信諾集團 (CI) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's first quarter 2008 results review.

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

(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.

Good morning, everyone.

And thank you for joining today's call.

I'm 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 Marsha Daw, CIGNA HealthCare's Financial Officer.

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

Mike Bell will then review the financial details of the quarter and provide the financial outlook for full year 2008.

David Cordani will discuss our health care results and medical membership outlook, and he will also comment on the strategic importance of the Great West acquisition.

Ed will make some concluding remarks and then we will 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" as the principle measure of performance for CIGNA in our operating segments.

Adjusted income from operations is defined as income from continuing operations, excluding realized investment results, special items; and beginning in 2008, the results of our guaranteed minimum income benefits business.

A reconciliation of adjusted income from operations to income from continuing operations, which is the most directly comparable GAAP measure, is contained 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.

Prior period results had been restated to conform to this new basis of reporting adjusted income from operations.

And we expect to make available shortly restated quarterly statistical information for the years 2006 and 2007 that reflect this new basis of reporting.

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, and 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 our first quarter results and disclosures.

First, CIGNA's quarterly results included an after tax charge of $24 million related to litigation matters associated with our health care business.

This charge is reported as a special item, and therefore is excluded from adjusted income operations in today's discussion of both our first quarter results and our full year 2008 outlook.

Next, effective January 1st of 2008, CIGNA adopted Statement of Accounting Standards Number 157, entitled "Fair Value Measurements", which clarifies the measurement of, and expands disclosures regarding, the fair valuing of certain assets and liabilities.

Now, in addition to expanding the fair value disclosures, Statement 157 also affects the results of our guaranteed minimum income benefits business, otherwise known as GMIB, which is reported in the runoff reinsurance segment.

This pronouncement requires CIGNA to fair value its GMIB assets and liabilities based on exit values, using current risk free interest rates, volatility and other market assumptions.

Now, historically we have used longer term averages for our market assumptions and we believe that using an exit value approach to fair value the assets and liabilities of this business is a methodology that does not reflect the underlying economics of the GMIB business.

In total, CIGNA's first quarter net income included after tax losses of $195 million or $0.69 per share related to the GMIB business, of which $131 million or $0.46 per share related to the adoption of Statement 157.

I would remind you that the impact of Statement 157 reporting on our GMIB results is for GAAP accounting purposes only and does not represent the actual economics or cash flows of the GMIB business.

Accordingly, the first quarter after tax losses are non-cash charges and have no effect on our estimate for 2008 subsidiary dividends.

Also as a reminder, CIGNA's future results for the GMIB business will become more volatile as any future change in the exit value of the GMIB's assets and liabilities will be recorded in net income.

CIGNA's 2008 earnings outlook, which Mike Bell will review in a few moments, excludes the results of the GMIB business and therefore any potential volatility related to the perspective application of Statement 157.

Finally, prior year claim development for our health care business has been relatively stable over the past several quarters, and is no longer a significant -- is no longer significant to that segment's reported results.

Accordingly, beginning this quarter, we will no longer provide a breakout of prior year claim development for the health care segment.

However, we will disclose the amount of prior year claim development in future periods if the business experiences significant changes from its current levels.

And lastly, I would like to inform you that CIGNA will be hosting its annual Investor Day this year on November 21st in New York City.

And with that, I'll turn it over to Ed.

Thanks, Ted.

Good morning, everyone.

Our first quarter adjusted income from operations was $265 million, or $0.94 per share.

Our quarterly results reflect both the challenging environment for our health care segment, as well as the continued strength of our disability and life and international businesses.

These results also demonstrate the benefits of our diversified business portfolio, which provides us with unique opportunities to grow profitably in today's difficult market.

Health care earnings were below our expectations due to the impact of lower margins on the experience rated book and lower than expected guaranteed costs in experience rated membership.

There were also several unfavorable items in the quarter which we do not expect to repeat in the rest of the year.

Our experience rated book provides us with a differentiated product in the marketplace and continues to be an important contributor to our earnings.

While first quarter experience rated results were lower than we expected, we are focused on strengthening the margins on this book over the remainder of the year, and David will review in detail the actions we are taking to increase the profitability of this business.

The specialty health care business continued to post strong results in the quarter, specialty programs are key to our value proposition as they create economic value in two ways -- by improving our persistency and by increasing our profit margins.

We grew aggregate medical membership by 2% on an organic basis, which was in line with our expectations for the quarter.

This membership result reflected higher than expected growth in ASO lines.

However, our guaranteed cost membership in this quarter declined more than we expected, and this reflects our continued focus on maintaining pricing discipline in a very competitive environment.

Our overall organic membership growth validates that our value proposition and capabilities continue to resonate well in the marketplace.

In addition, we are very pleased that the Great West Health Care transaction was completed on time and closed on April 1st.

The timing of the transaction and the high quality of their book of business are both positive contributors to our outlook.

Our acquisition of Great West brings us a strong organization whose talented employees, product platform and distribution capabilities will accelerate our profitable growth in the small group market, as well as increase the opportunities for national and mid-sized employers to improve the health, well-being and security of their employees.

Let me now comment briefly on our other businesses.

Our group disability and life and international businesses delivered another strong quarter, with competitively strong top line growth and profit margins.

For the quarter, our group disability and life business reported earnings of $68 million on 9% year-over-year premium growth and an after tax margin that continues to be industry-leading.

Our international business reported earnings of $52 million on 14% year-over-year growth in premiums and fees.

Overall, both our group and international operations have good growth opportunities and strong market positions, which we expect will enable them to deliver another year of good top line and bottom line growth in 2008.

Regarding the full year 2008 outlook, we expect that earnings per share will be in the range of $4.05 to $4.25 per share, which is consistent with our prior guidance.

The outlook now reflects the impact of the Great West acquisition on 2008 results, and increased earnings expectations for our group disability and life and international businesses, essentially offset by lowered expectations for our health care business.

Mike is now going to cover the specifics of the first quarter results, as well as our 2008 outlook.

Mike?

Thanks, at the Ted.

Good morning, everyone.

In my remarks today I'll review CIGNA's first quarter 2008 results; I'll also provide an update on our full year outlook.

In my review of consolidated and segment results, I'll comment on adjusted income from operations.

This is income from continuing operations, excluding realized investment results, GMIB results and special items.

Our first quarter earnings were $265 million, or $0.94 a share, compared to $279 million or $0.94 a share in 2007.

Our consolidated first quarter 2008 results reflected health care earnings which were lower than our expectations, partly offset by strong results in our group disability and life and international businesses.

I'll now review each of the segment results beginning with health care.

First quarter health care earnings were $138 million.

This result included several items which we do not expect to repeat in the balance of the year.

First, we recorded a $7 million after tax loss on a large non-medical account which is now managed by CIGNA Group Insurance.

Second, we estimate that we experienced a $4 million after tax impact on our guaranteed cost book from higher than expected upper-respiratory in-patient claims, which we believe were related to the increasing incidents of the flu.

Third, we incurred $4 million of after tax integration expenses associated with the Great West acquisition.

And in addition, as expected, we had a loss on Medicare Part D in the quarter due to our earnings recognition pattern for this product.

So apart from these items, underlying health care results primarily reflected lower than expected margins on our experience rated book, lower net investment income and lower than expected guaranteed costs in experience rated membership, partly offset by strong contributions from our specialty businesses.

Experience rated margins were driven by higher than expected medical costs on accounts in deficit and lower than expected net premium yields, in part reflecting competitive market conditions.

We are taking actions to improve experience rated earnings in the balance of the year, including securing additional renewal pricing increases and accelerating our deficit recovery efforts.

Health care membership grew organically by 200,000 members in the quarter, a 2% increase relative to year-end 2007.

This aggregate result was in line with our expectations, although the mix was more heavily weighted towards ASO business.

Our experience rated membership grow by 1%, which while positive, was short of our expectations.

Our guaranteed cost membership declined by 9% in the first quarter, and this decrease was higher than we had expected and reflected our focus on maintaining pricing discipline in an environment which continues to be very competitive.

Our guaranteed cost MLR was 83.8% in the quarter, excluding our voluntary business, and this included approximately 50 basis points in the quarter related to the higher than expected upper-respiratory in-patient claims which we do not expect to repeat in the balance of the year.

And apart from this impact, our MLR was in line with our expectations.

All in, we continue to expect the full year 2008 guaranteed cost MLR, excluding our voluntary business, to be approximately 83%.

And this is unchanged from our previous estimate and reflects the fact that our price increases have been higher than medical cost trend.

We also continue to expect medical trend for our total book of business to be in the range of 6.5 to 7.5% for the full year 2008.

Health care premiums and fees for the quarter increased 1% versus the quarter of 2007, primarily reflecting rate increases and higher specialty premiums, mostly offset by the decline in guaranteed cost membership.

First quarter operating expenses increased relative to last year, primarily reflecting higher technology and customer acquisition expenses.

And while we currently expect operating expenses per member to be relatively flat in the balance of the year, we are evaluating our options, particularly in light of the Great West acquisition.

Now I'll discuss the results of our other segments.

First quarter 2008 earnings in the disability and life segment were $68 million.

Earnings in the quarter were strong, due to attractive revenue growth and strong disability management results.

In our international segment, first quarter 2008 earnings of $52 million reflected continued growth and competitively strong margins in our life, accident and supplemental health and expatriot benefits businesses.

Our group insurance and international businesses continue to be important contributors to our consolidated results.

Results for our remaining operations, including runoff reinsurance, other operations and corporate were $7 million of earnings for the quarter.

First quarter results in the runoff reinsurance segment included the net favorable impact of settlement activity.

Before discussing our 2008 outlook, I'll comment briefly on our investment portfolio and results.

As we've discussed before, our investment strategy is to maintain a high quality, well diversified portfolio, and we're pleased with our investment management results and our highly experienced team of investment professionals.

Our investment portfolio is well diversified and our performance has been competitively very strong.

We continue to have no direct exposure to subprime loans and de minimus direct exposure to residential mortgages.

Our current commercial mortgage portfolio results are strong, reflecting our consistent, disciplined approach to underwriting.

All of our loans in this portfolio are fully performing; and said differently, none of our loans is currently 30 days delinquent.

I would note that we reported net realized capital gains in first quarter as we expected.

Future realized capital gains and losses cannot be reasonably estimated, but based on the current strength of our portfolio, and our consistent record of investment management discipline, we currently do not expect our net capital gain or loss results to be material to full year 2008 net income for the enterprise or to have any material impact on our outlook for full year subsidiary dividends.

Overall, we continue to be very pleased with our investment management results.

I'll now comment briefly on our capital outlook and provide an update on the impact of the Great West acquisition.

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

We ended first quarter 2008 with cash and short term investments at the parent of approximately $1.6 billion.

This included approximately $550 million in proceeds from debt issuance in first quarter, as well as 120 million of subsidiary dividends received during the quarter.

We used approximately 1.5 billion of this balance to finance the Great West acquisition which closed on April 1st.

With respect to our outlook, I would note that there is no change to our expectations for full year 2008 subsidiary dividends.

In the balance of the year, we expect subsidiary dividends to be approximately $380 million, and this is consistent with our February estimate of 500 million of subsidiary dividends for the full year -- and this takes into account approximately 400 million of surplus that we plan to retain in the subsidiaries to support the Great West acquisition.

At this point, excluding any additional M&A activity, any share repurchase and any additional net debt issuance, we expect other sources and uses of parent company cash in the balance of the year to net to approximately zero.

Our capital management priorities remain consistent with our prior communications.

We intend to continue effectively deploying capital for the benefit of our shareholders.

We now expect to have the capacity to resume share repurchase or consider additional acquisitions during the second quarter of 2008.

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

Next, I'll provide an update regarding our acquisition of Great West Health Care operations.

We closed the transaction on April 1st, as we targeted.

We acquired approximately 1.4 million full service medical members, as well as some membership in TPA arrangements.

Margins on the full service book continue to be strong and we're currently completing detailed integration plans with a strong focus on stabilizing and then resuming membership growth and on providing timely access to our more favorable total medical costs.

There are a number of moving parts in our plans; so for example, we're pleased with the estimated earnings power of the current book of business, which is slightly better than our expectations.

On the other hand, there is some downward pressure on investment income due to the lower market interest rates, and there's some upward pressure on integration expenses.

So we're currently focused on decisions and actions which would position us to achieve or surpass our targets for 2009 and 2010 earnings.

We expect to provide additional updates on the outlook for our integrated health care business in future earnings calls.

Consistent with our previous discussions, we expect the acquisition to be accretive relative to the full year 2008 EPS outlook that we discussed on our February earnings call.

We continue to expect the transaction will be further accretive in 2009 and that it will be significantly accretive in 2010 and beyond.

Overall, we continue to be excited about the long-term growth prospects that our acquisition of Great West provides.

I'll now review the earnings outlook for full year 2008.

The consolidated earnings estimates that I'll provide include our current expectations for the impact of Great West.

For full year 2008, we currently expect consolidated adjusted income from operations of $1.16 billion to $1.22 billion.

And this range is modestly lower than the range we provided in February.

I'll discuss the components starting with health care, and in a minute I'll provide our health care outlook including and then excluding Great West.

But first, let me provide some additional performance metrics.

We currently expect our medical membership to increase by approximately 2 to 2.5% for the full year 2008, excluding Great West.

The upper end of this range is lower than our previous estimate and takes into account our current assessment of the weaker economic outlook and of the competitive pricing environment.

We currently expect guaranteed cost membership to decline by an additional 1% in the balance of the year as a result of our maintaining pricing and underwriting discipline in a competitive market.

And we expect some very modest additional experience rated membership growth in the balance of this year.

We continue to expect medical cost trends for our total book of business, excluding Great West, to be in the range of 6.5 to 7.5% for the full year.

We expect guaranteed cost pricing yields to exceed trend, and we continue to estimate that the full year guaranteed cost MLR, excluding the voluntary business, will be approximately 83%.

Our estimate for full year 2008 health care earnings is a range of 735 to $775 million.

And this range reflects updated estimates based on our first quarter results and it also incorporates our current expectations from the 2008 impact of Great West.

Our updated outlook reflects a year-over-year earnings increase of 65 to $105 million after tax, excluding the 8 million of after tax prior year development that we had in 2007.

We currently expect Great West to contribute approximately 40 to 50 million in earnings, excluding the related financing costs of approximately 15 million after tax, which will be reflected in the corporate segment.

Now, there's several major drivers of the additional year-over-year earnings growth which I'll now summarize.

We expect growth in our service business, including the impact of increased membership and higher penetration of our specialty products, to deliver 50 to $65 million of after tax year-over-year earnings growth.

We expect guaranteed cost pricing actions in excess of medical trend to improve the full year MLR to approximately 83%.

And the impact of the improved MLR will be tempered by our projected full year guaranteed membership decrease of 10%.

We now expect guaranteed costs year-over-year earnings growth of approximately $15 million after tax.

We now expect experience rated earnings to be approximately flat with full year 2007, excluding the first quarter loss on the non-medical account.

In addition, the $7 million first quarter loss of the non medical account and our current estimate of the impact of lower short term interest rates will combine to lower health care earnings by approximately 15 to 20 million after tax for the full year relative to 2007.

We also continue to expect that our investments in segment expansion initiatives in the individual, small group and seniors markets, will be dilutive in 2008 by approximately 15 million after tax, but will be accretive to earnings starting in 2009.

So summing up the pieces, our all-in estimate for full year 2008 health care earnings, including Great West, is a range of 735 to $775 million.

Excluding Great West, our full year health care estimates are now 50 million lower than our February range, and this mainly reflects lower expectations for experience rated margins, lower expectations for investment income and lower estimates for guaranteed costs and experience rated membership, together with the unfavorable first quarter items that I discussed earlier.

Now, regarding earnings for the balance of the year, we continue to expect to see an increasing pattern of health care earnings throughout the year as we execute our pricing and underwriting actions and achieve additional revenue growth, including additional growth in our high margin specialty businesses.

In addition, we expect Great West net earnings contribution to primarily emerge in the second half of the year, with second quarter more impacted by integration expenses.

To be more specific, I'll now discuss our earnings expectations for the balance of the year relative to our first quarter result, and I'll do this on the basis that excludes Great West.

As I mentioned, our first quarter earnings included items which we do not expect to repeat in second through fourth quarters.

When we removed the non-medical account loss, the higher than expected upper-respiratory in-patient claims and guaranteed costs, the first quarter Part D loss and Great West integration expenses, our underlying run rate in the quarter was approximately $156 million.

This run rate would equate to 468 million in earnings in second through fourth quarters.

Our updated estimates for the full year excluding Great West indicate an increase in the balance of the year of approximately 85 to $115 million relative to this run rate.

Now, with respect to the components, we expect experience rated earnings in the balance of the year to be approximately 40 to 50 million higher than the first quarter, reflecting the impact of the profit improvement actions that we're taking as well as normal seasonal patterns.

We expect guaranteed cost earnings to be approximately 20 to 25 million higher than the first quarter run rate, reflecting the projected improvement in the MLR from 83.8% in first quarter, to approximately 83% for the full year.

We estimate that service earnings will be approximately 20 to 30 million higher than the first quarter run rate due to additional business growth, including the impact of higher penetration of our specialty products offset by a modest increase in operating expenses.

And we expect Part D to move from a loss of $3 million after tax in first quarter to positive earnings of 10 million in second through fourth quarters, consistent with the pattern in 2007.

So all in, we currently expect full year 2008 health care earnings excluding Great West to be 695 to $725 million; and including Great West, 735 to $775 million.

Now let's turn to the balance of our segments.

We expect our remaining operations to contribute approximately 425 million to $445 million of earnings in 2008.

We have modestly raised our expectations for group disability and life and the international businesses based on the strength of their fundamentals.

We expect both to continue to grow revenue while maintaining strong margins.

Specifically, we expect mid single digit earnings growth in group and double-digit earnings growth in international.

Now, earnings for the balance of our operations, which include runoff businesses in the parent company, are expected to be lower in the balance of the year, mainly reflecting higher debt financing costs and the impact of lower cash balances on parent company investment income.

Updated parent company losses for the full year had been updated to include approximately $15 million of after tax financing costs related to the Great West acquisition.

And this has been offset by higher expected earnings in the non-health care businesses.

As a reminder, our 2008 outlook excludes any potential GAAP results from the GMIB book.

Relative to our consolidated outlook, as is customary, our estimates for earnings and EPS assume no repurchase during 2008.

On this basis, with estimate that our full year 2008 consolidated adjusted income from operations will be in a range of $1.16 to $1 -- I'm sorry, 1.16 to $1.22 billion, and EPS in the range of $4.05 to $4.25 a share.

Our estimated range of EPS is equal to our previous range, and we believe this reflects the ability of our businesses to perform in a challenging environment as well as the benefit of our diversified earnings streams.

So to recap, our consolidated first quarter results reflected health care earnings which were lower than our expectations, partly offset by strong results in our group disability and life and international businesses.

As I discussed, we do expect health care earnings to improve significantly over the balance of the year.

And our 2008 EPS estimate, assuming no further repurchase and including the impact of the Great West acquisition, is a range of $4.05 to $4.25.

And with that, I'll turn it over to David.

Thanks, Mike.

Good morning, everyone.

It's been a challenging few months for a number of sectors in the U.S.

and in the broader global economy.

As a health service company, we clearly see the economic challenge faced by our customers.

Our focus on health translates to productivity and ultimately cost savings for our customers, both the employers and the individuals we serve.

Our strategy is to develop innovative products and services that promote consumer engagement to drive personal health improvement at a competitive cost.

This approach enables our customers in this economically challenging time to be more competitive.

In this environment, ur business remains strong and our strategy positions us very effectively to help our customers.

In addition, our acquisition of Great West on April 1st expands our reach geographically in the west and within buyer segments, specifically, the small employer segment.

Today, I'm going to share with you some additional thoughts on our first quarter results and the actions we're taking to further expand profitability in our experience related book; second, our 2008 outlook on membership growth and medical cost trends; and third, I'll share an update on market expansion, specifically the Great West acquisition and integration.

Starting with the first quarter, as Ed and Mike described, our health care earnings for the quarter were below our expectations, in part due to lower than expected results in our experience rated product, which was partially driven by membership and lower membership in our guaranteed cost product, both of which were impacted by the challenging external environment.

This was somewhat offset by strong growth in our specialty and health advocacy programs.

As a quick reminder, our experience rated product provides competitive differentiation in the marketplace and generates very attractive earnings per member.

The keep point of differentiation is the participating nature of the contract between us and our employer customers and the high rate of penetration of our specialty products.

With respect to experience rated, we believe the results for the balance of the year will show meaningful improvement, bringing the full year 2008 earnings in line with 2007.

With respect to this increase over the balance of the year, it's going to be driven by, first, a continuous albeit measured growth in membership; second, further margin expansion on our renewal book of business; and third, further gains on deficit recoveries from active and cancelled cases.

Our specific actions fall into three categories.

First, we expect to secure further rate actions on the renewing book of business for the balance of the year and additional specialty penetration on new business that we plan to write over the remainder of the year.

We are committed to maintaining our pricing and underwriting discipline.

Second, we remain focused on improving our medical cost result through a combination of actions, including intensifying our clinical reviews, large claim negotiations and obtaining additional provider discounts in targeted areas.

And third, we are accelerating our efforts for deficit recovery to improve profitability on specific accounts.

I'll now move to comments on our medical membership and medical cost outlook.

From a membership perspective, our total medical membership grew 2% organically in the first quarter, with higher membership in our service product, partially offset by lower membership in the guaranteed cost product.

As Mike discussed, the decline in guaranteed cost membership was higher than expected, reflecting our pricing discipline in a very competitive environment and higher levels of disenrollment as a result of the economic environment.

Our consumer driven health plan membership grew 40% since year end 2007 to 820,000 members, which was consistent with our expectation.

Looking through the balance of the year, we expect higher existing case member disenrollment and lower new sales reflecting the impact of the economic slowdown on the former and the very competitive pricing environment on the latter.

As such, our membership growth expectations for 2008 are in a range of 2 to 2.5%, excluding Great West.

We expect the majority of the growth for the full year to be in ASO products.

We expect guaranteed cost membership to be relatively flat and some modest experience rated membership growth in the balance of the year as a result of maintaining our pricing and underwriting discipline.

From a medical cost perspective, we continue to expect the trend for our book to be in the 6.5 to 7.5 range for 2008.

I would note that this range is consistent with our previous expectations and reinforces a very strong competitive result that we are delivering for our ASO customers and overall book of business.

I'll now turn to my final topic, our market expansion strategy.

We successfully closed the acquisition of Great West on April 1st without any regulatory issues and with little disruption to the business.

I'm really pleased with the way the CIGNA team coordinated with the Great West team to ensure that we were successful with this important first step.

As we previously discussed, we see the Great West acquisition as a meaningful part of our market expansion strategy.

First, it strengthens our geographic presence for our national and regional segment; second it accelerates our segment strategy in the small segment area; and third, it provides the opportunity to cross-sell additional programs and services to thousands of new employer relationships.

The acquisition adds approximately 1.4 million medical members in the employer segments and some additional members served through TPA arrangements.

We expect to create significant value for our customers and shareholders by focusing on four key economic levers.

First, by combining the capabilities of our two organizations, including our strong total medical cost position, we expect to stabilize and then resume growth of Great West membership.

Second, we expect a strong total medical cost position will improve cost levels for employers and margins on the acquired book.

Third, our measured approach integration will achieve operating expense synergies over time.

And fourth, we'll expand choice by offering our specialty products and health advocacy programs focused on improving health to current Great West members.

I have named Bill Roth had as the leader of this business on a going forward business.

Bill, who currently leads our individual and under fifty business, has taken on the responsibility for ongoing leadership of Great West.

Bill has considerable experience running these unique segments and brings the right perspective and leadership to the team.

In addition, we have a dedicated team solely focused on ensuring the successful integration of the business.

Looking forward, we will operate as one company, CIGNA, in the marketplace.

We are focused on preserving and feeding the existing Great West book of business, operating platform and infrastructure while improving profitable growth.

To that end, we've been able to retain nearly 100% of the Great West team.

We recognize the importance of this team in building Great West and now on building the next exciting chapter with CIGNA.

I'll now move to wrap up my comments.

It is clear that our first quarter results didn't meet our expectations and are not fully reflective of the current market position we have built over the last several years.

While our current full year outlook does reflect continued share gain and earnings expansion, it is below our potential, even when I consider these very challenging and competitive market conditions.

To that end, we are focused on first, expanding our operating margins on our book of business through a combination of pricing and underwriting, continued effective medical cost management and ongoing improvement in operating effectiveness and efficiency.

Second, effectively integrating the Great West business, which means avoiding service disruption for our customers, and physician partners, retaining the strong Great West team, improving the total medical cost position, securing operational efficiencies and positioning for profitable growth in 2009.

And our third priority is ensuring effective client and member service delivery of our existing programs while we continue to innovate our health service offering for 2009 and beyond.

We remain focused on improving our results for 2008 and ensuring we are well-positioned as we look forward 2009.

With that, I'll turn the call back over to Ed for his closing remarks.

Ed?

Thanks, David.

Now, before we take your questions, I want to underscore several points.

Our quarterly results reflect both the challenging environment for our health care segment, as well as the continued strength of our disability and life and international businesses.

This diverse mix of business provides us with unique opportunities to grow profitably in today's difficult market.

While first quarter health care results did not meet our expectations, we are committed to improving these results over the balance of the year with a strong focus, as David noted, on pricing and underwriting and continued effective medical cost management, particularly with regard to our experience rated business.

In 2008, we will continue to make investments in targeted market expansions for our health care business.

We believe this will lead to good growth opportunities in the long-term.

We are very pleased with the timely close of the Great West acquisition and we are focused on completing an integration that truly combines the strength of both Great West and CIGNA for the benefit of our customers.

We expect to leverage the Great West acquisition and strong competitive position we have built in the health care marketplace to meaningfully growth health care earnings over time.

Our group disability and life and international businesses delivered another quarter of strong results.

Our value proposition in both group disability and life and the international operations will enable us to profitably grow these businesses in 2008, while maintaining their competitively superior margins.

And relative to the 2008 outlook, I am confident we will be able to achieve our EPS range of $4.05 to $4.25.

In closing, I believe that CIGNA has solid market positions in each of our ongoing businesses and that we will leverage these positions to continue to continue to create value for the benefit of our customers and shareholders.

And while this completes our prepared remarks, as always, we will now be glad to take your questions.

(OPERATOR INSTRUCTIONS).

Our first question this morning comes from Matthew Borsch at Goldman Sachs.

Hi, good morning.

Thank you.

Question on what you're seeing in terms of price competition, particularly as it's impacting your fully insured business, and you know, if you could just give us any sense, are you seeing any signs of maybe potential improvement in the pricing trends in the markets that you're as it relates particularly as the not for profits but also the public companies?

Matthew, it's David.

Good morning.

As we've said previously in prior quarters, the pricing environment is competitive and very competitive.

And as we noted in our prepared remarks, our guaranteed cost membership results are a bit lower than our expectations, primarily as a result of that.

Specifically, if we look at the driver there, the primary driver is lower new business sales, and we relate that specifically to the pricing environment and our commitment to maintain pricing discipline.

To the second part of your question, is it more pronounced with not for profit competitors and/or do we see it firming up?

I think it's geographically specific, as we talked about before.

And in some geographies you have very dominant not for profit competitors that as you look at their surplus patterns, they're returning some surplus, and could be deemed to be pretty competitive.

We're on the sideline right now in terms of whether or not we see it firming up.

As I sit here today, we see the pattern very similar -- if you tell us to be optimistic that it might firm up, I think that would be a good sign.

But as of right now we would would say the competitive pricing environment had had a direct impact on our new sales in the guaranteed cost environment.

And just as a follow-up question, how should we think about the Great West enrollment in terms of where it fits in your three categories of commercial enrollment?

Is it more like the service business or in one of the other categories, just break it out?

Sure, Matthew.

It's David.

So my comments will be toward the -- when we refer to the 1.4 million members are in the employer segments.

The way we first categorize side segments, we categorize national accounts as commercial accounts of 5,000 or more employees that are multi-state.

So it excludes municipalities, et cetera.

We categorize our middle market -- we previously categorized them as employers in the 200 to 5,000 space,and then small segment below that.

As you think about the Great West membership first and foremost, about a third of the total membership falls in what we would call the small segment or what Great West refers to as the select segment.

And about two thirds falls into what we would call the middle market segment.

So in the 200 or 250 former Great West to 5,000 and then large single side employers.

But we have the nature of the contract -- as I think you know, their contracts are ASO with stop loss, and then packaged specialty capabilities.

So you could think about them as like service products as we know them, but because they're service matched up with stop loss and matched up with specialty, they have a very nice earnings pattern and they match up nicely against guaranteed cost products, especially in the select or under 250 life segment.

Okay.

Thank you.

Thank you, Mr.

Borsch.

Our next question comes from John Rex at Bear Stearns.

Thank you.

Just a question on the experience rated business.

First, could you just give us a comp in terms of 1Q '07 experience rated earnings versus this quarter?

As I recall last year Q1 '07 you were down about 15 to 20 million from the prior year.

Can you give us a similar comp for 1Q '08 versus 1Q '07?

Sure, John, it's Mike.

In this particular case, John, I think the best way to look at the comparison of first quarter '08 to first quarter '07 for experience rated is in fact to look at the ratio of the experience rated medical costs to the net premium in premium in ER.

Now, as we talked about before, that's not a perfect measure -- certainly it ignores investment income, it ignores specialty, it ignores operating expenses; but again, since several people like to look at the aggregate loss ratio, let's start there.

Okay.

In terms of first quarter '08 versus first quarter '07, that ratio was literally increased by 220 basis points.

So if you take 220 basis points times the 493 million of medical premium that you see in our [inaudible] supplement, you could equate that to $11 million before tax, which would be approximately $7 million after tax.

So I think that would be a reasonable margin measure for you to focus on.

Perfect.

And then could you just tell us a little bit what's going on with the accounts and deficits position?

And your ability -- you spoke about you're going to increase your efforts to recover those deficits.

So what kind of leverage do you really have to recover deficits from an account that walks on you, that decides they're going to go somewhere else, if they're in a deficit position.

How do you do that and what's happening also with existing accounts?

Are they just resisting our efforts to collect those deficits?

It sounds like that's part of the issue that you're seeing here.

Well, first, John, to answer your question on what kind of leverage do we have, we do not have contractual leverage that would force a customer to in fact enable us to recover the deficit.

Now, our history here is strong in this regard.

I mean, this book has traditionally run in the 80s in terms of persistency and again, we have a long history of for the most part being able to recover deficits.

Your point is a fair one, that this is a particularly difficult environment to try to secure deficit recovery, and we saw that to some extent here in the first quarter -- the persistency on this book in the first quarter was 83%, which was several points lower than what we had been targeting.

But in terms of the going forward, what do we expect, we still expect that there will be meaningful opportunity to secure deficit recovery over the balance of the year, and certainly that's baked into our expectations.

David, do you want to add?

One point I would add, in the quarter what we saw were some accounts that were in margin moved to deficit.

Now, that will happen in any given quarter, but we saw a little bit more in this quarter; and the relevant point there is when you think about the relationship with those accounts, since they were in margin, they've historically run well, so the employer's seen predictable, good service delivery.

Since they just moved into deficit, as you might expect, the deficits are smaller on average than maybe the historical book and that speaks to a healthier relationship and then the opportunity along with good medical cost management to be able to recover that going forward.

Do you explicitly -- in terms of your experience rated earnings forecast for rate, do you explicitly build in an assumption of deficit recovery of some amount; and if you do, could you tell us kind of what it was and what it is now?

John, it's Mike.

Yes, we do, explicitly build that into our overall earnings expectations for experience rated.

I'd rather not quantify the specific amount, but it's fair to say that's built into the earnings expectations that I described in my prepared comments.

Would that be a majority of the takedown in your expectations for earnings for experience rated this year that you described?

It's fair to say that it would be a slight majority of the increase in earnings for Qs 2 through 4 versus first quarter.

Okay.

Thank you.

Mr.

Rex, thank you for your question.

Next we'll hear from Charles Boorady at Citi.

Hi, it's Stacy in for Charles.

I'm just wondering what your capacity is to buy back stock this year and also what your free cash flow is at the parent after the Great West acquisition.

Sure, Stacy.

It's Mike.

In terms of our share repurchase capacity, what I would suggest that you do is think back to the roll forward that I gave in the prepared remarks.

So at the end of first quarter, we ended with parent company cash and short term investments of, to be a little more precise, $1.63 billion.

You can assume that we paid approximately a billion and-a-half for Great West on April 1st.

And then if you add to that subsidiary dividends for the last three quarters of the year of approximately 380 million, you would conclude that if we did no repurchase and no acquisition and no additional debt issuance, that we would end the year with approximately $500 million of cash at the parent level.

Now, you can compare that to our long-term target of 250 million and conclude that we had the capacity, again, with no further debt issuance at this point, to do approximately 250 million of either share repurchase or acquisitions, beginning in second quarter.

Got it.

Okay.

Can you also just break down the components of your medical cost trends?

Marsha?

As Mike has said, our overall medical trend is expected to be 6.5 to 7.5%, consistent with our previous guidance.

The components of the trend are also consistent with our prior guidance, with in-patient, outpatient in high single digits, professional mid-to single digits and pharmacy in the high to single digits.

All right, great.

Thank you.

Thank you, Stacy.

Next we'll hear from Christine Arnold at Morgan Stanley.

Good morning.

Couple questions.

First, on Great West, they ran about 44 to $48 million in net income each quarter last year.

And then we had $13 million kind of that we're going to exclude because they had investment income that you're not taking.

So that leaves us with about 30, $31 million, per quarter in net income times three, suggests that you should have 93 million in contribution from Great West.

Why are we only looking for 40 to 50?

Sure, Christine.

It's Mike.

Good morning.

Good morning.

First, in terms of pro forming the Great West results to our investment income, what I would suggest you do is look at the full year 2007, which was approximately 172 million of after tax earnings on the book of business that we acquired.

If we take down the net investment income by approximately $22 million, which takes into account the lower interest rates and also the lower amount of capital that we have invested in this business versus what Great West did, you would get approximately 150 million as a starting point.

So I think a little higher than what you were describing.

So call it 37.5 million a quarter to sound precise.

If you look at that and compare it to what we're expecting for Qs 2 through 4, you could take that and multiply it by approximately three.

So take -- call it 110 to 115 million, so roughly flat with their run rate in 2007.

And that's the combination of better loss ratio, some revenue leverage, offset by lower membership that we're projecting here for the balance of the year.

If you subtract off of that approximately $20 million of after tax cost to amortize the intangibles -- which I need to emphasize here, we're still working through the purchase accounting.

So that's our current best estimate.

That's a number that's in a little bit of flux.

And then, importantly, reduce it further by 45 to 50 million after tax from integration or transitional expenses, you would get to the 40 to 50 million of incremental earnings that we expect before the financing, which is picked up in corporate so that wouldn't be picked up in health care.

Is that helpful?

Yes, it is.

But what we're saying is the integration costs are not going to be offset by synergies, it's a net reduction?

I think it's fair to say that in 2008 there are some modest synergies built into the 110 to 115 that I just described.

It is fair to say there are not sufficient synergies to offset the -- what we believe will be ultimately non-recurring integration expenses in 2008.

And then two follow-ups here.

Experience rated, could you help me understand how much you expect to be able to improve your MLR just with rate actions, excluding deficit recoveries and everything else.?

And then, why did the voluntary loss ratio increase by 10 percentage points?

Okay, first on experience rated -- again, we don't typically project things on a loss ratio basis because the -- there are other components to earnings besides just the loss ratio.

But it's fair to say that just like we saw last year, we saw an improvement last year from first quarter 2007 to the full year 2007 of approximately 190 basis points.

So it was, call it 250 basis points lower Qs 2 through 4 versus first quarter.

We would expect to see a similar kind of pattern here in 2008.

Again, I'm not trying to be precise with the loss ratio because I think there are other more important metrics.

But ballpark that kind of improvement over the balance of the year.

And again, that's the combination of the renewal pricing actions that we expect to get in the second half of the year, which will be higher than what we got in first quarter.

In addition, we expect the additional deficit recoveries and we also get some contribution in terms of earnings from higher revenue which includes the benefit of higher net invested income, because with the higher revenue we have higher asset balances.

In the case of the voluntary business, overall we feel good about the voluntary growth that we saw in first quarter and in fact, on an all-in basis, voluntary earnings were up relative to our expectations and relative to 2007.

So while your comment is fair that the loss ratio was up, again, from an earnings standpoint we feel real good about the first quarter results.

David, you want to add?

Christine, good morning.

Just the one item I would add -- we can follow up with you with the detail of the loss ratio off line -- but as that voluntary business grows over time, one of the things we found very interesting in that segment is the opportunity to bring new products to market.

So there are new products in addition to what the industry knows as, we'll call them just traditional kind of weekly paid, very lean benefits.

As those new products which we're starting to see some sales of through the voluntary portfolio come through, they'll have higher premium, higher medical cost, relationship to the premium but a very nice contribution, as Mike noted, to the bottom line as well.

So in fact, a mix, okay.

Thank you.

Thank you, Ms.

Arnold.

Scott Fidel at Deutsche Bank, your line is open.

Thanks.

First question is if you could walk through the expected impact relative to your initial guidance around investment income and maybe help quantify that.

Then also, just maybe spike it down into the three individual primary business segments -- health care, group and disability and international.

Sure, Scott, it's Mike.

First, for health care, we are now expecting an impact for health care of 5 to 10 million lower in net investment income for the full year 2008, versus our original expectations.

So 5 to 10 million after tax in -- lower in health care.

The only other business where it has a material impact on our earnings expectations is group insurance.

And it's reasonably manageable.

So less than $5 million after tax.

Okay.

Then a follow-up question, just around Part D and how claims are coming in relative to expectations in the first quarter, maybe sort of highlight relative to some competitor comments about higher than expected costs there.

And then just a separate follow-up, if you could give us an early glimpse into how the sales pipeline and national accounts is looking at this point for '08 relative to '07.

Good morning, Scott.

It's David.

I'll take the two comments.

First, on Part D, your question is just what's the pattern of claim costs looks like.

As you know, relative to some of the other competitors, our Part D portfolio is meaningfully smaller, although I might add we're very pleased with the growth we saw from 2007 to 2008.

As it relates to the claims, if you look at the very immature loss ratios, our loss ratio in the first quarter of 2008 is meaningfully better than 2007, and now 2007 patterned nicely came to where we thought it would be.

But 2008 starts in the low to mid-90s as opposed to an equivalent quarter in 2007 started just over 100% before you start factoring in the risk corridors from the government.

So the performance we're seeing in Q1 is in line with our expectations.

And the pattern as we sit here right now, we would expect to see for the full year is in line with our expectations, where that MLR would improve throughout the course of the year coming into the 83% range or so.

Specific to the national account pipeline, as we think about the national account pipeline for 2009, to your question, the -- currently the 2009 pipeline is in line with our '07 pipeline -- bear with me for a second -- which was a very strong and very attractive pipeline.

In 2008, the pipeline spiked up yet even further; and as we peel that apart, that was specific to a meaningful amount of business from one competitor in one geography, specifically on the West Coast.

Most of that business which did not move.

So if I strip that unique circumstance out which was tied to some integration disruption, our current look at our '09 pipeline is consistent with '07 and consistent with kind of a same store basis 2008 pipeline.

The only additional nuance I would give you there is we tend to look at our opportunities in terms of either new new relationships -- so entering into new relationships with employers -- versus kind of expanding growth opportunities with existing relationships.

What's interesting about the 2009 pipeline is it's a bit higher on the new-new relationship, which we view as attractive as well.

As you might recall over the past couple years, we talked about really aggressively working to expand relationships where we've been successful, and now we need to continue to do that but introduce new relationships into the Company.

That's helpful.

And then so that helps with the new business sales visibility and then, David, if you could help us think about sort of the other piece and maybe in terms of end group attrition, maybe as a percentage of the book or percentage of particular accounts, how that's looking now relative to the past couple years so we can think about sort of a net number when combining new sales and then retention.

Sure.

And again, I'm going to speak to national accounts, because I think your question goes to 2009 and it's very early to speak to the regional segment there.

By way of back drop, we've consistently and historically told you that we feel as though the national account portfolio when it's run healthy runs in the low to mid-90s -- 92 to 94% retention.

So this is case level, member weighted retention rates; and as you recall, a year ago we saw even a higher performance level relative to that.

For 2008, we expect to see it in the 92 to 94% range, and as we sit here today for 2009 we expect it to be in the same range.

So conclusion, consistent and healthy case level retention in a very competitive marketplace.

To the second part of your question, which is the kind of member disenrollment, as we pattern from the second half of 2007 through '08 and our early look at 2009, based on prior patterns, you will see -- we see member disenrollment to have a little bit more pressure on it that we could attribute to the economy.

And you could even dial into some sectors specifically.

So to recap national accounts, the pipeline right now, while it's still early relative to the close ratio for 2009, is healthy and consistent with the last couple of years, stripping out that unique point I made for 2008.

The retention ratio case level retention, in line with historical patterns in that 92 to 94% range.

And potentially a little softer disenrollment number, but consistent with what we're seeing right now.

Thank you.

Thank you, Mr.

Fidel.

Next we'll hear from Justin Lake at UBS.

Thanks.

Good morning.

Couple questions first on Great West, just as far as the book for 2008, can you tell us how much is already renewed, meaning kind of behind us as far as attrition; and also give us an early read on what you're seeing in regards to providers as you try to move Great West members over to your contracts?

Justin, I'll start on the membership renewal piece.

Approximately a shade over 60% of the book at this point has renewed for 2008.

So it's just a shade higher than 35% is the remaining portion of the book to renew over the balance of the year.

David, you want to talk about the providers?

Sure.

Good morning.

Justin.

First, relative to the providers, the way you asked your question, I just want to tilt it a little bit.

We've been very consistent.

Our approach here is to improve total medical cost, and the approach to improve total medical cost has three fundamental components.

One is obviously the relationship, the payment relationship with the hospital or the physician in terms of unit cost.

Two is the medical management programs that affect both utilization and mix and severity.

And three is the provider service model.

So that's the large body of work that's underway as we sit here today.

We feel as though it's very important to approach the medical cost improvement as a total medical cost improvement path.

To date, we've been pleased with the interactions with the physician and hospital community in general.

Clearly, there is some cases where there's a little bit of concentration where there is some ongoing dialogue and negotiations.

But we're building off an environment where both CIGNA and Great West had a reputation for servicing the physician and hospital community pretty well, such that as we approach the dialogue for the two entities coming together, it's being approached off a good service proposition as we look to improve the results.

So a lot of work to do in 2008, but the early indicator are positive and in line with our expectations.

Okay.

Mike, can you just remind us for 2009 and 2010 if you start off with that 40 to $50 million baseline, I guess really 35 to -- or 25 to $35 million baseline X the financing, how that steps up in 2009, 2010 as far as costs?

And also I guess on the membership side, are these projections -- given that only -- that two thirds of the book has renewed and you're seeing about 100,000 members of attrition, should we expect to see -- or I guess just say have you already embedded another 50,000 members of attrition for the rest of the year?

Okay.

Justin, it's Mike.

First, let me take your second question first and then come back to the earnings outlook.

First, you are right, we are expecting or at least we've embedded in the financial model that we talked about approximately another 50,000 -- it's actually a shade higher than that -- it's approximately 5% of additional membership attrition over the remainder of 2008.

So we expect to end 2008 approximately in terms of full service members at about 1.35 million full service members.

In terms of the expectations for 2009, it's a little early to try to be specific in terms of membership outlook.

Again, there are a lot of moving parts, and obviously as we get closer to 2009, we'll update that.

Certainly our goal at this point is to stabilize the membership in 2009 and then begin growing it in the second half of the year and certainly begin growing it into 2010.

In terms of how that relates to the earnings expectations; first, it's important to note that there are a number of moving parts here that I view as open switches.

As I mentioned earlier to Christine's question, the purchase accounting is something that we're still working through right now.

We obviously expect to have that finalized in second quarter.

But that is an estimate that's potentially moving around.

The integration expenses -- so the expenses we have related to the transition period -- there is some upward pressure there.

And again, we're still working through plans there.

On the flip side, the book of business coming into the year is actually stronger than what we had modeled, and so that's obviously an area of upside opportunity relative to our earlier expectations.

And then very importantly, we're still working through our strategies around pricing for 2009 on the operating expense and specialty synergies.

So the point is here, there are a lot of moving parts.

Now, back to your question, what are our expectations for 2009 and 2010?

As we talked about on prior calls, we expect that the -- before the financing costs, we expect to be in the range of 170 to 180 million of after tax earnings in 2009.

Again, subject to the caveats I gave you earlier.

What that would mean in terms of our updated estimates, we would expect that the underlying earnings would be in the ballpark of call it 215 to 230 million of after tax earnings, and that reflects the better loss ratio capturing the benefit of the access to the stronger medical cost position, as well as some very modest expense synergies.

Again, membership is really the main wild card there.

But that 215 to 230 is a reasonable starting point.

At this point, we're modeling 25 million of after tax cost from the amortization of the intangibles and we're modeling at this point for 2009 approximately 20 to 25 million after tax of integration expenses.

So that would get you to approximately 170 to 180 before financing.

And that -- the 170 to 180, the comparable number then for 2010, let's see, would be -- it was 200 to 250 on a net basis, so add 25 to that, so call it 225 to 275 on a gross basis before financing for 2010.

That's still our expectation -- again, subject to the moving parts I described earlier.

Appreciate the update, thanks.

Thank you, Mr.

Lake.

(OPERATOR INSTRUCTIONS).

Next we'll hear from Bill Georges at J.P.

Morgan.

Thanks, good morning.

Question, a couple follow-ups on the experience rated book.

I think last quarter you had talked about persistency in the 83% range -- and correct me if I'm wrong about that.

But I think that you said you were targeting 86 to 88% persistency in that book.

So I'm wondering, do you think it's reasonable to assume that you're going to get to that by the back half of the year?

And then, could you specifically address within the deficit accounts what does persistency look like there and how has that changed over the last couple of quarters?

Bill, it's Mike.

First, in terms of persistency, you're absolutely right.

We had persistency in first quarter for the experience rated book of approximately 83%.

That is consistent with the full year persistency that we had on the book in 2007.

In terms of our expectation for the remainder of the year on the persistency, we would expect a very modest decline.

So I would expect at this point that we'll end the year with full year persistency in the book of approximately 82%.

In terms of the pieces deficit versus surplus, I don't have the specific numbers committed to memory.

I think it's fair to say that the persistency rate on the deficit cases is modestly lower than our expectation and modestly lower than what it is a year ago.

Again, at this point, while we're still working to optimize the balance of membership and earnings over the course of the year, I think it's fair to say that we do intend to increase our intensity on these renewals and err on the side of higher margins versus what we did first quarter.

Okay, and then one quick follow-up.

I think that you had also -- you know what, you answered that question already.

You know what?

I'm sorry you talked about having maybe 30% of this book in deficit as a target.

And again, correct me if I'm wrong on that.

But I'm just wondering, has there been any change in the percentage of the experience rated book that is in deficit?

There has, Bill.

It increased.

Our longer term target is 30%.

It was 32% at year-end '07.

And it's now increased to 35%.

Okay.

Great.

Thanks very much.

Thank you, Mr.

Georges.

Next we'll hear from Douglas Simpson at Merrill Lynch.

Good morning, everyone.

Just a quick question on the -- I understand the $0.46 impact from the mark on the GMIB piece of the business.

What was the additional $0.23 loss from that business in the quarter; and was that -- does that 23 -- was that sort of a normal event or was it driven in some respects by the change in accounting?

And I guess what I'm getting at is that $0.23 loss from GMIB was a lot bigger than we've historically seen, but now it's excluding from results.

Sure, Doug.

First, you're absolutely right in terms of the component parts.

In addition to the one-time impact of implementing the 157 Rules on 1108, there was a $0.23 net income hit in first quarter of 2008 that was driven by a combination of the weak stock market and lower interest rates, which get exacerbated by the new 157 standards.

As we talked about before, we view the 157 standard as being a very, very conservative accounting standard.

It forces us to value these liabilities on an exit pricing standard.

So we have to hypothetically put ourselves in the shoes of a buyer of this business and try to say if there was a buyer out there for this book, how would they likely value it.

That's a much more conservative standard than what we have used historically, which has been to use historical averages as opposed to this hypothetical exit pricing standard and that's the $0.23 in the quarter.

I think it's important to remember here that this is not the basis on which we're going to capitalize this business.

This is not the basis that determines how much capital that we have to have in CG Life and by virtue of the fact that there's no change in our subsidiary dividend outlook for the remainder of the year, you can conclude that we do not believe this will have a material economic impact for us in 2008.

Just as, by the way, if in fact our estimates turn out to be right, and this reverses over time and becomes gains in future quarters, which we we think over a long period of time it in fact will, that won't help us either.

So the point is, it really don't drive the economics of CG Life in particular.

It's exactly, Doug, that volatility that has motivated us to split it out and not include it in the adjusted income from operations.

Okay.

Maybe just circling over to the health care segment, just as you guys think about growth, you know, if we look back, 2005 to 2008, the health care segment profit has grown roughly -- if you include Great West, you're on track for a tagger of about 2% annually over that four-year period.

And just as you look out over the next four years, do you think that accelerates or, you know, how -- because '05 to '08 you had a lot of buyback activity and you had a relatively stable net income or [inaudible] line in the health care segment.

As we look forward you've intimated that you'll buy box stock probably not as aggressively.

But do you see the health care segment growth accelerating over the next three to four years?

Doug, most certainly we expect the health care growth to accelerate over the next three to four years.

That be the case even without the Great West acquisition.

We obviously think the Great West acquisition adds to that growth rate.

But as we talked about at the Investor Day, we continue to expect that health care revenue growth for the next several years will be in the high single digit kind of range, and when we add to that expected margin improvement, we expect over a three to five-year period, operating income growth for health care of approximately 10%.

And then if you add to that our longer term share repurchase, it's a pace that in 2008 we would expect the -- well, we don't project repurchase but based on our capacity, we would expect that the share repurchase in 2008 will be lower than the longer term expectation because in fact we're rebuilding the capital and CG Life to support the Great West business.

On a going forward basis, whether it be share repurchase or additional acquisitions that make sense economically and strategically, we would expect to get another, call it 3 to 5 points of EPS growth from that combination.

So I think it's not a good idea to try to look at your 2005 to 2008 piece and try to extrapolate that that's our expectation going forward.

Thank you, Mr.

Simpson.

Next we'll hear from Carl McDonald at Oppenheimer.

Thank you.

Wanted to focus here on operating expense in the health care segment, higher than I expected.

Looks like the core went up about 6%.

Clearly, the lower enrollment [inaudible] commercial risk impact.

Was there anything else in that core number that inflated in the first quarter?

Sure, Carl, it's Mike.

The main driver of our expense increase in first quarter in health care in the other operating expense item was higher technology expenses.

As we've talked about on prior calls, we do see this need for higher technology expenses in 2008 than what we had in 2007, in particular.

And it really is to strengthen our market pacing capabilities, particularly in this environment where more than ever service at the consumer level is increasingly important; and what that means is making sure that we're making the technology investments to support our capabilities being able to meet those needs over the long-term.

And if you can quantify that, that would be helpful.

The follow-up was on the Great West enrollment, any way you can size for us what the loss in terms of the Great West enrollment was last year relative to expectations this year?

Trying to get a sense for if the enrollment that you're seeing in that book, is sort of normal attrition or if it is in some way related to the acquisition.

First, I'm sorry, when you said the quantification, was it the quantification of the IT piece in particular?

Yes, exactly.

Just sort of the incremental spending that you're doing this year.

Okay.

Well, again, there are a number of moving parts here, obviously, but if you look at first quarter of 2008 versus fourth quarter of 2007 -- so if you look at a sequential pattern, you would see that IT expenses in health care were up 15 million on a sequential basis.

So a little more than half of the sequential increase in the other operating expense line item that you're referencing in the supplement.

The case of Great West, I must admit, Carl, I don't have the '07 membership result for Great West committed to memory.

We didn't own the business then and so I don't have it committed the memory.

I think it's fair to say that we expect in 2008 approximately -- what we're modeling right now is approximately a 10% membership decline for the full year, and that will be 5% from here through the end of the year; and I think it's fair to say that there is some pressure on the -- on that number.

Not pressure on the number, I think the number's a reasonable estimate; but the point is, that that number does reflect pressure on the book of business out in the marketplace.

It's pretty normal in an acquisition like this.

David, do you want to add?

Good morning, Carl.

As I look at the 2008 results, as Mike said, there's approximately the 10% pressure on the membership which is generally speaking in line with our expectations.

As you peel it apart, retention levels generally speaking are strong, which is I think the important part of the quality that Mike made reference to previously, and that's a good reinforcement of the value they're supplying to the employers, the members, and their producer partners.

What we're seeing is lower new business sales as they carried into 2008.

I think some of that is market conditions.

Some of that is, as Mike made reference to, just the general uncertainty of what transpires with a pending acquisition and transition.

By a way of a little bit of market color, having spent a lot of time with Great West's very strong sales leadership around the country as well as a lot of their producers, there's a lot of excitement -- a lot of excitement and a lot of support for the two companies together because of one, our understanding of their product or our shared view of their product [inaudible], two, our ability to improve the total medical costs and three, our ability to expand choice relative to specialty products as well as health improvement products.

So while our projections allow us a minus 10% for 2008, the marketplace is reacting very positively to the two companies coming together.

Great.

Thank you.

Thank you for your question, Mr.

McDonald.

Next we'll hear from Josh Raskin at Lehman Brothers.

Hi, thanks.

I just have two quick questions, I think.

I just wanted to understand the deficit recovery actions that you're taking.

I guess first question is, how exactly do you go back to the accounts and try to get that?

And then second, is there an embedded assumption that lapsed accounts are going to contribute to those recoveries?

Josh, good morning, it's David.

So specific to your question on deficit recoveries, there's a normal course of business and then I'll try to tease out a little bit of what we're intensifying.

There's really two fundamental ways to go about recovering deficits as the book is managed over time.

One is the ongoing management of prudent underwriting and great execution in medical cost management.

So just to play out an example, if an account has the equivalent of 1% of medical cost in deficit, upon renewal if you secure a rate increase that's 1% greater than the underlying medical trend and performance is in accordance with that, you then work your way into recovery of the deficit.

The second fundamental way to recover the deficits is with targeted medical cost actions, to the extent there's something unique happening in an account -- if they have a more acute consumption of care in a specific care category, and a specific geography, and a specific facility, et cetera.

So that's kind of fundamental management of the book day in, day out, underwriting execution and medical cost management.

Beyond that, especially as you have the longer term relationships with customers, there is the opportunity to facilitate deficit recoveries even intrayear.

As an employer understands their experience and as a employer is committed to a longer term relationship and improving the health of their employees, in some cases employers will commit -- formally commit -- to funding their deficits over time.

So that's kind of an ongoing negotiation that happens between our underwriting leaders with the accounts as the transparency of their experience is shared with them.

We discuss why it's in deficit.

In some cases, even intracontract year the employer will make a commitment, a binding commitment, to fund their deficit and that's an ongoing negotiation.

So the first category is fundamental underwriting and medical cost management.

The second category is really working with employer, employer by employer to secure commitments to fund that deficit either that year or the next year over time, through a binding relationship.

And in your guidance -- and it sounds like none of the improvement in the experience rated book for the remaining three quarters of the year include recoveries from lapsed accounts, is that right?

Josh, I think that's a fair comment.

Okay, and then what's the dollar value of the deficits, in terms of the size, versus maybe some historical perspective?

Josh, it's a fair amount lower than what it was during the challenging period back in 2003, 2004.

I think it's fair to say that it is higher than what it was a year ago by approximately 12%.

And that reflects the fact that 35% of the cases are now in deficit versus a year ago, it was closer to the 30.

I guess I'm just trying to get at, Mike, what's the dollar amount?

Just trying to figure out how much of that is contributing to the sort of degradation of the health care earnings.

Sure.

Maybe the way to thing about it, Josh, is that at at this point in time at the end of first quarter, for those accounts that are active, we have approximately 132 million of deficits that in fact we've charged to earnings in the past that represents opportunity to recover in the future.

To the extent that obviously all of those cases persist, that would be the potential upside.

David, you want to add?

Josh, I just had one additional point.

As you think about the number that Mike quoted -- and as you said, it's lower than it had been in the past -- therefore, you could also think about the average deficit per case or average deficit per member within the case is lower.

That's a very important point, because as Mike probably points out, it represents an opportunity for us to recover in earnings improvement over time, in an area we've been very consistent.

A key is to ensure when a case does go into deficit, which is a normal part of running the portfolio, it doesn't go into deficit for too long of a period of time or too severe of a deficit relative to the size of the case.

I think the other thing to remember as well is on a per member basis, the margins that we generate out of experience rated are extremely strong, and in fact some of our best margins.

So as Mike pointed out, the number in aggregate is lower than it's been historically and that's an opportunity for us to -- if we manage it effectively -- improve those margins even further.

Mr.

Raskin, thank you for your question.

Next, we'll hear from Greg Nersessian at Credit Suisse.

Okay, thanks.

Good morning.

Just a quick question on the membership drop in the guaranteed cost book.

I was wondering if you could just sort of break out the pressures there in terms of a couple of different sources in terms of potentially losing some of that enrollment to other fully insured carriers, losing some fully insured business that's going to ASO, either with another carrier or switching internally?

And then, just breaking out the end group attrition.

Greg, it's David.

First macro in term of, just relative to our expectations, the result we're seeing versus our expectation is predominantly driven by lower new business sales.

But that's headline number one in terms of what we would have expected three or four months ago.

As it relates to some of the color that you're describing, as you think about the guaranteed cost product and you think about what's transpiring in the market conditions, we're seeing more movement of ASO and alternative funding mechanisms the like of experience rated coming down in average case size.

So the guarantee cost segment is predominantly [inaudible] in the small employer segment and the lower end of middle market segment.

So as we look at the mix of our business, our retention rate was a tad lower than we would have liked it to been on 1/1/2008.

We don't see that business going in pattern to any one competitor or competitor type; but generally speaking, we see that business moving to other guaranteed cost alternatives in a very competitive environment.

Thank you, Mr.

Nersessian.

Our last question comes from Peter Costa of FTN Midwest Securities.

Could you contrast for me in the experience rated book versus what's gone on in the other guaranteed costs book?

In the guaranteed cost book, you've got membership down, but your MLR -- you only deteriorated about fifty bps, and on the experience rated book your membership is more flat, but you've had a 220 bps problem in MLR.

So can you describe why those two different things have happened, as these books have gotten more similar over time, and I would think that this is sort of a function of what your actions are?

Is it other businesses that you're selling to the experience rated that makes that business worth keeping more?

Peter, it's Mike.

First of all, in terms of the difference in membership between guaranteed cost and membership rated, as David appropriately called out, a big difference in the two books of business is the higher new business sales in experience rated versus the new business sales that we've had in the guaranteed cost books.

So that's a primary driver of the difference in the membership fees.

In terms of your comment around the loss ratio, I think that's really mixing apples and oranges.

First, the loss ratio is a very crude way to look at the experience rated book.

We think it's much more appropriate, for example, to include the specialty relationships and really look at the all in profitability of those customers.

And in terms of new business profitability, I think it's fair to say that new business tends to be lower margin than the renewal book, all things equal.

I mean, for example, by definition, there's no debt recovery on new business, despite the nature of the product.

But we do believe that while the new business is a lower margin book versus the renewing in experience rated, all in this is contributing to earnings for 2008; and maybe even more importantly, longer term we believe the economics are very attractive.

As Ed reinforced, this is a book where we have very strong earnings on a per member basis.

David, do you want to add?

Yes, Peter, just two points.

One is, as we think of what transpired in the books by way of the volume versus our expectations for the first quarter, as I noted previously, the guaranteed cost -- the somewhat lower membership in guaranteed cost was specifically driven by less sales.

To contrast that with a point that might tease out in the experience rated, our sales were not lower.

Our retention drove about half of the lower membership that we saw.

And then, conversions -- so conversions as experience rated business to ASL within the company drove the other half in terms of softness.

So to reinforce Mike's point, it was different levers.

And then finally, as we've always pointed out, it's important to note that the experience rated portfolio is very highly penetrated with specialty products from [inaudible], through behavioral, through pharmacy, disease management, dental programs, et cetera.

Mr.

Costa, thank you for your question.

Ladies and gentlemen, this concludes CIGNA's first quarter 2008 results review.

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

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