信諾集團 (CI) 2010 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by for CIGNA's second quarter 2010 results review.

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

  • We'll conduct a question-and-answer session later in 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, sir.

  • - VP IR

  • 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 David Cordani, our President and CEO, and Annmarie Hagan, CIGNA's Chief Financial Officer.

  • In our remarks today, David will begin by briefly commenting on CIGNA's second quarter results and discussing the progress we have made to date with our growth strategy.

  • He'll also provide an update on the Company's actions regarding Healthcare reform and he will conclude his remarks by providing an overview of our International operations, which is a key component of our global portfolio of businesses.

  • Annmarie will provide a detailed review of the financial results for the quarter, and will discuss the full year 2010 financial outlook.

  • She will also provide an update on our expense reduction activities and capital management goals as well as our growth strategy.

  • We will then open the lines for your questions.

  • Following our question-and-answer session, David will provide some brief closing remarks before we end the call.

  • Now as noted in our Earnings Release, CIGNA uses certain non-GAAP financial measures when describing its financial results.

  • A reconciliation of these measures to 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 posted in the Investor Relations of CIGNA.com.

  • 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 David, I will cover one item pertaining to our second quarter results.

  • Relative to our run-off reinsurance operations, our second quarter shareholders net income included an aftertax non cash loss of $104 million or $0.37 per share related to the guaranteed minimum income benefits business, otherwise known as GMIB.

  • I would remind you that the impact of the Financial Accounting Standards Board's fair value disclosure and measurement guidance on our GMIB results is for GAAP accounting purposes only.

  • We believe that the application of this guidance is not reflective of the underlying economics, as it does not represent management's expectations of the ultimate liability payout.

  • Because of application of this accounting guidance, CIGNA's future results for the GMIB business will be volatile as any future change in the exit value of GMIB's assets and liabilities will be recorded in shareholders net income.

  • CIGNA's 2010 earnings outlook, which we will discuss in a few moments, excludes the results of the GMIB business and therefore any potential volatility related to the respective application of this accounting guidance.

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

  • - President, CEO

  • Thanks, Ted and good morning everyone.

  • Before Annmarie reviews our second quarter results and full year outlook, I'll take a few minutes to cover three topics.

  • First, I'll put our results in the context of our growth strategy.

  • I'll also highlight key points of differentiation and priorities to further enhance our effectiveness.

  • Second I'll provide our perspective on US Healthcare reform and what you can expect from CIGNA, and third, I"ll provide a profile of our rapidly growing international operations.

  • Let's get started.

  • Relative to our second quarter, I'm pleased with our earnings of $1.38 per share, because it affirms the strength of our diversified global portfolio of businesses.

  • We delivered strong results from each of our ongoing businesses, International, Group Disability and Life and Healthcare.

  • Our second quarter results validate how we are delivering on our strategy.

  • I'll briefly revisit the three components of the how.

  • First let's go deep.

  • It's all about focus.

  • Targeted market leadership and expansion, be it geographic, product, or targeted buying segments.

  • This is evidenced by strong membership growth in our middle market and select segments, as well as double-digit premium growth from our Health, Life and Accident business and our very attractive expatriate and disability business growth.

  • Second is go global.

  • Here we capitalize on and establish our global footprint and capabilities in order to expand into geographies with product lines and distribution channels that position us for additional profitable growth over the next three to five years.

  • And third is go individual.

  • This is a buyers' segment, and also a way we run our business, by focusing on the individuals we serve.

  • We're leveraging and learning from outside the US, where we currently have approximately 5.5 million individual policies in force, and we're positioning for growth in the US individual market.

  • Across our businesses, we're providing differentiated value to our customers that's best supported by our strong retention rates, our multi-program relationships and clinical quality results.

  • Take for example our US Healthcare business.

  • We have a sharp focus on delivering high levels of service and choice for our customers.

  • For example, providing a diverse suite of offerings from funding options, to clinical and productivity management, lifestyle management, and wellness programs.

  • We also provide a high level of transparency into the medical costs through extensive reporting for our self-funded and experience-rated customers.

  • In order to continue to meet our objectives as a leading health service Company, we're building on our two key enablers, people and information.

  • I'll comment briefly on people.

  • We've been building a strong team from our sales organization, our award winning Customer Service team, our caring clinicians, our support functions and our leadership team.

  • On a targeted basis, we continued to add to our leadership team both in the US and abroad.

  • Our recent additions underscore the diverse and deep experience required to continue our momentum.

  • Let me preface this by something I have discussed with many of you in the past.

  • This is a continuous process, to add leaders on a targeted basis when and where we need to drive our business.

  • Said otherwise, we're never completely finished and we will continue our journey of expanding roles and adding key leaders on a targeted basis.

  • I'll highlight a key addition in the US, and then in a few minutes I'll highlight some key adds on the International side.

  • We recently announced the addition of Burt Scott in the new position of US Commercial President.

  • The creation of this role was enabled by our deep and highly tenured team of Healthcare business leaders.

  • Burt brings over 30 years of success, driving growth for health and financial services companies, with particular focus on customer experience.

  • Obviously, this is a fit for how we focused our business and where we're headed.

  • So to sum up our year-to-date 2010 results, they represent meaningful progress toward achieving our full year and long-term strategic operating and financial objectives.

  • Now let's turn to the topic that represents substantial change in the environment and marketplace.

  • US Healthcare reform.

  • Although it's early days, I'll highlight some of what you should expect from CIGNA looking forward.

  • At CIGNA, we have a dedicated team of individuals who are focused in three areas.

  • First, being compliant with the law of the land.

  • Second is working proactively with state and federal agencies to convert the legislation to sustainable regulation, and third identifying and pursuing opportunities created by this rapidly changing market.

  • We're working hard to make sure the US Healthcare system changes are sustainable.

  • We recognize the legislation that passed earlier this year did a good job of improving access.

  • However, to be sustainable, we need a Healthcare system that improves quality while reducing cost.

  • These are the keys to sustainability.

  • This is achievable but only if we shift the focus from just sick care to also focusing on keeping people healthy in the first place.

  • As we see it, there's a recipe for success.

  • This is what we're advocating for and delivering in the market place each and every day.

  • From our view, the next generation of health and wellness programs in the US and around the world must link quality and cost in order to be sustainable.

  • The creation of awareness on health issues, health risks and what individuals can do about them is a critical first step.

  • Once awareness is elevated, we must align incentives for individuals and physicians to promote positive behaviors, such as individual accountability, focus on prevention and wellness, and changes in the reimbursement for doctors, facilities and other Healthcare professionals to focus on the quality of outcome rather than only the quantity of services.

  • These must be supported by two critical items, actionable information about treatment options and alternatives, the cost of care as well as expected quality outcomes.

  • In addition, providing assistance from trained Healthcare professionals who help individuals improve their health and navigate the complex Healthcare system.

  • Today we're delivering meaningful value for customers where we apply this recipe.

  • For example, we have demonstrated that customers can achieve 26% lower medical costs over four years, all while levels of engagement go up, health compliance goes up, and overall Healthcare quality improves as well.

  • We're also using awareness and incentives in our on-site and retail care delivery, our biometric screening and our health coaching capabilities.

  • The environment we operate in is nothing if not dynamic, and you can expect CIGNA to continue to innovate.

  • For example, we're accelerating the rate of partnering with physicians and hospitals to incent them on quality outcomes.

  • This is happening today with our patient centered medical home and accountable care programs.

  • Regarding the impact of US Healthcare reform, obviously much more is needed to convert the legislation to sustainable regulation.

  • And although all of the effects are not totally clear yet, based on progress to date, we continue to believe that the direct impact of reform to CIGNA is manageable.

  • And as we have previously discussed, this rapidly changing marketplace creates opportunities for CIGNA.

  • Relative to the direct impact of Healthcare reform, our Group Disability, Life and International operations represent about 40% of CIGNA's year-to-date earnings from operations, and are essentially outside the scope of US Healthcare reform.

  • Specific to our Healthcare operations, over 90% of our medical membership is in self funded or experience-rated business, which already has a high degree of transparency of medical costs from employers, with medical cost improvements directly benefiting employers, and our individual and small group membership represents approximately 1% of our total membership.

  • We see opportunity in the fact that we can take a fresh look at these markets rather than protect the past model.

  • Specific to opportunities we see, we believe our diversified product portfolio and global geographic footprint provide us with new and attractive opportunities for expansion, both inside and outside the US.

  • We are well positioned philosophically, with the goals of Healthcare reform, those being transparency, choice and individual responsibility, and strategically we continue to invest in capabilities that are in line with these market shifts.

  • With that, I'm going to give you a deeper profile on our International operations before I turn the call over to Annmarie.

  • To state the obvious, the global marketplace is diverse, complex and rapidly growing.

  • With each country having its own culture, growth opportunities and barriers to entry.

  • We have established focused business models that are responsive to the needs of individuals and businesses we serve.

  • Today, our International operations includes a workforce of over 9,000, and generates over $2 billion in revenues.

  • This historically delivered double-digit revenue growth, double digits earnings growth, with very attractive margins and capital efficiency.

  • We expect this trend to continue.

  • This growth rate and earnings power is significant by any standard of measure.

  • Our International operations currently includes four lines of business, two that are large and well established, our Health, Life and Accident business and our Expatriate business.

  • One established but smaller and growing one, that's our Healthcare business, primarily focused in Spain and UK and an emerging business, focused on individual private medical insurance.

  • Today, I'll discuss the two larger businesses in more detail.

  • These businesses have locally licensed insurance companies in 27 global jurisdictions that are led by dedicated local management teams, supported by dedicated product development and marketing teams, and they distribute products and services through differentiated and diverse channels.

  • These capabilities, coupled with ongoing innovation, are critical drivers of our success.

  • Our largest and fastest growing business is our Health, Life and Accident business which is now led with the addition of Jason Sadler, a prominent leader of large, multi product Asia-based businesses and with our focus on the rapidly growing markets in Asia, he's headquartered in Hong Kong.

  • The addition of Jason has enabled us to move our prior Health, Life and Accident Head, David Skinner, also Asia-based, to focus solely on China, which is a huge opportunity for us, given its current size and rapid growth rate.

  • In our Health, Life and accident business, we serve individuals by providing low premium, short-term supplemental health and security-related coverages.

  • Our operations are in the Asia-Pacific and Euro regions, and we continue to systematically expand our footprint to position for sustained growth in the future.

  • The second largest business is our Expatriate business, which serves expats in virtually every country throughout the world.

  • This business is run by Andrew Kelty who joined CIGNA after a number of executive leadership positions around the globe.

  • In this business, we offer multi national organizations medical benefits for their employees on long and short-term International assignments.

  • We provide global access to Healthcare through our global network of Healthcare professionals, and we support this with a world class multi lingual, multi cultural service model.

  • In addition to the attractiveness of the revenue and earnings contributions from these businesses individually, we're taking the decades of International experience of servicing individuals and providing supplemental Healthcare coverage, and leveraging that knowledge to continue our global expansion to new geographies, including the US.

  • We see the global economy fast becoming borderless, and at CIGNA we have a terrific and established foothold in this rapidly growing marketplace.

  • We're providing the thought and market leadership to move along with it, as well as shape what the future looks like.

  • In closing ,I'm pleased with the progress we have achieved on the global growth strategies and our 2010 financial and operating objectives.

  • Our second quarter results are strong and reflect the strength of each of our ongoing businesses.

  • I'm confident in our ability to continue to execute on the fundamentals, and achieve our full year goals and we continue to invest to position ourselves for continued success beyond 2010.

  • Finally, as we continue to execute our global growth strategy, I'm fortunate to have such a talented and dedicated team with me here at CIGNA.

  • With that, I'll turn the call over to Annmarie.

  • - EVP, CFO

  • Thanks, David.

  • Good morning, everyone.

  • In my remarks today I will review CIGNA's second quarter 2010 results, as well as provide an update to our full year outlook.

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

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

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

  • Our second quarter consolidated earnings were $384 million, or $1.38 per share, compared to $313 million or $1.14 per share in the second quarter of 2009.

  • This reflects very strong results from each of our ongoing operations.

  • They are International, Disability and Life and Healthcare.

  • And we continue to leverage this diversified portfolio of businesses to deliver value for the benefit of our customers and our shareholders.

  • I will now review each of the segment results beginning with Healthcare.

  • Second quarter 2010 Healthcare earnings were $247 million.

  • This result reflects lower medical costs, the impact of targeted membership growth, strong contributions from specialty businesses, and ongoing operating expense improvements.

  • Specific to our strategy execution, we are consistently achieving strong customer retention and new sales in targeted segments and geographies.

  • Overall, Healthcare membership was up slightly versus the first quarter of 2010.

  • This result reflects continued growth in our guaranteed cost and our experience rated products.

  • Offset by disenrollment and our national account ASO business.

  • The growth in our commercial risk businesses came primarily in our targeted markets and our targeted customer segments including Middle Market, Select, and individual.

  • Healthcare premiums and fees grew 15% on a quarter-over-quarter basis.

  • This increase reflects net membership growth and a change in membership mix, which includes a higher percentage of commercial and Medicare related risk business.

  • Turning now to our medical costs, results in the quarter demonstrate strong clinical quality and competitively attractive medical costs for all of our customers, of which the majority, over 80%, are served through self-funded relationships.

  • Specific to earnings, our second quarter results include favorable prior period claim development of $40 million after tax across our risk book of business.

  • Of this amount, $14 million is related to prior years, and $26 million is related to the first quarter.

  • Our medical results reflect lower than expected utilization levels, including the absence of flu-related claims.

  • We also saw lower medical costs in the first half of the year, due to a greater percentage of business in high deductible plans.

  • It is typical for these plans to have seasonally low claims in the earlier part of the year, followed by higher claim levels in the latter part of the year.

  • Specific to our guaranteed cost book of business, second quarter results include $11 million after tax of favorable prior year claim development, which is part of the overall $14 million I referred to earlier.

  • Given the relative small size of this book of business, and the fact that results tend to bounce around from quarter to quarter, we suggest that it is more meaningful to focus on the year-to-date results.

  • Our guaranteed cost medical care ratio, or our MCR, for the first half of 2010 was 82.3% excluding prior year claim development.

  • Regarding our experience rated product, we continue to see good growth in this business at attractive margins.

  • Results in the quarter also benefited from favorable prior period claim development, again reflecting lower utilization and the impact of an increase in the mix of high deductible products.

  • Relative to our new business and our experience rated and guaranteed cost products, while we are still only six months into the year, results to date continue to support our pricing target, and reflect good pricing and underwriting discipline.

  • ASO earnings were favorable overall, driven primarily by strong contributions related to our specialty businesses and lower operating expenses.

  • Year-to-date core medical operating expenses were lower compared to the same period last year, driven by cost reduction actions taken in 2009.

  • We have maintained our strong clinical delivery and service models during these cost reduction efforts.

  • As we pursue additional operating efficiencies, we will continue to make appropriate trade-off decisions, regarding strategic investments and the potential impact of Healthcare reform.

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

  • Second quarter earnings in our Group Disability and Life segment were $89 million.

  • This reflects continued operating excellence in our Disability management program, which also contributed to a net benefit of $29 million after tax related to reserve studies.

  • Through our expertise in Disability management, we are able to help employees return to work faster, which increases productivity and drives cost savings for our customers.

  • Results in the quarter were strong overall, and this segment continued to deliver attractive margins.

  • Second quarter earnings in our International segment were $64 million.

  • Our health, Life and accident business benefited from good persistency and strong new sales in our targeted growth countries.

  • We also saw strong renewal rate actions and lower claim levels in our expatriate benefits business.

  • Overall, results in the second quarter demonstrate good execution of our growth strategy and the value we provide to our customers and shareholders by leveraging the capabilities of our diversified portfolio of businesses.

  • Earnings for our remaining operations including run-off reinsurance, other operations and corporate totaled to a loss of $16 million for the second quarter.

  • Relative to our run on VADBE book of business, results were breakeven.

  • Turning now to our strategy, second quarter results demonstrate continued consistent execution of our global growth strategy.

  • Through the first half of 2010, we achieved solid growth in each of the business areas of focus.

  • Specifically, in our Middle Market, our Select segment, Disability, and our global product offerings.

  • Medical membership in the Middle Market segment is up 7% versus year-end 2009, reflecting good customer retention and new sales.

  • Customers within this segment generally purchase both medical and specialty coverages, which allow us to more effectively manage the overall health and wellness of the individuals we serve.

  • Medical membership in the Select segment is up 6% versus year-end 2009, reflecting stronger retention rates and new sales due in part to the success of the benefit program that we rolled out in the second half of 2009.

  • In our National account segment, we continue to focus on those employers who value engagement and incentive based products offered on an integrated basis, and we have had success in winning new business and further penetrating existing accounts that are aligned with this value problem significance.

  • Regarding our Disability business, we have demonstrated solid premium growth in the first half of this year which further supports our position as an industry leader in this space.

  • And finally, relative to our global businesses, we continue to see strong Health, Life and Accident sales and good persistency as I noted previously.

  • We also see good revenue growth in our expatriate benefits business.

  • Overall, we are pleased with the progress we have made to date in executing on our strategic, operational and our financial goals.

  • This execution has resulted not only in enhanced customer access, but also improvements in service and clinical quality.

  • Now I'd like to provide a brief update on our efforts to reduce our medical operating expense base.

  • We remain committed to reducing our medical operating expense base and to making meaningful progress in closing our competitive gap while maintaining service excellence and making prudent investments to fuel growth in our strategic areas of focus.

  • Medical operating expenses, which directly correlate to our competitive expense position, and provide for the most meaningful expansion opportunity were down 4% versus the first half of 2009, while both membership and revenue have increased.

  • Specifically, medical operating expenses were $1.3 billion in the first half, which is lower than the first half of 2009 by $63 million pretax.

  • This year-over-year improvement is largely due to the impact of the cost reduction actions taken in 2009 while we continued to grow and invest.

  • We continue to expect to reduce our medical operating expense base in 2010, but to a lesser extent than we previously communicated.

  • This change is due to targeted and strategic increases in spending in the second half of the year for three main reasons.

  • First, in volume related expenses, as we expect to increase our level of spending on Customer Service and other areas in response to our growth in risk membership.

  • Second, we have contemplated incremental technology-specific items, including spend for supporting compliance, with Healthcare reform as well as accelerated spend related to HIPAA 5010.

  • And third, in discretionary spend, as we invest in targeted areas to further support execution of our growth strategy.

  • Beyond 2010, we will continue to pursue additional medical operating expense savings while ensuring continued service excellence and strong clinical delivery.

  • We will continue to make the appropriate trade-off decisions as we target closing our competitive operating expense gap, while supporting strategic investments and Healthcare reform.

  • Turning now to our investment portfolio, results continue to be strong relative to the challenging economic conditions.

  • We recognized net realized investment gains of $14 million after tax in the second quarter, which was net of a $3 million aftertax impairment on our commercial mortgage loan portfolio.

  • In the second quarter, we completed our comprehensive annual review of each of the commercial mortgage loans in our $3.4 billion portfolio.

  • The average loan to value ratio of the portfolio was essentially unchanged, improving modestly to 76% compared to our most recent estimate of 77%.

  • Market conditions remain challenging, but there are growing signs of stabilization and increased demand.

  • Overall, we view these results of our annual mortgage loan review as positive.

  • And while we continue to believe our portfolio is comprised of high quality, stable properties, we will continue to aggressively manage all aspects of the portfolio and respond appropriately to emerging information.

  • We continue to be quite pleased with the high quality and diversification of our overall investment portfolio and we believe our problem investment exposure is manageable.

  • I'll now discuss our capital management position and outlook, including a summary of our subsidiary capital and our parent Company liquidity.

  • Overall, we continue to have a strong balance sheet and good financial flexibility.

  • Our subsidiaries remain well-capitalized with statutory surplus well in excess of regulatory minimum, and we repurchased approximately 6.2 million shares of CIGNA's common stock through August 4th, for $200 million.

  • Regarding parent Company liquidity, we ended the quarter with cash and short-term investments at the parent of approximately $720 million.

  • This includes outstanding commercial paper borrowing of approximately $100 million, as well as $300 million of long-term debt issued in May.

  • Turning now to our full year 2010 capital management outlook, we started the year with $475 million of cash at the parent.

  • We continued to expect full year subsidiary dividends of $1 billion.

  • We issued $300 million of long-term debt in May.

  • While this increases our parent Company liquidity in 2010, we are committing $225 million of these proceeds to the repayment of long-term debt maturing in January of 2011.

  • We continue to expect the full year net aftertax impact of the Pension Plan funding to be a net use of $150 million, which we have completed in the first half of the year.

  • As I mentioned previously, we used $200 million for share repurchase.

  • We now expect full year other net uses of $250 million.

  • Putting all the pieces together, we expect to end 2010 with parent Company cash of approximately $1.175 billion.

  • Given the uncertainty of the equity markets and the economic conditions, as well as the potential impact of Healthcare reform, we are now targeting $400 million worth of cash at the parent Company.

  • Considering this increased parent Company cash target of $400 million, and commitments of $225 million for long-term debt and $100 million for commercial paper maturities, our outlook implies that we would have approximately $450 million available for capital deployment for the balance of 2010.

  • Our capital deployment strategy remains the same.

  • This strategy prioritizes the use of capital resources to, first, provide capital necessary to support growth and maintain or improve the financial strength ratings of our subsidiaries.

  • This includes evaluating potential solutions for our run-off reinsurance businesses and our pension funding fund obligations.

  • Second in our capital deployment strategy, we would consider M&A activity with a focus on acquiring capabilities and scale.

  • And finally, after considering these first two items, we would return capital to investors through share repurchase.

  • Overall, our capital outlook for 2010 remains quite positive.

  • I will now review our earnings outlook.

  • Overall, we have increased our consolidated full year 2010 earnings outlook, reflecting the strength of our second quarter results from each of our ongoing businesses.

  • For full year 2010, we now expect consolidated adjusted income from operations of $1.13 billion to $1.21 billion.

  • This is $60 million to $80 million higher than our previous outlook.

  • Regarding our run-off VADBE book, this outlook reflects approximately breakeven results for full year 2010.

  • This assumes that actual experience, including capital market performance, will be consistent with the long-term reserve assumptions.

  • If the current environment of sustained equity market volatility and low levels of interest rates persist, we may increase our reserve which could result in losses in the second half of 2010.

  • We now expect full year earnings per share in a range of $4.10 to $4.40 per share, which is an improvement of $0.25 to $0.35 per share over our previous outlook.

  • Our earnings per share outlook reflects share repurchase activity through August 4th, and does not include any future share repurchase activity.

  • Regarding the impact of Healthcare reform legislation, our 2010 outlook contemplates the benefit coverage requirements effective this year, certain operating expense items, and limitations on the future tax deductibility of certain retiree benefit programs and other compensation.

  • I'll now discuss the components of our 2010 outlook, starting with Healthcare.

  • We now expect full year Healthcare earnings in a range of $765 million to $825 million, which is an improvement of $35 million to $45 million from our previous outlook.

  • This improved outlook is largely due to lower medical costs driven by prior year claim development and lower claim utilization.

  • In addition, more favorable specialty results will be essentially offset by targeted investments in capabilities and additional investments related to accelerated compliance spend and Healthcare reform.

  • Relative to medical membership, we now expect full year 2010 membership growth of approximately 3%, which is at the high end of our previous outlook of 2 to 3%.

  • This modest improvement reflects strong customer retention and sales execution.

  • I'd also reinforce that new business pricing and the renewal rate actions we are obtaining are consistent with our expectations.

  • Turning to medical costs, for our guaranteed cost book of business, we now expect a full year MCR to be approximately 83%.

  • This reflects the favorable impact of prior year claim development, and the benefit of the lower than expected utilization levels in the first half of 2010.

  • Our outlook for the second half of the year assumes that claim utilization returns to historical levels, including an assumption that flu-related claims will be consistent with the third and fourth quarters of 2009.

  • Our second half MCR also contemplates a higher level of claims due to typical seasonality on the portion of our business in high deductible plans.

  • As a result of the lower claim utilization levels experienced in the first half of the year, we have reduced our total booked medical cost trend expectation by 50 basis points.

  • We now expect full year medical cost trends for our total book of business to be approximately 8%.

  • Regarding Medicare Advantage Private Fee for Service, we continue to assume a breakeven result for this business in our full year outlook.

  • Now moving to our Group Disability and Life and our International operations.

  • We now expect Group and International to contribute full year 2010 earnings of $510 million to $530 million.

  • This is a $25 million to $35 million improvement over our previous expectations primarily reflecting the strength of our second quarter results.

  • These two businesses consistently deliver differentiated value for our customers, and as a result, competitively strong growth and margins.

  • Regarding our remaining operations, including run-off reinsurance, other operations and corporate, we continue to expect a loss of $145 million for full year 2010.

  • So all in, we now expect consolidated EPS to be in a range of $4.10 to $4.40 per share.

  • So to recap, our second quarter 2010 consolidated results reflect the strength of our global diversified portfolio of businesses.

  • Results also demonstrated effective execution of our global growth strategy, with year-to-date membership and revenue growth in our targeted areas of focus.

  • Our current capital outlook is quite strong, and our investment portfolio is of high quality, and finally, we are confident in our ability to achieve our full-year 2010 earnings outlook, which represents competitively attractive earnings growth.

  • With that, we'll now take your questions.

  • Operator

  • (Operator Instructions).

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

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

  • One moment, please, for your first question.

  • We will go first to Matthew Borsch with Goldman Sachs.

  • - Analyst

  • Good morning.

  • My first question is on your expatriate business, couple things there.

  • I think last quarter you had said the claims development, or perhaps it was the trend in the quarter was $5 million favorable to your earnings in ex-pat.

  • If you could update what that figure was for this quarter if I got that right.

  • And then more broadly, with the NAIC leaving apparently open to HHS, the question of whether the MOR rules will apply to ex pat, but laying out a recommendation for how the rules should work if in fact it's applicable, could you comment on what range of impact you might see or where you expect that to come out?

  • - EVP, CFO

  • Good morning, Matthew.

  • It's Annmarie.

  • I'll take that first part of the question on the ex-pat claims, and then I'll ask David to comment on the impact of reform on ex-pat.

  • You're right, last quarter we talked about a $5 million kind of better than expected run rate on the claims.

  • When I look at the total International operations, so including Healthcare and Health, Life and Accident as well as expatriate benefits, through the six months we probably had about $15 million to $20 million all in that was better than expected claims results primarily as it relates to seasonality.

  • So as we look first half to second half, so it's somewhere in the neighborhood about $15 million, primarily in ex-pat that we would not expect to occur in the balance of the year.

  • - President, CEO

  • Matthew, good morning.

  • It's David.

  • On the second point, first by way of backdrop, whether it's ex-pat or other issues, we continue to work very closely with HHS, the White House Staff and the NAIC.

  • And as you know, things continue to evolve.

  • Let me give you a minute of background on ex-pat and then directionally answer your question.

  • Our ex-pat portfolio is large and broad.

  • What I mean by that, there's insured coverage and there's ASO coverage.

  • There's coverage for US domiciled employers and non-US domiciled employers.

  • Therefore, there's a variety of services being consumed both in the US as well as outside the US.

  • Additionally, as I believe you know, it's a pretty complex offering with a different administrative service profile.

  • So the breadth of the global network, 24 by seven, 365, the multilingual service, up through and including evacuation services, present a very different type of offering than a traditional commercial employer offering.

  • The reason why I provide that backdrop is that's a lot of the conversation that's been happening with White House staff, HHS and the NAIC to make sure they understand the overall design of the programs, how they're consumed, who they're targeted for, et cetera.

  • It's early to draw a conclusion but as we said in our prepared remarks, at this point we believe the direct impact of finalization of the Healthcare reform is manageable for our business, and we'll obviously stay quite transparent and open with you as it comes to closure.

  • - Analyst

  • If I could ask one follow-up on a different topic.

  • As you touched on VADBE, can you give us an update of in the past where the market sensitivity is, maybe relative to S&P levels, if the S&P drops to, I don't know, whatever threshold level, what the impact might be.

  • - EVP, CFO

  • Sure, Matthew.

  • It's Annmarie.

  • Relative to our VADBE results, as we discussed before, these results have been in the breakeven range over the last four to five quarters.

  • As we noted in our prepared remarks, and in our press release, if the market levels continue to have that low level of sustained interest rate as well as the volatility that we've experienced in the S&P, we've indicated that we could have a charge.

  • Now, to put that in perspective, to get to your specific question, we do disclose our sensitivity.

  • Relative to the S&P, closed at around 1120, 1125 at the end of June, a 10% change in that S&P level, Matthew, would hit the reserves by about $10 million to $15 million after tax.

  • In addition, relative to our interest rate environment, we have seen sustained low levels of interest.

  • Just to put some perspective around that, because I think these are the two sensitivities that are most important for you to think about, the interest rate sensitivity, as you know, our growth rate is about 5% and in our critical accounting estimates, in our 10-K, we would indicate that a 50 basis point change in interest rate would be about $15 million to $20 million.

  • The only other thing I would put an exclamation point on there is when we think about our interest rate, it's a long-term growth rate assumption and I wouldn't think of that sensitivity as relates to the short-term rates that we're hearing today, like the 0.4%, 0.5% range.

  • So relative to VADBE, when I think about interest rates, the 7 to 10 year kind of Treasury rate is in the 3.5% range and even that is not necessarily a strong proxy for the sensitivity that we have as it relates to our VADBE reserve.

  • So order of magnitude, if you had an interest rate worry, would you think of it in the $10 million to $50 million range, potentially.

  • Probably more than you asked for.

  • I thought it would be a fulsome disclosure to talk about those couple of sensitivities that we have out there.

  • - Analyst

  • Fantastic.

  • Thank you.

  • Operator

  • Thank yoy, Mr.

  • Borsch.

  • We're go next to Josh Raskin with Barclays Capital.

  • - Analyst

  • Hi.

  • Thanks.

  • Good morning.

  • First question, just on Medicare Advantage, I know Annmarie you talked about the expectation of still seeing Private Fee for Service as break even.

  • Can we read into that a suggestion that claims are coming in?

  • And I know sometimes the lag on those are a little bit longer but claims are coming in sort of as expected and maybe you could help us in terms of a expectation for 2011 now that your bids are submitted, would you expect that business to be profitable or smaller or both?

  • - EVP, CFO

  • Sure, Josh.

  • Annmarie here.

  • Relative to the Private Fee for Service piece of it, what we talked about was that during the year we had more individual Private Fee for Service than we may have expected.

  • So I assume that's the question you're really going at.

  • Through six months, we would think our paid claim levels are about as we expected, and as I noted in my prepared remarks we are continuing to assume that was breakeven.

  • To date, we've received no additional information that would make us change our expectations around the health of the population that we talked with you all about after the first quarter.

  • So feel pretty good through six months, albeit you know as well as I do that this type of individual claim reporting is a little bit longer.

  • So we'll continue to update that as we go into the third and fourth quarter.

  • Relative to your specific question around 2011, on the individual piece, we have indicated that we have not filed for individual Private Fee for Service, whether it be in a network base or a non-network based and I'm sure you're aware of our new Humana relationship on the group side, which I'd ask David to comment on for you.

  • - President, CEO

  • Morning, Josh.

  • On the Group network based program we're delighted to have the relationship we secured with Humana as both the distribution and service alliance.

  • For our employer customers we've been able to secure a Best-in-Class network service and clinical offering to be coordinated up against our commercial offering and we'll coordinate that service along with Humana as we go into 2011.

  • - Analyst

  • Okay.

  • That's helpful.

  • And then just on the national account selling season, I know it's a little bit early and it seems like there's a little sort of delay I guess in the market but I'm just curious what you guys are seeing and how we should think about expectations for some of ASO business going into 2011.

  • - President, CEO

  • Josh, is David.

  • Just a few of the themes.

  • As you referenced, it's early.

  • Just by way of color context, I think over the past couple years we referenced that the decision making cycle has pushed off.

  • So and I think that's attributed to the size, complexity and magnitude of these decisions as being more C suite decisions than ever.

  • Having said that, I'd give you a few points.

  • One, as we sit here today our pipeline for national accounts, breadth and quality, is about the same as it was last year and what I would have told you last year is that our 2010 pipeline we felt good about and was contextually in line with our 2009 pipeline, so as it relates to looks at opportunities, volume, breadth and quality, feel pretty good about it in terms of what we're seeing in the marketplace.

  • However, because of that decision making cycle being longer, a high percentage of those programs are reportedly in RFP or final stage right now.

  • That's theme number one.

  • Theme number two is the preponderance of those RFPs or requests or finalist meetings are intense live focused on what we call engagement and incentive based programs.

  • Could be CDHP, could be high sophisticated co-insurance programs.

  • Could be using zero fund account balance programs to deposit incentives back in, but high use of incentives and when we talk about engagement based programs, we have a program called our Integrated Personal Health Team that looks at the whole person as opposed to individual modules of service delivery.

  • The demand for those type of services is rather high and we're pleased to see that.

  • Finally, if we look at our book of business in terms of what's out of it, inferred in your question, adjusting for one piece, one large piece of business that was on cycle that wee knew about that's large and lower margin, that's also in pattern with what we've seen last year.

  • Overall, early, our national account selling season's in line with our early expectations and our strategic forecast.

  • - Analyst

  • And I'm sorry, David, did you infer there that there's one large account.

  • Is that one that's going to lapse or that's just now currently out for bid?

  • - President, CEO

  • It's a large account on cycle, out for bid, for kind of partial movement is the way I would look at it and because of its size and breadth, tends to be lower margin and we've known about it for quite some time.

  • Just part of managing a large, broad, portfolio.

  • Important headline, Josh, is I would ask you to think about the balance of opportunities, known sales, known finalist opportunities, coupled up against business that's out to bid, it's really in line with our expectations right now both in terms of quality and depth which we feel goods good about.

  • - Analyst

  • Okay, thanks.

  • Operator

  • We will go next to Christine Arnold with Cowen and Company.

  • - Analyst

  • Hi, there.

  • Couple questions.

  • On Medicare Advantage you said you're expecting breakeven.

  • Does that mean it's been breakeven thus far?

  • Because I'm kind of sensing based on the loss ratios that we were in a 97% to 97.5% range in the quarter.

  • Is my math off?

  • - EVP, CFO

  • Christine, it's Annmarie.

  • No, your math's not off.

  • Given the seasonality of this, and as any new business, or any loss reserves were put up, we do put provisions for adverse deviation on.

  • There's also some of the timing relative to the expense recognition on Private Fee for Service.

  • So if you think about the pattern, it's almost like a Part D type pattern.

  • So first quarter you have losses.

  • Second quarter you have some profits coming through to bring the six month number in the low single digit loss category.

  • And then through the balance of the year, you have a slight uptick so that the full year is breakeven but there is seasonality relative to the recognition of our provisions for adverse deviation as well as our expense recognition.

  • - Analyst

  • Okay.

  • So losses first half, profit second half.

  • - EVP, CFO

  • That's correct.

  • - Analyst

  • And then on the prior period development, $11 million of the $14 million was related to guaranteed costs.

  • Can I assume the vast majority of the $26 million related to first quarter was also guaranteed costs so I can adjust for seasonality?

  • - EVP, CFO

  • Sure, Christine.

  • Relative to the $26 million, it was around $20 million in guaranteed costs with the balance of it in primarily in our share returns bucket.

  • - Analyst

  • Can you tell us how much of your ex-pat revenue is insured US domiciled, not short-term and might be subject to the floors?

  • - EVP, CFO

  • Yes, Christine, at this point in time we're not prepared to answer that actual split.

  • As David mentioned in his earlier comments, as we get more clarity around things we'll be as transparent with you all as possible.

  • Operator

  • Thank you, Ms.

  • Arnold.

  • As a reminder for participants, please limit yourself to one question and one follow-up.

  • We'll go next to John Rex with JPMorgan.

  • - Analyst

  • Could you give us a little more color on the drivers of the utilization decline you're seeing.

  • Categorize for us in the four major buckets where you're seeing the most weakness and what you attribute that to, and then how is this impacting your pricing decisions as you think about 1/1 renewals and how much you're going to bake into your expectations?

  • - EVP, CFO

  • Thanks, John.

  • Annmarie.

  • Relative to the lower utilization, remember, overall on at least the guaranteed cost book of business, you're talking about a small book of business and that utilization probably attributed about $10 million after tax to the results through the first quarter.

  • In addition, I'll remind you that from an overall book, we really only changed our trend by about 50 basis points, so good news, lower utilization, good news.

  • I might not necessarily say reached, but actually good news there.

  • And a lot of it is due to the flu and, therefore, we're seeing it come through in bits and pieces across in-patient, pharmacy and professional but order of magnitude we have not materially changed our trend number.

  • I think the only thing that really changed in the trend number was the pharmacy we might have said was high single digit and now I might say mid to high.

  • As it relates to that, given that it's not a material move, we don't expect a material price change.

  • As we go into 2011, we'll obviously be considering all the components of what's going on with Healthcare reform as well as kind of our trend perspective and as typical, we would expect to price -- I'm not trying to forecast 2011 at this point, but our typical process is to price at about trend.

  • - Analyst

  • And are your bed days running positive or running negative?

  • When you think about bed days per thousand members now.

  • - EVP, CFO

  • I'd say they're about zero, kind of in a breakeven perspective from a trend perspective.

  • So basically it might be plus a half a point, minus a half a point.

  • They're at about breakeven.

  • - Analyst

  • Just wanted to come back to VADBE quickly, make sure I understood your commentary.

  • If we assume that interest rates stay where they are right now for the balance of the second half and market volatility is consistent with what we saw in the first half, what would be the size of the reserve you would need to take in the second for that book?

  • - EVP, CFO

  • So John, there are two parts of the many moving parts within the VADBE liability, so obviously they're two important ones but I don't want to pretend it's as simple as saying in answer to that question we could project what will happen.

  • Remind you again that at June we feel good about our long-term reserve.

  • The flag I had out there for you was, again, if it continues, to your point, and the bigger piece of the uncertainty right now is around the interest rates.

  • So I think I said when I was talking earlier that relative to the interest rates, I wouldn't look exactly at the low level that's there today, the short-term rate because that's not necessarily representative of was we expect to happen over the long term.

  • I'd use something like the seven to 10 year Treasury as a proxy but even that is not necessarily indicative of what we pick as a long-term rate.

  • So if I had to be boxed into a number, I would say somewhere in the $10 million to $50 million range but there are a lot of moving parts and really we need to stay tuned and watch that and again, we have the outlined our sensitivities but again they're just two of the moving parts.

  • Other things could move favorably to offset that as well.

  • - Analyst

  • Just to be clear, make sure -- I want to understand this.

  • If the seven to 10 year Treasury stays where it is now, you think it would be a $10 million to $50 million reserve addition.

  • - EVP, CFO

  • Order of magnitude.

  • I think at the end of the day this is not catastrophic or huge.

  • It's a manageable number that we might expect.

  • - Analyst

  • Could you size it, volatility, if market volatility is like it was in the first half, what's again, broadside of the barn, is that $10 million to $50 million also?

  • - EVP, CFO

  • I wouldn't add those together.

  • I would actually look at all the moving parts as potentially in that range.

  • - Analyst

  • I see.

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Rex.

  • We will go next to Ana Gupte with Sanford Bernstein.

  • - Analyst

  • I had a question firstly on your practice PBM.

  • Could you give us any color on your views on the recent arrangement and how you think about that with regards to getting better discounts, but then it's probably offset to some degree around your vertically integrated value proposition to your MIddle Market customers.

  • - President, CEO

  • Good morning, it's David.

  • Relative to the PBM, first, macro.

  • We actually expect the PBM space, both narrow and broad to continue to be very dynamic.

  • A lot of growth, a lot of changes both in classic pharmaceutical delivery, as well as specialty pharmaceutical delivery.

  • We expect to see a lot of movement and change in the marketplace.

  • In the context of our PBM, as you reference, we continue to believe our PBM is currently delivering a significant amount of integrated value for the benefit of our customers and as you go back to our growth strategy, our growth strategy focuses on Middle Market employers, Select segment employers and those National account employers who value engagement and incentive, which tend to be highly integrated.

  • There's a strong proposition there.

  • Second piece I would add to it, though, is a PBM is not one unit.

  • There's a variety of components that exist in a PBM from formulary management to clinical program management through mail order and as we said in the past we concluded that it was most prudent to retain the asset on an integrated basis but like all the assets we have in our portfolio, we will continue to consider whether or not there's alternatives, looking at parts of the asset or the whole of the asset to create more value.

  • As it stands today, a very important part, delivering good integrated clinical quality and total cost quality for our customers, especially because of the targeted segments we're going after but we'll continue to be open to strategic considerations for portions of it as we look forward.

  • - Analyst

  • Okay.

  • Follow-up, just wrapping up on the PBM, did you have turnover in your leadership there and then just different question on M&A, you said that's one of your top priorities over share repurchase.

  • Would you look at strengthening your health benefits portfolio and possibly get more local and national scale or are you looking more at adjacencies like International or some of your competitors moving into health services to a large degree.

  • - President, CEO

  • Two comments.

  • Relative to leadership you might be referencing, the former President of our PBM actually went to be CEO of a captive PBM which is actually quite a good outcome.

  • It was an individual that CIGNA's known for a long period of time and matched rather nicely to his career plans and career objectives.

  • We had built succession in the organization, so there was a seamless transition of responsibilities and the prior President of our PBM had that as a responsibility, built a strong team that's currently running the business.

  • So it's both a blessing and a curse of having a strong leadership team, of potential turnover of leadership.

  • The important message is a seamless leadership transition within the Company and the strategies continue to be executed.

  • Specific to your M&A question, yes, M&A's an important part of our strategy but by no means the sole part.

  • We need to demonstrate we can grow organically.

  • Specific to your question, we see opportunities, broadly speaking from an M&A space, as long as it's strategically aligned and financially prudent.

  • So we wouldn't limit to one or the other.

  • We would look and use our strategies, our guide post and our strategy speaks to go deep, go global, go individual.

  • So my broad answer to your question as you put categories around it is yes, but we'll use that strategy as our specific guide post to identify either go deep opportunities or the broadening opportunities that present themselves.

  • - Analyst

  • Thanks for taking the question.

  • Operator

  • Thank you, Ms.

  • Gupte.

  • We'll go next to Doug Simpson with Morgan Stanley.

  • - Analyst

  • Hi.

  • Good morning everyone.

  • Certainly appreciate the color on the VADBE book and the discussion around the $10 million to $50 million number for the second half of the year.

  • If we just connect the dots back to sort of 2008 and prior, there have been a number of true-ups generally to the down side on the reserve for that book.

  • I mean, how do we think about -- what type of number would you have to take to really give a very high level of confidence that we wouldn't have to take any future reserve hits on that line of business?

  • - EVP, CFO

  • It's Annmarie.

  • Just to make sure and clarify what you said there, prior to what I'll frame as a debacle of market environment in 2008, we have been pretty much breakeven for VADBE for quite some time.

  • So I just want to be clear that there weren't a lot of charges that were happening before that.

  • We had been breakeven for some period of time.

  • Relative to your specific question, as it relates to what charge we would have to take to be done with it, I don't want to comment on that specifically, because that's a hard question to answer.

  • Having said that, we as a management team are very focused on continuing to identify solutions to either mitigate further or ultimately eliminate the VADBE exposure as we have talked about, and we specifically cover in our capital deployment conversation as well.

  • Relative to a specific number, I'm not in a position to give you that at this point in time.

  • - Analyst

  • Okay.

  • Maybe just you touched on the potential impact of rates on that piece.

  • How should we be thinking about the pension discount and return rate assumptions, just given where the markets are now?

  • I know it's mid year and that will be done at year-end, but just directionally.

  • - EVP, CFO

  • Sure.

  • You're right that we do a review of that at year-end.

  • Relative to the returns, we feel good about the overall returns on our portfolio through six months.

  • They're generally in line with our long-term assumption of around 8% and as you might recall, we did adjust the discount rate at the end of last year, so your guess is as good as mine as to what's going to specifically happen relative to interest rates as we move into the latter part of the year and select our discount rate but we did go to a lower number as we closed 2009.

  • - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Simpson.

  • We'll go next to Carl McDonald with Citi.

  • - Analyst

  • Thanks.

  • You pointed out that the guidance for the other segments, so ex out Life International for a loss of $45 million.

  • First half loss was closer to $45 million.

  • So is that incremental loss in the second half, is that all the investments and additional spending you talked about or is there anything else to call out there?

  • - EVP, CFO

  • Carl, it's Annmarie.

  • Thank you for pointing that out.

  • Yes, as we move ahead through the balance of the year, the other segments do have some number contemplated in there for Healthcare reform, the interest rate on the debt, et cetera.

  • So I would not necessarily run rate the $45 million that I have through the first half and that's really the $145 million is our best estimate at this point in time as to what we think the second half would run at.

  • - Analyst

  • Okay.

  • And then on the Private Fee for Service, now that you made the decision to exit that, how quickly do you think you can eliminate the associated SG&A there and what's a reasonable SG&A ratio to think about on that product?

  • - President, CEO

  • Carl, good morning, it's David.

  • You should expect a pretty orderly wind down period with that so you'll think about a run-out curve that would trans spire over the first couple quarters of the year a pretty expeditious wind down, too.

  • And that model is served with, the service model for that is some variable labor, some outsourced relationships and partners.

  • So we have a good opportunity to match the wind down of administrative costs in the first half of the year and we don't think we're going to have any stranded overhead or issues that go along with that, if that's what you're looking for.

  • - Analyst

  • And the reasonable SG&A ratio on that product?

  • - President, CEO

  • I think it's somewhat -- point being, I think it's somewhat irrelevant.

  • Because if you're asking for the individual Private Fee for Service, as Annmarie referenced previously, we're exiting that book of business but you think about it as eight.

  • - Analyst

  • Thank you.

  • Operator

  • Thank you, Mr.

  • McDonald.

  • We'll go next to Scott Fidel with Deutsche Bank.

  • - Analyst

  • Thanks.

  • First question is if you have an updated estimate of what you think your all-in health reform related costs will be this year.

  • I know in the first quarter you had cited a number around $10 million but at that point it was primarily just related to the change in the deductibility of taxes on Part D, so now that we know of a few other elements, if you have an updated figure for that.

  • - EVP, CFO

  • Sure, Scott, it's Annmarie.

  • You're correct we did talk in first quarter of about $10 million aftertax and it was related primarily to the retiree medical and the other compensation.

  • Order of magnitude, as I mentioned in my prepared remarks, we do expect to spend a little bit more in the second half, relative to Healthcare reform and I would say that the number for the full year across the entire enterprise is approximately $20 million.

  • - Analyst

  • Okay.

  • And then just had a follow-up for David, and David, any thoughts around whether your views on Medicaid are evolving at this point, just given the coverage expansion and just how much Medicaid is expected to grow over the next few years?

  • Obviously CIGNA has historically kept that market at arm's length but any thoughts on changing that approach?

  • - President, CEO

  • Good morning, Scott.

  • As you reference, contextually, CIGNA has not focused on Medicaid in the past.

  • It's not because we view it as a bad or unattractive business, we view it as less leverageable against what we have as capabilities domestically.

  • So as we sit here today and look at future market opportunities, this is what we went through with you all on our strategy, we would look to the individual market broadly defined as being very attractive and we would look at some components of the governmental marketplace as being attractive and I think what you're referencing is that there's going to be a blurring of the line between what maybe what the individual and classic Medicaid market looks like.

  • We're spending a lot of time looking at that.

  • But the traditional Medicaid marketplace still we have a similar view, the emerging Medicaid marketplace as it blurs with the individual market, we view as attractive over the long term.

  • - Analyst

  • More around sort of the hybrid market with the subsidized products and sort of that balances into the exchanges?

  • - President, CEO

  • That's a great example to bridge my comments.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Fidel.

  • We go next to Peter Costa with Wells Fargo.

  • - Analyst

  • Did you talk about your conversations you how they've been going with companies or customers, regarding the experience rated product you have.

  • Given you go to 2011 and there's going to be rebates in all health insurance business, how are customers reacting to that when you talk about your experience rated product versus traditional products?

  • - President, CEO

  • Peter, good morning, it's David.

  • Relative to the experience rate, we call it sure returns, because it's more references in the marketplace how the product functions.

  • If you step back and think about it, it's kind of interesting, because the whole notion of rebating employers based upon their experience or book to business is a fundamental component of what underlies a share-return and experience-rated product.

  • If anything, there's a heightened degree of interest in key markets where we're educating and investing in energy with brokers and in the marketplace.

  • So we view more opportunity versus less over time but we continued to view that product is a bit more of a niche product, not a product that's a solution for everybody.

  • But the important part again to underscore, it's transparent.

  • The employer sees their medical costs and we share in, if you will, the benefits of effective clinical quality and medical cost delivery or deficits that are created and in an environment of increased transparency, be they rebates or otherwise, we would see more demand versus the less.

  • - EVP, CFO

  • As I noted in my prepared remarks, we are seeing good growth in 2010 as it relates to the experience rated product and as David said, further opportunity as we move ahead.

  • - Analyst

  • So you're guaranteeing higher MLR rebates or is there something else that separates that product from what would be traditional products going forward.

  • - President, CEO

  • I would not think about guaranteeing higher rebates.

  • Think about employer by employer by employer, an estimate Think about employer by employer by employer, an estimate is done of their underlying medical costs.

  • A lot of transparency around that estimate takes place, so it's not a veil.

  • There's an understanding of product design, the clinical programs, the incentives that are put in place, and then at a minimum on a quarterly basis there's good transparency about how they're running, and surpluses get credited into their premium stabilization account.

  • Deficits get aggregated and earned back going forward.

  • I would not think about it as guarantees attaching to it, I would think about transparency, high visibility and kind of more of a shared responsibility of the employer working in conjunction with us to optimize the outcome for their employees.

  • - Analyst

  • Okay.

  • And going forward, will you be combining those two businesses in reporting your MLR instead of just giving an MLR for the guaranteed cost business?

  • - President, CEO

  • Peter, could you repeat the question in terms of our intent going forward?

  • - Analyst

  • Your MLR right now you just provided for the guaranteed cost business.

  • Will you eventually be providing that for the experience rated and the guaranteed cost business combined considering the two businesses are getting more similar?

  • - EVP, CFO

  • Peter, it's Annmarie.

  • We talk about the guaranteed cost MLR quite honestly, given that's a fully risked business.

  • However, when you go to our statistical supplement we do have the total MLR in there as well, and so I don't think that there's any necessity to break out anything different as we move forward.

  • The only thing I would add to David's comments is, relative to the shared returns product, I would think of it along a continuum, just to clarify what you were saying around guarantees.

  • You have your guaranteed cost, which is your traditional full risk business and then you have your ASO where your large employers want their own -- want to see their own experience and sometimes cover that with some catastrophic cover up at the top.

  • The experience rated business is kind of that which falls in between so it's that mid-sized employer that wants to be rated and priced based on their own experience but isn't exactly ready to make that transition up to the full ASO product.

  • That's the way I would look at it along the continuum.

  • To David's point, transparent on their own experience and that's how the rating goes.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you, Mr.

  • Costa.

  • Our last question will come from Justin Lake with UBS.

  • - Analyst

  • Thanks.

  • Good morning.

  • First question on the SG&A, can you kind of try to quantify for us the higher spend in the second half as far as what we should think about versus the current run rate.

  • And also, can you give us an update on your target of 150 to $200 million for 2011 and 2012 on SG&A reductions?

  • And any color on timing there, identified cuts.

  • - EVP, CFO

  • Sure, Justin.

  • It's Annmarie.

  • Relative to kind of quantifying what we see as additional spending in the second half as it relates to Healthcare, remember, I'm talking about that core medical, the medical operating expense line that you'll see in the quarterly statistical supplement.

  • As I noted in my prepared remarks, that is smart, strategic investment that we think is prudent, given what's gone on relative to our growth strategy and also some acceleration because we think it's prudent to advance the compliance expense.

  • Order of magnitude, I think of that as about $10 million to $15 million after tax.

  • Relative to your $150 million to $200 million, I would just remind you, again, that we are committed to continuing to identify opportunities to improve our operating efficiencies.

  • As we talked before, we didn't give any specific timing or quantification of how that would fall into 2011 and 2012 but we are still committed to making the right balances and trade off, identifying operating efficiencies, and ensuring that we're continuing to invest smartly to ensure that we're well positioned for the opportunities around Healthcare reform, to ensure that we're well positioned relative to compliance.

  • The final thing I'll say there is we are going through our process as we speak and we're not in a position yet to give out 2011 guidance, obviously, but as we get closer to that, we'll give you more visibility into those numbers for 2011 and beyond.

  • - Analyst

  • And just quickly, a follow-up on 2011.

  • Given the Company's business momentum and your relative lack of exposure to Healthcare reform, can you go through -- is there any reason we should think you wouldn't be targeting positive operating earnings growth next year, without getting specific on numbers, just thinking about up or down.

  • - President, CEO

  • Justin, as Annmarie said, it's early to think about and talk about 2011 especially given the unique marketplace.

  • Having said that, when we think about the diversity of our portfolio, our non-US business, our Disability, Life and Accident business, our service related Healthcare business and our specialty portfolio and our momentum, as we said in our prepared remarks, we feel good about 2010 and we feel good about the opportunity from an outlook standpoint.

  • So we're not going to guide you to a number but rather take you back to the core of our business and where we're focused right now, speak to the diversification of the business, both domestically and abroad as well as the target of our strategy and both Annmarie and I feel good about opportunities for the future.

  • - Analyst

  • Could I ask a follow-up on VADBE.

  • Just to be clear, in 2008 the market volatility drove reserve increases and actual dollars having to be inserted there from a capital perspective.

  • If I remember correctly in 2009 you actually had some gains there.

  • You didn't take out capital.

  • You didn't actually have positive capital from that business.

  • As you take losses here, are you talking about book losses that or are you talking about capital losses in dollars?

  • - EVP, CFO

  • Justin, just to put in perspective, 2008 I don't need to remind you that those type of capital markets, knock on wood, are not what we're thinking about as we move through the balance of the year.

  • And if you'll recall, the S&P has to go down pretty far for it to impact our dividend paying capability.

  • So I would think that in the near term, if we had any charge in the second half it would be manageable from both a dividend paying capability from the sub, as well as potential earnings impact.

  • - Analyst

  • Okay.

  • So you wouldn't see any change to the dividend, regardless if you took a 50 or $100 million loss.

  • - EVP, CFO

  • Not at this point in time.

  • But I still want to emphasize, I don't want people walking around thinking that we have a known $50 million to $100 million exposure in VADBE, we're just flagging that there could be some charge in the second half and I've given an order of magnitude in the $10 million to $50 million really to be representative that we don't think it's catastrophic here.

  • Operator

  • That being our last question, I would like to turn the call back to David Cordani for any additional or closing comments.

  • - President, CEO

  • In closing, we hope you take away a few conclusions about our business as we navigate and help shape this dynamic market.

  • First, our second quarter 2010 results are strong, and they reflect the value we're delivering to our customers, the strength of our diversified portfolio of businesses, and the effective execution of our global growth strategy.

  • We're also making significant progress towards the creation of strategic and financial flexibility, through our continued strengthening of our capital position, and our effective management of operating and medical costs for the benefit of our clients.

  • We're actively involved with the implementation of the sustainable Healthcare program that focuses on health and prevention, while effectively addressing access, cost and quality.

  • We see this as a natural for us given our long-standing mission predicated on helping individuals improve their health, well-being and sense of security and we see this approach as more important than ever.

  • Specifically, our focus on making sure our company is aligned with and compliant with the new law, we'll continue to work with regulators to create a sustainable Healthcare system and we're also identifying additional growth opportunities for CIGNA to pursue in this rapidly changing market.

  • Finally, CIGNA is well positioned as a global health service Company with diversified global portfolio of businesses and I'm confident that our global footprint will enable us to achieve our 2010 strategic and financial objectives and deliver meaningful value for the benefit of our customers and shareholders as we look to the future.

  • Thanks again for joining us for today's call.

  • Operator

  • Ladies and gentlemen, this concludes CIGNA's second quarter 2010 results review.

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

  • The recording of this conference will be available for ten days following this call at 719-457-0820 or toll free 888-203-1112.

  • Again, that's 719-457-0820 or toll free 888-203-1112.

  • With pass code 1460324.

  • Thank you for participating.

  • We will now disconnect.