year development, the higher prior year development in the prior years no longer really applied to this year, particularly the fact that medical cost trends have stabilized as opposed to declining, our membership has generally stabilized, there's shrinkage in membership tends to drive favorable prior year development.

  • Given that our membership is now much more stable, that's a contributor to the lower level and also our operational improvements have also stabilized.

  • So for all of those reasons we're not surprised that it's lower in 2007.

  • There's nothing explicit in our expectations for 2008 around prior year development but if I had to speculate, I would suspect that prior year development will probably also be immaterial in 2008.

  • In terms of your question on buyback, Scott, I think you know that we don't comment on share buyback repurchase activity just as a matter of policy.

  • - Analyst

  • Okay.

  • And then just as a follow-up, maybe if could you talk about just on the sources and uses of cash expectations for 2008, any particular items that you would spike out there.

  • And then just a bit more topical, actually, this morning UnitedHealth announced that they're going to acquire Fiserv's health business.

  • Just your thoughts around on how that deal might impact the ASO environment and basically how much you compete with Fiserv's health at this point.

  • - CFO

  • I'll deal with the parent company cash question.

  • First, in terms of 2008, I'd like to wait until a combination of the investor day and the year-end analyst call to be real specific in terms of 2008.

  • But what I would suggest at this point is that our 2008 expectations for subsidiary dividends are at this point in line with our longer-term expectation that approximately 75% of our consolidated earnings should translate into subsidiary dividend from the operating companies to the parent, which means that the remaining one quarter of the earnings would essentially entail retained earnings in the operating subs to support their growth.

  • In 2008 we expect to be pretty close to that.

  • There's some other moving parts.

  • We expect to extract some additional capital from the operating subsidiaries that Group Insurance operates in, but again, there's some other moving parts that I'll give you some more detail on on a future call.

  • - President, CIGNA Health Care

  • Scott, it's David.

  • On the Fiserv question I'll start and see if Ed wants to add to that.

  • Not speculate specifically on why they purchased Fiserv but more broadly, don't generally see them in the mainstream business model today.

  • Two, there's continued demand for lower cost or more efficient ASO-type offerings and leaner ASO-type offerings, so you'll see some activities from certain competitors around that, whether they are shared admin, buying small PPAs and trying to leverage those capabilities.

  • And third comment is, as Ed, Mike, myself have previously indicated, we expect to see further pressure on the second tier players as they compete to make sure their value propositions are competitive.

  • And I think you see some of that playing out here.

  • Ed?

  • - Chairman, CEO

  • Yes, David, I think that's right.

  • I don't know that we see any material impact to our business.

  • I think as you suggested, some of the direction we've seen, some of the areas we've taken advantage of, I think other people have recognized as well and that's likely the motivation.

  • But I think we feel very well positioned to continue to meet the needs of that particular part of the market.

  • - Analyst

  • And on the fee competition in the ASO side, has that becoming, would you say, more from the majors or have the second tier players been competitive on fees essentially to try to retain some of their membership?

  • - President, CIGNA Health Care

  • Scott, David.

  • I would just say both my prepared remarks and in general, the competitive pricing environment is pretty meaningful right now.

  • The fee-only competition's pretty meaningful and back to our strategy, it's why we're so passionate about having a very diversified specialty portfolio.

  • Because if you're solely competing on a ASO-only service proposition, that's a very difficult standalone service proposition to compete against and we believe you'll continue to see pressure there.

  • So for us continuing to expand our specialty capabilities is an integral part of our business model.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Fidel.

  • Next we'll go to Matthew Borsch with Goldman Sachs.

  • - Analyst

  • Yes, hi.

  • Good morning.

  • Sorry if you covered this in your remarks, but on the decline in commercial risk enrollment, was that a, can you just comment on what was driving that?

  • - CFO

  • Matt, it's Mike.

  • Generally, what's driving that is the competitive pricing environment and the fact that we are committed to maintaining our pricing discipline.

  • Now, obviously overall our aggregate membership increased sequentially, as we talked about, we expect our aggregate membership to continue to increase in 2008.

  • - Analyst

  • Got it.

  • Okay.

  • So it was not, you wouldn't characterize it as a couple of large accounts, was it more sort of erosion across the board in markets where you're maintaining pricing discipline?

  • - CFO

  • Yes, the latter, Matt, as opposed to any particular sizable accounts.

  • - Analyst

  • Okay.

  • Got it.

  • And just coming back to the topic of Fiserv, the acquisition there and I'm going to comment a little bit just on a competitor here in a couple respects.

  • The question comes us with these acquisitions, well, why did they do it and why didn't you do it, you know, that's sort of my first question.

  • And the second is, you know, on capital deployment, one of your competitors has talked about going to a substantially higher debt to capital level to fund a greater level of share repurchase activity.

  • Just wondering where you might be in terms of contemplating perhaps a similar move now or in the future and if you could just remind us where your target debt-to-cap is relative to where you are now.

  • Thanks.

  • - CFO

  • Sure, Matt.

  • It's Mike.

  • Let me deal with your second question first.

  • In terms of debt leverage, which we measure as debt to total cap.

  • At the end of third quarter, we were at 28% and there's been no change in our targeted range of 20 to 30% during normal times.

  • So in fact, absent significant acquisitions, we expect to be reasonably close to that 25% level.

  • Now, in the event of an acquisition, we could conceivably go higher than the 30% on an interim basis, but we're quite serious about our long-term plan to be close to that midpoint of that 20 to 30%.

  • - Analyst

  • And why is that?

  • - CFO

  • Main reason, Matt, is to protect our ratings.

  • It's very important to us that we continue to have operating subsidiary ratings, particularly CG Life, in that strong A level and we believe that's important because it's important to our national account customers.

  • And based on our discussions with the rating agencies, we think the combination of the strong results and the strong capital in our operating subsidiaries, coupled with that kind of parent company leverage and parent company cash with a long-term target of $250 million, that that combination of elements puts us where we need to be in terms of the ratings.

  • - Analyst

  • Got it.

  • - Chairman, CEO

  • Matthew, it's Ed.

  • In terms of M&A and what and what not, as Mike said, we do constantly review a broad range of opportunities.

  • The criteria we use to evaluate their attractiveness to us really hasn't changed.

  • We've been very consistent and said we'll consider things that are strategic, that add real value to us.

  • Sagamore, for example, is a good example of that.

  • We've said that they have to be economically attractive to shareholders and then we also want to be able to integrate those acquisitions without distracting us from the good, organic growth that we've been generating in the operations.

  • So as a practical matter, when an acquisition meets those criteria, we're much more interested than not.

  • - Analyst

  • Okay.

  • Got it.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Borsch.

  • We'll take a question from John Rex at Bear Stearns.

  • - Analyst

  • Just first a question on your fourth quarter guidance for the Health Care segment.

  • It's a rather wide earnings range of $40 million on a midpoint $180 million business.

  • It just implies you have really limited visibility on your 4Q and I'm curious what's driving your hesitancy on your guidance for that segment for the fourth quarter '07?

  • - CFO

  • John, it's Mike.

  • I would ask you not to read in too much to that particular range.

  • I think it is fair to say that it's probably wider than what we've done in the past but that was not an intent to signal something in particular.

  • I would say that we are in the process of evaluating a number of issues related to operating expenses and in particular, getting ready for the growth that we expect in 2008.

  • So there's a little more volatility in that area than the normal, but I would ask you not to over react to that.

  • - Analyst

  • I mean, so I mean, was that just -- we really shouldn't think about a $40 million range then?

  • - CFO

  • I'll stick with the range that we've put out there.

  • But my point is that wasn't a conscious attempt to signal a significant amount of uncertainty.

  • - Analyst

  • Okay.

  • And then on the experience rated business, I think in your comments you said that you didn't expect it to improve and now I know it's been, clearly, '07 performance has been well below '06 because that was kind of a record year of experience rated, but even, you know, we're still kind of lagging the results that you used to get out of experience rated business.

  • And is that kind of a signal then that it's kind of reset the way we should think about earnings contribution in this segment is a bit reset from what maybe used to get over the last number of years?

  • - CFO

  • John, just to be clear, the 2007 and 2008 margins in this business are in fact in line with what we've earned over a long period of time.

  • Now it is fair that 2005 and 2006 earnings in this block of business was particularly strong and essentially represented a recovery from the challenge results we had in those areas in 2003 and 2004.

  • But just to be clear, we feel real good about the earnings that we're generating in experience rated.

  • We feel good about the fact that we're on a path for top line growth in 2008.

  • You know, combination of the expected continued membership growth as well as premium growth on the existing accounts.

  • And so our expectation is to have top line growth in the high single digits next year for experience rated, and the fact you couple that with all-in margins consistent with what we expect to generate here for full-year 2007, and that means good earnings growth in this book of business so we feel good about the results.

  • - Analyst

  • So the margins in '07 and '06 are kind always looked to me like '06 margins were considerably higher than in '07 on experience rated but that's a mistake?

  • - CFO

  • No, John, let me just say it again.

  • You're absolutely right.

  • The 2006 margins and earnings, for that matter, were stronger in experience rated than what we expect to achieve in 2007.

  • But the point is that 2007 and 2008 we expect the all-in margins to be approximately equivalent between the two periods, which means good earnings growth since we expect top line growth in that business.

  • - Analyst

  • Okay.

  • And then just one last thing.

  • Just kind the implied share count in your guidance, it would look like you're kind of using your full-year '07 weighted average shares, which would be up from where you were as you reported the 3Q.

  • Is that just kind of conservatism in the guidance or is there some reason we should actually expect the share count should trend up from where you were at 3Q '07?

  • - CFO

  • Well, John, a couple things.

  • First of all, remember that in the implied share counts in our guidance, there's no repurchase activity in any future period.

  • In addition, just because of the common stock equivalents, depending upon what happens to our stock price, we do have some expansion in common stock equivalents modeled over the period.

  • Obviously, you're free to use your own estimates in that area.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Rex.

  • Next we'll go to Charles Boorady at Citi.

  • - Analyst

  • Thanks.

  • Good morning.

  • First just a housekeeping question on how you calculate your adjusted EPS.

  • In the second quarter you excluded a $0.19 charge for reinsurance and in this quarter you are including a favorable reserve development in that same segment.

  • Is that inconsistent or can you explain that?

  • - CFO

  • Sure, Charles.

  • In terms of special items, we have been consistent that any single special item greater than $20 million, either plus or minus, that we expect to be non-recurring and want to talk about as a separate item and urge you not to think about it in terms of the ongoing earnings of the business, we've been very consistent with that.

  • In this particular quarter, there are a number of non-recurring items in reinsurance that led to the positive result in the quarter and it's a good economic result, it's just not expected to be recurring.

  • The point is that none of those individually summed up to more than $20 million after-tax and that's why we didn't break it out.

  • Once again, you're free to do whatever you want in terms of your own models, obviously.

  • - Analyst

  • Okay.

  • Okay.

  • That helps.

  • And on International, you know, at this growth rate it's going to, if it continued, it would eclipse Life and Disability next year and it would eclipse Health Care in three-and-a-half years.

  • Now I know you're not expecting this growth rate to continue, but maybe you could talk a little bit more about the opportunities to grow in terms of how big you see it in the next, say, three to five years and are you able to invest enough capital to keep it growing or are you constraining its growth by not allocating enough capital to that subsidiary?

  • And then also related to capital allocation for growth, you talked about pretty significant potential expansion in Medicare Advantage.

  • I know you're not giving us a target on enrollment, per se, but how much capital do you foresee needing to support the growth in MA next year?

  • I assume you'll be growing in some new markets.

  • - Chairman, CEO

  • Charles, it's Ed.

  • Let me start on International.

  • We are very pleased with the growth we are seeing there.

  • And I would remind you that this is a reasonably capital-efficient business, meaning it tends to be high return, low capital intensity business.

  • And so we very much like not only the earnings growth but the actual return on the capital we do have invested there.

  • In terms of the outlook, we talked about, again, double-digit growth next year.

  • I think we feel that in the markets that we are particularly focused on, and that includes Asia, what you're seeing there is increased penetration and a growing middle class that our products really appeal to.

  • So I think we feel we have ample opportunity to continue to grow this business.

  • We have a very tight focus on the kinds of business that we are writing.

  • And as you also know, we have continued to pare back in markets where we see less growth opportunity so we can maintain that focus.

  • For example in much of Latin America, we've really pulled back there because the growth opportunities are just now where near as significant as they are in Asia.

  • So I think we feel very, very good about results to date, but maybe more importantly, continue to believe that we can see good growth in that block of business and that that growth will be very capital-efficient.

  • - Analyst

  • What's your market share, roughly, Ed, just so we get a sense for how much the untapped opportunity is for you still?

  • - Chairman, CEO

  • Oh, gee, that's really hard to measure, Charles, for a couple of reasons.

  • One, remember the lines of business that we are in are truly kind of specialty-oriented and I'm not sure I can give you a good sense for market share.

  • I think what I can tell say to you is, in terms of penetrating that middle class that is growing in places like Korea and Taiwan and China and Indonesia and Thailand, there is lots of opportunity to continue to grow these businesses.

  • These are products that that population really looks at as income replacement, essentially, in places where there isn't much of a social safety net.

  • So if you look at hospital cash products or critical illness products, personal accident products, as the middle class grows they're looking for some security, these products are a fairly low-cost way to provide some of that and so there's continued good growth traction.

  • - Analyst

  • Do you think you're setting your targets too low or do you have internal targets that are higher than what you're telling us for that segment next year?

  • - Chairman, CEO

  • Well, I think you can assume that given the kinds of returns we're generating on this business, we continue to push pretty hard.

  • And I would also point to things like remember, we made an acquisition in Thailand, I guess, last year.

  • That was to position us more effectively in a market where we think there's going to be ongoing growth.

  • In China, for example, as recently as probably 18 months ago, we were only licensed to do business in, say, two regions.

  • Today, we are at six with probably two more to come in the next year.

  • So we have pretty aggressive goals, Charles, to continue to grow this business.

  • - Analyst

  • That's great.

  • And then just on capital for MA expansion, is that going to be a significant use of capital in '08?

  • - President, CIGNA Health Care

  • Charles, good morning.

  • It's David.

  • I would say it is not a significant use of capital in '08 and specifically, the Medicare expansion in '08 is a continuation of our build.

  • So we will grow PDP but we will launch the private fee for service focused on accommodating the needs of our employer sponsored.

  • I think looking beyond that, we hope that that's a good problem to have with the growth we expect over the long-term and we'll dimension a little of that at our investor day.

  • But for 2008 do not look at it as a material consumption of capital.

  • - Analyst

  • All right.

  • Great.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Boorady.

  • Next we'll take a question from Greg Nersessian at Credit Suisse.

  • - Analyst

  • Good morning.

  • Just a quick question on the membership expectations for next year.

  • Thank you for the breakout in terms of your one-one expectations.

  • But then beyond that, just wondering if you could give us a sense for directionally how you expect the guaranteed costs to track next year and then also initial expectations on the MA enrollment given your commentary on your activity there?

  • - President, CIGNA Health Care

  • Greg, it's David.

  • Relative to growth, again, we'll start the year, knock on wood, with a good number, 2 to 3% growth, balanced very nicely, again, between our national and our regional segment.

  • We expect that the makeup of it is, as we indicated in the opening remarks, is primarily ASO, so de minimus flat or slightly down on the guaranteed cost side of the house, mostly ASO.

  • And as Mike mentioned, we're seeing some good emerging traction on the experience rated.

  • As we look to the full-year, we'd expect consistent with prior full-years, the regional segment will take over and carry the remainder of the growth pattern.

  • So national segment will stay approximately in pattern to the one-one number and we'll see better growth throughout the latter part of the year in the regional segment.

  • And as a result, we expect to see some guaranteed cost sales growth in the later part of the year and continuation on the experience rated results.

  • Relative to the Med Advantage, as I mentioned before, it's really a build year for us so we expect modest overall contribution to the private fee for service members.

  • Not a material driver of our overall membership and maybe you can thing about it in the 10 to 20,000 life range for us during the full-year as we build out the capabilities.

  • Possible to exceed that with some large off one-one wins but we're not banking on that at this point in time.

  • - Analyst

  • Okay.

  • Great.

  • Very helpful.

  • My then second question was, could you just go through the components of trend?

  • A couple of the other companies in the sector had mentioned that they had seen their inpatient trends tracking lower.

  • Wondering if you're seeing that as well?

  • And then just generally, if you could go through the rest of the components also.

  • - CIGNA Health Care Financial Officer

  • Greg, it's Jon.

  • Relative to the components of the 6.5 to 7.5% that's built into our expectation for 2008, first, I'll provide a high level component range at this point.

  • Inpatient and outpatient, so facility overall, we'd expect to trend it at high single digits and that's relatively consistent with what we've seen this year, probably a little bit better.

  • Professional, low to mid single digits and pharmacy, mid-to high single digits.

  • Now by our year-end call we should have better visibility on the book of business changes that impact a net medical cost trend so we'll be prepared to provide more specificity on trend components at that time.

  • - Analyst

  • Okay.

  • Great.

  • And if I could sneak in one more.

  • The guaranteed cost or, I'm sorry, the commercial HMO yields looked lower this quarter, sequentially, and the growth rate was lower.

  • Is that a function of mix shift or the timing of enrollment that either came on or lapsed in the quarter?

  • Could you touch on that as well?

  • - CFO

  • Sure, Greg, it's Mike.

  • It's all of the above that you described, particularly, the mix shift piece.

  • And I would really urge you to, as you thing about our guaranteed cost block, to think about the commercial HMO and the open access products essentially in a single bucket since what we've seen over the last several years is the market increasingly more interested in open access products as opposed to the traditional HMO.

  • And so I'd suggest that you look at those in aggregate.

  • - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Thank you Mr.

  • Nersessian.

  • We'll move next to Josh Raskin at Lehman Brothers.

  • - Analyst

  • Couple quick ones.

  • I just want to make sure I heard you right, Mike, when you said that the aggregate run-off reinsurance development was less than $20 million.

  • I'm sorry, was that in aggregate it was less than 20 or there were no individual items over 20?

  • - CFO

  • The latter, Josh.

  • There were no individual items less than 20 in aggregate.

  • Run-off reinsurance reported earnings of $39 million for the quarter and that was a combination of a couple of different settlements and then some favorable run-out in personal accident.

  • - Analyst

  • Is there a good run rate for what you would think run-off reinsurance should be at?

  • - CFO

  • At this point, Josh, what we're modeling is approximately breakeven in 2008.

  • There's a fair amount of uncertainty in this business and, you know, that coupled with the FAS 157 fair value, however that ends up playing out, will add volatility.

  • But at this point, I would suggest to you that breakeven is a reasonable expectation.

  • - Analyst

  • Got you.

  • And then just secondly, the Medicare health support pilot, it sounds like you guys took the $6 million charge.

  • What's the status of that pilot?

  • Are you guys, is that just sort of not meeting the end point so not recognized in the revenue or is this sort of a more sort of termination of the project?

  • - CIGNA Health Care Financial Officer

  • Josh, it's Jon.

  • Relative to the MHS pilot and the charge, the charge really reflects the recent quarter's performance as currently evaluated by CMS, which is below our expectations and inconsistent with previous quarters.

  • This has led to our revising our forecast related to the performance guarantee liability for the three-year program.

  • As a result, we've taken the charges you noted of approximately $6 million in the third quarter.

  • Now we have been notified by CMS that during the process of evaluating the performance methodology as recommended by a consultant, RTI, in their July report to Congress.

  • But given the uncertainty, we took this appropriate charge in the quarter.

  • But I would note, this is independent of any future decisions that we may make regarding continuation of the program.

  • - Analyst

  • Okay.

  • So it still sounds like you guys are relatively on track, just had a blip in the third quarter and took down some of the revenues there.

  • - CIGNA Health Care Financial Officer

  • That's correct.

  • - Analyst

  • Okay.

  • And then last question, if I could sneak one in.

  • The PDP membership based on the bidding and the benchmarks that have come out, where do you think your PDP ends up next year?

  • - CFO

  • Josh, it's Mike.

  • I would suggest at this point that a range of 325 to 350,000 members is reasonable.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Mr.

  • Raskin, thank you.

  • Next we'll go to Christine Arnold at Morgan Stanley.

  • - Analyst

  • Good morning.

  • A couple of questions.

  • First, on your operating expenses.

  • How much improvement in operating expenses have you built in, recognizing you did say that you'd be making some investments in capabilities?

  • - CFO

  • Christine, it's Mike.

  • First, in terms of productivity, what we're modeling for 2008 right now is operating expenses on a PMPM basis, excluding the segment expansion, so excluding what we're investing in individual small group and seniors, we're expecting PMPMs on that basis to be up modestly, very modestly, 0 to 1% in 2008 versus full-year 2007.

  • So the implicit assumption underneath that is that the productivity gains that we expect to achieve as part of our multi-year plan will essentially be offset by increasing expenses to support market-facing capabilities, so including the higher technology expenses.

  • And really, Christine, what this reflects is the fact that we're cognizant of the need to balance earnings growth with additional investments to support our long-term market position and at this point we think the current 2008 plan strikes that to balance.

  • But this is certainly something that we're going to continue to evaluate throughout the year.

  • We'll also provide some additional detail to you at the investor day.

  • - Analyst

  • So am I thinking about this wrongly, because I'm kind of thinking that you guys have targeted kind of down 2 to 3% even with some of your market-facing investments the last couple years and you have 99-point something or another percent of membership on in-state platforms.

  • So I was hoping to see more operating expense leverage in '08.

  • Am I thinking about the historical targets wrong?

  • - CFO

  • Christine, I think you're thinking about it right.

  • I think what will be useful will be having some more discussion here in two weeks at our investor day on some of those investments that we're making in market-facing capabilities as well as the net productivity gains that we continue to expect to get in 2009 and 2010 and we will update those.

  • We continue to believe there is favorability to be captured there on a net basis in '09 and '10 and we will update those estimates for you in two weeks.

  • - Analyst

  • So this is s a timing issue.

  • We're going to see more of the benefit of the transformation in '09, '10 and then more spending in '08.

  • Is that fair?

  • - CFO

  • I think it's fair to say that there are timing issues.

  • Again, I'd rather not go into more detail until we can get give it greater context.

  • - Analyst

  • Okay.

  • And is it fair to say that you expect guaranteed cost enrollment to be down full-year '08 or do you expect that to kind of dip entering the year and then rise after that?

  • - CFO

  • Christine, it's Mike.

  • At this point we certainly expect some modest downward pressure in first quarter of '08.

  • In terms of the remainder of the year, it's hard to gauge since it will depend in large part to the competitive pricing environment.

  • I mean, we do expect to maintain our pricing discipline over the remainder of the year.

  • We have built in some modest increases 2Q through 4Q at this point into the model, but again, that's one that's very much in a state of flux, given the pricing environment.

  • - Analyst

  • So you're more dedicated to the MLR target than to the enrollment.

  • - CFO

  • Yes, I think that's a fair comment.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you, Ms.

  • Arnold.

  • And our last question will come from Justin Lake at UBS.

  • - Analyst

  • Thanks.

  • Just wanted to flush out a little bit more around this competitive pricing that you're discussing.

  • Can you give us any detail in regards to, you know, are there specific segments of your book that are getting competed against?

  • Is it in specific geographies?

  • Is it not for profits or for profits that are taking business?

  • Is there anything you could tell us that might give us some help in understanding what's going on?

  • - President, CIGNA Health Care

  • Justin, good morning, it's David.

  • A few color comments.

  • First, we see it very pronounced in the guaranteed cost segment and (inaudible) look at my competitor's results, most competitors are demonstrating de minimus guaranteed cost growth.

  • So see it in guaranteed cost, first off.

  • Secondly, by way of a region of the country, if we were to point to a region of the country, just to give you a little bit more flavor, the Southeast and the southern most Southeast, so Georgia and on through Florida tends to be an extraordinary competitive market right now that we see around the country.

  • And I think the third part of your question, you know, do we see it more for profit versus not for profits, you know, that pattern's been there for quite some time.

  • So at any given point in time in any state, you might see a not for profit getting a bit more aggressive and dealing with a little bit of capital being returned.

  • So I see that more of a continuation, little flare-ups in some locations, but more broadly, we see a very competitive landscape.

  • And to Mike's prior point, we're committed to maintaining that pricing and underwriting discipline that's required in this market.

  • And my final comment would be we also feel very good in that we have such a diversified funding mechanism portfolio.

  • So we're not guaranteed cost only, we're seeing some traction emerging on the experience rated and we're seeing the ability to carry a highly penetrated ASO alternative further down market so we're not a one-trick pony, for lack of a better description, in the marketplace right now.

  • - Analyst

  • Maybe you can just spend a moment, then, talking about the components of that commercial HMO book, as far as maybe what's specifically sitting in there.

  • You know, is it large employers or mid-market?

  • Is it a lot of government business?

  • Just to get a little flavor for what we should be thinking there as far as maybe the competitive segment.

  • - President, CIGNA Health Care

  • Sure, Justin, David.

  • I'll start there.

  • So for our -- you said commercial so I'm going to expand that to risk because as Mike said, you need to look at our risk open access and risk HMO that's how we look at the block.

  • Historically our book has been predominantly middle market with some actual national account business in there.

  • And as you might expect, if it's national account business, it's going to be slices.

  • First and foremost, we've tried to take a very targeted approach in the sliced national account space and to the extent we didn't believe it was a good, long-term proposition for us or the employer, exit some of that business.

  • So point one is, we're predominantly middle market in our book of business today.

  • Again, we define middle market as commercial employers, 200 to 5,000.

  • Historically there's been some national account business there and we've whittled that down a little bit over the last couple year time horizon.

  • Secondly, as we've talked about expansion initiatives, looking forward we see some very attractive opportunity for us to expand further, under 200 and ultimately under 50 with the guaranteed cost pricing.

  • But as we stand today, we have primarily middle market business in that segment that makes up an approximate million members, or 10% of our total membership portfolio today.

  • - Analyst

  • That's helpful.

  • When you talk about larger commercial employers, is it conversions to ASO that you're seeing?

  • Is it a reduction in the slice where they're pushing people more to a single plan offering or is it someone just coming in and saying, you know what, we're willing to do that at a much lower price point?

  • - President, CIGNA Health Care

  • Yes, I would say, Justin, again, two themes.

  • One, first, broadly in the marketplace, we continue to see the ASO funding mechanism and alternative funding mechanisms continue to work their way down in size segments as a general theme.

  • Secondly, specific to large employers, historically you would have a large employer that might take a guaranteed cost alternative in one or two or three of their geographies as an alternative or run a guaranteed cost HMO side-by-side with a ASO, PPO and a market.

  • And over a long-term that side-by-side alternative isn't necessarily a winner.

  • You're exposed to a bit more adverse selection.

  • So the two themes we see in the national account, or even high in the middle market, absolutely seeing more and more ASO penetration moving down market, and secondly, just a recognition that potentially a side-by-side with a slice proposition of guaranteed cost with ASO is not necessarily a long-term winner for us.

  • - Analyst

  • Got it.

  • If I could just sneak in one more.

  • Last year at around this time you gave us some really, some good detailed numbers around your pipeline growth year-over-year, case sizes, close ratios.

  • Can you run those by us again?

  • My apologies if I missed it early on.

  • - President, CIGNA Health Care

  • I'll provide you a little color there and we will embellish on this at our investor day.

  • But two predominant segments here, national and regional.

  • As we came into 2008 with the national segment, we expected to see a good pipeline, about the same size as the prior year.

  • And remind you that the prior year pipeline was up significantly.

  • We said the average case size that we were looking at a few quarters ago was, a couple quarters ago, was looked to be a bit larger and that's what unfolded.

  • For national accounts for our best look at our one-one business, our close ratio is pretty strong for ourselves.

  • Concluding on that, we expect the retention rates to be in our historical average for the national segment which is in the low to mid-90s.

  • For the regional block of business, again, which we define a bit more broadly than our competition, so we go 200 to 5,000 commercial employers and then single-site large employers, as we sit here today that pipeline is up somewhat, absent some large cases.

  • It's up order of magnitude, 10%, which we're happy with because last year it was up meaningfully and was very attractive.

  • As we sit here today that close ratio against the regional book is about equal to where it was last year and again, we feel good about that.

  • - Analyst

  • You said the close ratio in national accounts, was that up or down?

  • - President, CIGNA Health Care

  • For going into 2008, it's up somewhat.

  • - Analyst

  • Great.

  • Thanks a lot.

  • Operator

  • Thank you, Mr.

  • Lake.

  • Ladies and gentlemen, this does conclude CIGNA's third quarter 2007 results review.

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

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

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

  • The pass code for the replay is 4716739.

  • Thank you for participating.

  • We will now disconnect.