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Operator
Ladies and gentlemen, thank you for standing by for CIGNA's third quarter 2010 results review.
At this time, all callers are in a listen-only mode.
We'll conduct a question-and-answer session later during the conference, and review procedures on how to enter the queue to ask questions at that time.
(Operator Instructions).
As a reminder, ladies and gentlemen, this conference, including the question-and-answer 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'm Ted Detrick, Vice President of Investor Relations.
And with me this morning are David Cordani, our President and Chief Executive Officer, and Tom McCarthy, CIGNA's Acting Chief Financial Officer.
In our remarks today, David will begin by commenting on CIGNA's third quarter results, and our continued progress in executing on our growth strategy.
He will also provide insights into the approaches that CIGNA has taken to improve engagement of individuals and healthcare professionals, with the goal of driving better health outcomes while reducing costs.
Tom will provide a review of the financial results for the quarter, and will discuss the full year 2010 financial outlook.
Then, David will make some comments regarding early thoughts on 2011.
We'll then open the lines for your questions.
And then 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 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 section 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'll cover a couple of items pertaining to our third quarter results.
Relative to our runoff reinsurance operations, our third quarter shareholders' net income included an after-tax noncash loss of $10 million or $0.04 per share, related to the guaranteed minimum income benefits business otherwise known as GMIB.
I would remind you that the financial impact of the financial accounting standards board's fair value disclosure and measurement accounting guidance on our GMIB result 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.
And CIGNA's [2000] 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 prospective application of this accounting guidance.
Now, another component of our runoff reinsurance operations is the guaranteed minimum death benefit product, otherwise known as VADBe.
Unlike the GMIB business, the financial results for VADBe are included in CIGNA's adjusted income from operations.
During our second quarter call, we indicated that if the environment of sustained equity market volatility and low levels of interest rates were to continue, then we would need to strengthen our VADBe reserves, which would result in a charge to earnings of up to $50 million after tax.
Because the low level of interest rates did persist during the quarter, we increased our VADBe reserves, which resulted in the recording of a noncash after tax loss of $34 million or $0.12 per share in the third quarter.
With that, I'll turn it over to David.
- President, CEO
Thanks, Ted, and good morning, everyone.
Before Tom reviews our third quarter results and full year outlook, I'll take a few minutes to cover a couple of topics.
I'll briefly comment on our performance in the context of our growth strategy.
Last quarter, I profiled our International business, so this quarter, I'll profile our US businesses.
Here, I'll provide insights into the unique approaches we're taking to improve the delivery of care by engaging individuals and healthcare professionals in our effort to improve health and productivity.
Let's get started.
Relative to our third quarter, I'm pleased with our earnings of $1.10 per share, and the results of each of our ongoing businesses, International, group disability, and life and healthcare.
These results demonstrate the strength of our diversified portfolio of products and services, and the effect of execution of our global growth strategy.
This strategy focuses on providing differentiated service in clinical programs, which drives client and customer retention, and attractive new sales in our targeted geographies and customer segments.
Within our healthcare business, results include ongoing superior clinical program outcomes, and the continuation of the industrywide trend of lower than expected medical utilization.
It is important to remember that approximately 90% our medical customers are in self-insured or experienced rate of business arrangements.
Therefore, lower utilization directly benefits our corporate clients and their employees in the form of lower total medical costs.
Now, I'll dig in a bit further into the success we're having with the execution of our growth strategy, and how they connect to these results.
As a reminder, the strategy is to go deep, go global, and go individual.
The go-deep component means we're building a leadership position in targeted markets, product lines and customer segments.
By focusing on specific groups, such as middle market, where we have over 8% customer growth, and in the select segment where we have approximately 9% customer growth.
By targeting markets in geographies in the US and abroad, where we currently have an attractive existing portfolio, and our growth outlook is favorable.
By leveraging our product strength, such as our disability product, where we have strong, new business sales, additionally we're introducing new products.
For example, here in the US, our chronic condition support program.
In Spain, private medical insurance for individuals.
By achieving attractive results in national account customers who value engagement and health improvement capabilities.
And by pursuing new distribution channels, including the Internet and direct TV in global markets.
Each of these efforts is clearly aimed to retain, expand and add new customer relationships.
Next is go-global, which means we're leveraging our breadth of our established international footprinting capabilities to further differentiate our products and services, as well as expand into new geographies.
We've been growing organically, and also inorganically, through our recent acquisition of Vanbreda International.
This acquisition establishes CIGNA as the leader in the expatriate space.
The acquisition doubles our customer base in this business, and further expands our global delivery network.
In addition to this strategic acquisition, we're growing our health, life and accident, and global expatriate businesses with double digit revenue growth.
The go-individual component of our strategy identifies the individual as the customer, regardless of how we access them, either directly through individual policies or employer-sponsored plans.
We continue to experience very strong demand outside the US for our products and services, and as we leverage our enterprise capabilities, we believe a significant long-term opportunity also exists for us in the US market.
Today, by effectively executing our strategy, CIGNA is helping improve health, well-being and sense of security, with more than 60 million customer relationships globally.
Now, if we step back a minute, as many of you know all too well, the US marketplace has been changing dramatically over the last couple of years, and there are a number of forces that we've seen the market confront.
Such as the continued rise in healthcare costs, which employers indicate challenges their competitive position, and is not sustainable.
Increased employer demand for better management of both costs and quality, increased individual demand for the same, coupled with the desire for help in making more informed decisions, and demand for better services and improved health outcomes.
The philosophy and progress that I will comment on today are designed to answer this market demand.
At CIGNA, we've been implementing programs that have aligned our business strategy to crack the code on improving customer engagement, quality and cost outcomes.
We fully recognize, embrace and are leading what is required to deliver differentiated value, and to create a sustainable system, with more transparency of quality and cost, more engaged and [empowered] customers, more alignment between physicians and patients, and a system based on quality of outcomes, not just quantity of procedures.
With that as a backdrop, I'll talk about how we've been answering the needs for improvement and providing value.
Research indicates that incentives get customers more engaged in their own health management.
Last week, the results of our five-year CIGNA choice fund study was issued.
It covers nearly one million customers, comparing incentive based programs to traditional programs.
The headlines from that study are, engagement in quality of care improves without cost shifting, customized incentive based programs reduce costs without compromising care by engaging individuals to improve their health, and helping them be more informed healthcare consumers.
Specific findings include lower costs for individuals and employers, 15% lower in the first year, growing to 26% savings by year five.
10% greater use of preventive care services.
More partnering with physicians to manage chronic conditions.
21% higher participation in disease management programs, which improves quality, and lowers medical costs.
Individuals are more engaged.
For example, they're 40% more likely to use online quality and cost information when making healthcare decisions.
And 19% more likely to work with health advocates to improve their health and wellness.
In the US, there's growing demand for our differentiated solutions that improve health, and increase productivity by leveraging our medical and disability management programs.
And that level of engagement works for both health improvement, as well as disability outcomes.
Importantly, independent studies validate our approach.
For example, studies published by the integrated benefits institute and JHA, validate the impact of our disability management programs.
Through early engagement of individuals, CIGNA is delivering short-term disability duration improvements of 8% over the industry average, and our customer service satisfaction ratings are well above industry norms.
The evidence is clear in the study findings, engagement and incentive alignment have real value.
We've been talking with you for some time about the importance of engaging the individual and the physician in order to improve quality, and lower costs.
Using information and aligning incentives to strengthen partnerships with physicians and their patients, our customers, is what the industry now calls accountable care organizations.
So, let's talk about what CIGNA is doing differently to make these concepts real.
Our accountable care organization approach is a partnership with doctors, designed to enhance quality of care for individuals, improve the service experience, and reduce overall costs.
The approach supports the shift from fragmented, costly healthcare, to coordinated care anchored by the patient/physician relationship.
Let's discuss how it works.
The primary care physician is responsible for monitoring and facilitating all aspects of an individual's medical care.
This is in collaboration with a team that may include nurses and health educators, all who direct individualized care and health coaching.
To make this work, incentives are expanded and specifically designed for healthcare professionals.
Together, we enhance service and lower medical costs by expanding access, and improving care coordination for patients, through leveraging electronic medical records and clinical support systems.
Through broad access, which includes after hours and weekend scheduling.
Through embedded care coordinators, and through the tools to provide comprehensive care coordination to patients.
This critical piece is accomplished with physician resources and CIGNA resources.
Today, we currently have over 120,000 individuals, and over 1,000 physicians in accountable care organization programs spanning 11 states.
Recent results from one of our pilot programs are very encouraging.
Gaps in care, which account for over 0.5 of the errors and complications in medical care in the US, were 10% better than the control group.
This includes improving gaps in care for those considered highest priority, by almost 14%.
The results of our five-year study of our incentive based plan I spoke about earlier, demonstrate that when we design the right programs, provide incentives, and provide support for people, they engage and improve their health while lowering costs.
Our success to date provides evidence that better, more sustainable healthcare solutions do exist.
When we shift from just focusing on sick care to healthcare as well.
Now, before I turn the call over to Tom, I want to reiterate that our third quarter results are strong, and underscore the important contribution of each of our ongoing businesses.
I'm pleased with the progress we've achieved to date on our growth strategy, and with our 2010 financial and operating objectives.
Our results are a testament to the dedication and hard work of our 30,000 plus CIGNA team members.
With 60 million customer relationships, each day our team has a real impact around the globe.
I'm confident in our ability to continue to execute on our business strategy, and achieve our full year goals.
I'm proud of CIGNA's role as an innovative partner for customers, clients and healthcare professionals, in designing healthcare and disability solutions.
Both our mission and strategy recognize, we are indeed in a rapidly-changing market place.
We greet change not as a reluctant insurance company but as a forward-looking global health service company, and we are in a unique position to lead through engagement and innovation as we shape global health services for years to come.
With that, I'll turn the call over to Tom.
- Acting CFO
Thanks, David.
Good morning, everyone.
In my remarks today, I'll review CIGNA's third quarter 2010 results.
I will also discuss our outlook for the full year of 2010.
In my review, I've consolidated the 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'll provide our earnings outlook.
Our third quarter consolidated revenues were $5.3 billion compared to $4.5 billion in the third quarter of 2009.
Third quarter consolidated earnings were $299 million or $1.10 per share compared to $311 million or $1.13 per share in the third quarter of 2009.
The third quarter results reflect strong earnings and revenue contributions from each of our ongoing businesses, that is, International, group disability and life, and healthcare.
And we continue to leverage our diversified portfolio of programs and services to deliver value for the benefit of our customers and shareholders.
In healthcare, third quarter 2010 earnings were $240 million.
This result reflects the benefit of lower than expected medical cost trends, and solid execution of our business strategy, with continued membership growth in our target areas that focus and sustain clinical quality for our clients and customers.
Overall, healthcare medical membership was up nearly 80,000 members versus the second quarter of 2010, bringing our year-to-date organic growth to approximately 3.5%.
Excluding the Medicare individual private fee for service business, membership is up 2.9% on a year-to-date basis.
This result reflects continued success with our guaranteed costs, experience rated and middle-market ASO products, offset somewhat by disenrollment in our national account ASO business.
The growth in our commercial risk business was focused in our targeted markets and customer segments, including the middle market, select and individual, segments where we also benefit from strong specialty product penetration.
Healthcare premium and fees grew 19% on a quarter-over-quarter basis.
This increase reflects net membership growth, and the change in membership mix, which includes a higher percentage of commercial and Medicare-related risk business.
Excluding Medicare individual private fee for service, our quarter-over-quarter growth in healthcare premium and fees was 12%.
Turning now to medical costs, results in the quarter continued to demonstrate attractive medical cost trend and sustained clinical quality for our clients and customers.
The medical cost trend includes the impact of the lower than expected medical services utilization.
As David mentioned, the majority of our customers, approximately 90%, are in funding arrangements whereby they directly benefit from medical cost improvements.
Across our risks book of business, our third quarter medical cost results include favorable prior period claim development of $30 million after tax.
Of this amount, $9 million is related to the prior year.
Specific to guaranteed costs, our year-to-date medical care ratio or MCR was 80.7% on a reported basis, or 81.7% excluding prior year claim development.
Regarding our experience rated product, we continue to see good growth in this business at attractive margins.
Relative to new business and our experience rated and guaranteed cost products, results to date continue to support our pricing targets, and reflect good pricing and underwriting discipline.
ASO earnings in the quarter continue to reflect strong contributions from our specialty business.
Now, turning to operating expenses, we continue to focus on reducing our medical operating expense base, and improving our competitive expense position while maintaining our strong clinical delivery and service levels, and funding strategic investments.
Year-to-date, medical operating expenses were down 2% while we are growing our covered lines by about 3%.
We'll continue to take action to reduce our operating expense, and create additional capacity for strategic investments.
Over the balance of 2010, we will incur some increased costs to support our membership growth, accelerate strategic investments, and support healthcare reform implementation.
Overall, we expect a net reduction in medical operating expenses in 2010, and expect to improve our competitive expense position.
Now, I will discuss the results of our other segments.
In our group disability and life segment, third quarter earnings were $60 million.
This result was in line with our expectations, and reflects the strength of our disability management and return to work programs.
Revenues in the quarter were $758 million.
Excluding the termination of two nonstrategic government life insurance programs, group revenues were up 9% in the third quarter of 2010 compared with the third quarter of 2009.
This segment continues to deliver differentiated value for our clients and customers, as well as attractive margins.
Turning now to our International segment, third quarter earnings were $50 million.
This was also in line with expectations, and reflects continued growth in our health, life and accident, and expatriate benefits businesses.
International revenues in the quarter totaled $602 million, up 20% from the prior year quarter, or 18% on a currency adjusted basis.
Our health, life and accident business benefited from improved persistency in solid new sales in our targeted countries, driven by both product and distribution channel expansion.
Our expatriate benefits business continues to deliver attractive results with solid membership growth and strong renewal rate actions in our existing business.
This segment will also benefit going forward from the recently-acquired Vanbreda International business.
Overall, results in the third quarter were solid for each of the ongoing businesses in our diversified portfolio, and demonstrate good execution of our growth strategy.
Earnings for our remaining operations, including runoff reinsurance, other operations and corporate, totaled to a loss of $51 million for the third quarter.
As Ted mentioned earlier, this includes reserve strengthening of $34 million after tax in our runoff VADBe book of business.
Consistent with our discussion from the second quarter earnings call, this loss is primarily related to the sustained low interest rate environment.
This increase in reserves does not have a material impact on our capital management outlook.
Turning now to our investment portfolio, results continue to be strong relative to current economic conditions.
In the third quarter, we recognized net realized investment gains of $18 million after tax, coupled with strong net investment income results.
Our commercial mortgage loan portfolio continues to perform well in a challenging environment.
Overall, we continue to be pleased with the quality and diversification of our investment portfolio.
I will now discuss our capital management position and outlook.
Overall, we continue to have strong balance sheet and good financial flexibility.
Our subsidiaries remain well capitalized, the statutory surplus consistent with our internal benchmarks, and well in excess of regulatory minimums.
During the third quarter, we deployed capital to repurchase 2.5 million shares of CIGNA common stock, and we invested approximately $400 million to fund the acquisition of Vanbreda International.
Regarding our pension plan, given that interest rates are currently at very low levels, when we complete our year-end evaluation, we expect to adjust the discount rate used in determining our pension plan obligation.
However, we do not expect this change to have a material impact effect on our funding contributions or GAAP pension expense.
Regarding parent company liquidity, we ended the quarter with cash and short-term investments at the parent company of approximately $635 million.
This reflects outstanding commercial paper borrowing of approximately $100 million, as well as $225 million earmarked for the retirement of long-term debt maturing in January of 2011.
For the full year, we expect to end 2010 with parent company cash of $825 million.
After considering our parent company cash target of $400 million, as well as commitments of $225 million for long-term debt maturities and $100 million for commercial paper maturities, our outlook implies that we would have approximately $100 million available for capital deployment.
As we look to the future, we'll continue to carefully evaluate capital deployment options to ensure we deliver sustainable value for the benefit of our customers and shareholders.
As such, our capital deployment strategy remains the same.
The strategy prioritizes the use of capital resources to first, provide capital necessary to support growth and the financial strength of our subsidiaries.
Second, 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 position and outlook remain positive.
Turning now to our earnings outlook, for full year 2010 we now expect consolidated adjustment income from operations of $1.2 billion to $1.25 billion.
This range is $40 million to $70 million higher than our previous expectations, primarily reflecting an increase in our healthcare outlook, and partially offset by the impact of the VADBe reserve strengthening in the third quarter.
This outlook also assumes that our runoff VADBe results will be break-even for the fourth quarter of 2010.
We now expect full year EPS in the range of $4.35 to $4.50 per share, which is an improvement of $0.10 to $0.25 per share over our previous expectations.
This earnings per share outlook does not include the impact of 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 will now discuss the components of our 2010 outlook, starting with healthcare.
We now expect full year healthcare earnings in the range of $825 million to $855 million, which is an improvement of $30 million to $60 million from our previous expectations.
This improvement reflects the benefit of lower than expected medical cost trend, and continued execution of our (inaudible) growth strategy.
Relative to medical membership, we expect year-end 2010 membership to be consistent with the current quarter result, with year-over-year growth of about 3.5%.
This is an increase from our previous outlook of approximately 3% growth, reflecting continued strong customer retention and sales execution.
I would also reinforce that our new business pricing and renewal rate actions we're obtaining as we grow our business, are consistent with our expectations.
Turning to medical cost, for our guaranteed cost book of business, we now expect the full year MCR to be approximately 82%, which is an improvement of 100 basis points versus our previous expectations.
Our fourth quarter MCR anticipates a higher level of claims due to the seasonal impact of the increasing portion of our business in high deductible plans, and also assumes that flu-related claims will be consistent with the fourth quarter of 2009.
As a result of the continued low claim utilization levels experienced in the third quarter, we have reduced our medical cost trend expectations by 50 basis points.
We now expect full year medical cost trend for our total book of business to be approximately 7.5%.
Regarding Medicare Advantage private fee for service, we continue to assume a full year result that is approximately break-even.
Now, moving to the other components of our outlook, we continue to expect group and International to contribute full year of 2010 earnings of $510 million to $530 million.
Regarding our remaining operations, including runoff reinsurance, other operations and corporate, we now expect a loss of $135 million for the full year 2010, which includes the impact of the third quarter VADBe reserve strengthening.
So all-in, based on consolidated adjusted income from operations of $1.2 billion to $1.25 billion, we now expect consolidated EPS to be in the range of $4.35 to $4.50 per share.
Now to recap, our third quarter 2010 consolidated results reflect the strength of our global diversified portfolio of businesses, and continued effective execution of our growth strategy.
Our current capital outlook is strong, and our investment portfolio is of high quality.
Finally, we remain confident in our ability to achieve our full year 2010 earnings outlook, which represents attractive earnings growth.
With that, I'll turn it back over to David for some comments on 2011.
David?
- President, CEO
Thanks, Tom.
I'll now make some comments on 2011.
As you may expect, given the dynamic legislative and economic environment, it is too early to provide explicit 2011 guidance.
Specifically, regulations from healthcare reform are still being developed, and their impact is not fully settled.
In addition, the timing and pace of the normalization of medical service utilization is also unknown.
Having said that, today I'll provide insights into reviews on some of the key dynamics relevant to CIGNA for 2011.
First, I would remind you of our position as a global health service company with a diversified portfolio of capabilities.
Second, that we're effectively executing our growth strategy, as evidenced by the solid business fundamentals and good growth in our targeted markets, which is driving attractive 2010 earnings from each of our ongoing businesses, and provides us with favorable momentum going into 2011.
Our International operations are generating double digit revenue and earnings growth through the third quarter, reflecting improved customer retention and new sales in targeted geographies.
We expect to continue to grow our revenues and earnings in our International business in 2011.
For group disability and life, we are reporting solid premium growth in 2010 from a continued demand for our differentiated disability management programs in a challenging environment.
All-in, we expect our group results to be stable in 2011 relative to 2010.
In healthcare, the legislative and economic uncertainties make it difficult for us to set expectations for 2011.
However, let me make a few observations.
We have good momentum stepping into 2011 off a very strong 2010.
We're achieving membership growth in our targeted areas of focus, and sustained clinical quality for the benefit of our clients and customers.
Also, we believe that our broad portfolio of health improvement products and services, which focuses on leveraging transparency, and engagement with clients, customers and healthcare professionals to improve health, is well aligned with the intent of healthcare reform.
We also have a higher mix of service-oriented, fee-based products and programs compared to our major competitors, which better positions us to adapt to this changing market place.
This higher mix of sell-funded and experience rated business where clients and customers directly benefit from medical cost savings, also means the impact of variability and utilization, either medical cost or the potential for customer rebates in 2011, will be less impactful for us than companies with larger risk-based medical membership.
So all-in, while it is too early to set expectations for 2011 results, we believe our diversified portfolio of products and services will serve us well in this rapidly changing and dynamic environment.
With that, we'll turn the call over to the operator for your questions.
Operator
(Operator Instructions).
We'll go first to Matthew Borsch with Goldman Sachs.
- Analyst
Maybe I missed this last part on your healthcare earnings directionally for 2011.
Do you, directionally, can you say down, flat, up, and on the life disability side, should we infer stable means you expect earnings would be more or less flat for that segment?
- President, CEO
Matthew, good morning.
It is David.
I don't think you missed anything because we didn't provide anything explicitly for healthcare.
So you didn't miss anything.
First, on the second part of your question, we said that at this point, we would expect group to be stable.
We'd note that, as we flagged in prior quarters, our group insurance business had benefited by several items that we indicated were one-timers.
Taking that into consideration, we would expect the strong 2010 results would be more indicative of a stable outlook for 2011.
Specific to healthcare, we didn't say up, flat or down, because it really is too early to say.
What we did highlight and feel very strongly about is that we're carrying momentum out of 2010, and secondly, with 90% of our business being experience rated or service-oriented, there is a direct correlation between either favorable medical expense trend unfolding and/or neutralizing the impact of rebates.
But we didn't classify it otherwise.
- Analyst
Okay, understood.
Maybe you can talk a little bit about what you're seeing, if anything, in the market from smaller competitors, where maybe you've been approached perhaps or had discussions with plans or TPAs that might be considering pulling out or wanting to sell the business, with all of the reform changes coming.
What are you seeing on that front?
- President, CEO
Matthew, first, just in the market place, broadly, from a demand standpoint, employers continue to seek pretty innovative products and programs, which is requiring companies to invest in capabilities around health improvement, engagement, transparency, the ability to communicate through mobile devices and otherwise.
So, you take that into consideration with your comments relative to the reform implications more directly, it is a pretty disrupted and unsettled environment.
To your macro question, are there emergence in the market place of consolidation?
I'm not going to comment specifically around what is indeed transpiring.
More broadly, we're seeing good growth opportunities for ourselves, and over time, as we've said in the past, we would expect to see the market place present opportunities for further smart consolidation opportunities, but I would stop at that.
- Analyst
If I could sneak in one last question here.
Could you characterize if employers on the margin are pressing you to be, maybe this is the wrong word, but tougher on medical management?
A little more restrictive, given all the trend pressures combined with the economy that they're facing?
- President, CEO
Matthew, good job sneaking in a third question, by the way.
But I speak with employers in a couple of different categories.
The preponderance of employers that we're interacting with are actually orienting a little differently.
There is enough evidence now that says that if you get the right incentives aligned, if you get the right engagement programs, you actually get a better outcome and benefit than trying to double down on prior generation, if you will, medical management.
Now, there are some employers that either have further opportunity because they have not been as effective with other services or programs.
But I would say the broader trends we're seeing are next evolution of what you might be calling medical management, are individual specific clinical programs that use incentives, engagement, work with physicians to improve engagement, lower cost by improving quality.
That's really where the big trend is right now.
Operator
Thank you, Mr.
Borsch.
We'll go next to Josh Raskin with Barclays Capital.
- Analyst
Hi, thanks.
Good morning.
I know in the release you talked about favorable claims in the runoff reinsurance.
I was just curious if you could quantify that?
And then, I know you're not talking about healthcare earnings, but maybe you could talk a little about membership trends, particularly for January 1 in healthcare?
- Acting CFO
Josh, it is Tom.
So, I think you're referring to the fact that reinsurance loss was less than the VADBe charge in the quarter, and that did include some minor favorable development in our worker's comp book, and some other normal quarterly fluctuations.
Nothing really of note, the major driver there was the VADBe charge.
- Analyst
So, could we say $7 million sort of offsetting it?
Would that be right ballpark?
- Acting CFO
Yes, in the ballpark.
- President, CEO
Josh, this is David.
The second part of your question, are you looking for membership trends, to be specific?
- Analyst
Yes.
- President, CEO
So, for us, 2010, first and foremost, the driving force behind our membership trends are very strong traction in our Go-Deep strategy.
We're seeing attractive retention in growth rates in our key segments and our key market places.
I think maybe inferred in your question, as we look to 2011, built on the comments I made to Matthew before, what we're seeing is a continuation of demand for programs and services that show the ability to both improve quality, and simultaneously either reduce cost and/or improve productivity on a go-forward basis.
But for 2010, we're very pleased with the traction we're seeing on our Go-Deep strategy, both geographically and by segment.
- Analyst
I guess historically, at this time of year, you guys have given more explicit guidance around at least national accounts and understanding that that's not necessarily a target market, still a big chunk of membership for you.
So maybe even just some commentary on where you think national accounts will play out?
- President, CEO
Sure, Josh, and first and foremost, relative to national accounts, national accounts continues to be an important and target business segment for us.
The nuance that we continue to pull out is, we're focused on those national account buyers who value engagement and incentive based programs to improve health.
Let me give you a little more color on that.
Last quarter, I told you that for 2011, at that point in time, the pipeline we had visibility to at that point was about the size of the pipeline we had from a year ago, and that was a healthy pipeline.
Additionally, I said that the amount of our business that was out to bid, at that point in time in national accounts, was about the size of the business that was out to bid a year ago.
So, in pattern, in terms of looks and portions of our business that was out to bid.
Additionally, I flagged that there was a large case in our portfolio with lower margin that was out to bid.
As we sit here in the third quarter, without again providing you explicit 2011 guidance, the pattern has played through, and as a result, directionally we would expect that our national account performance in 2011 would look like our national account performance in 2010 with an important nuance.
We continue to see a change in the make-up of our book of business with more of the covered lives being engaged in incentive, engagement and health improvement and productivity based programs year after year, which is on strategy.
- Analyst
Ok, so, similar first quarter expectations in 2011 relative to 2010.
- President, CEO
Again, I'm not giving you 2011.
If you think about the pattern, the pattern right now, as I sit here today, looks like the pattern from a year ago as we look forward.
Operator
Thank you, Mr.
Raskin.
We go next to Christine Arnold with Cowen & Company.
- Analyst
Hi there.
Couple of questions here.
You said the timing and pace of normal service utilization is unknown in comments on healthcare.
Could you give us a sense for what you're expecting in your forward pricing for your guaranteed cost book of business?
And then, in the quarter, given that your loss ratio for the total healthcare division was much higher than guaranteed cost, can you tell us whether either the Medicare Advantage MLR stayed in that 96, 97 range, or whether the experience rated MLR upticked?
- President, CEO
Christine, good morning.
This is David.
I'll start on the direction of medical costs, and I'll ask Tom to comment on the trend, and then your MLR comments specifically.
What we're communicating first on the broad comments, on medical cost trend is we're recognizing that we have seen that the rate of growth of medical costs, call it trend, is lower than was expected, right?
So the underlying utilization trend is lower than expected.
What we're flagging is that we don't yet believe that that sets a new normal for 2011.
And if it does normalize, we're flagging that, we're not sure when it does normalize back.
Very importantly, just the rate of growth in utilization is at a lower level than was anticipated.
We're seeing the impact of that, the 90% of our customers that are ASO and experience rated are seeing the benefit of that.
And we're flagging that there's some uncertainty as to whether or not that does refer back to a historic pattern or not.
I'll ask Tom to comment on the specifics of what we're assuming from a pricing standpoint.
- Acting CFO
Hi, Christine.
Let me just reiterate, we're comfortable with the pricing and underwriting discipline we're seeing right now.
Looking at 2010 first, our pricing yields were generally at our expected medical trend, and as trend materialized favorably compared to our expectation, we saw the loss ratio improve.
For 2011, we're expecting to deliver rates that are consistent with our expectation for medical costs, and again, that does include an increase in medical utilization from the current lower levels.
That's kind of where we are on the pricing environment.
To your specific question, on the overall loss ratio, I would say that Medicare private fee for service is continuing to perform about as we expected, but there was a small uptick in the loss ratio, so that's probably being reflected in the results.
- Analyst
If I could ask you exactly where the prior period development was?
You gave some sense for guaranteed costs, but if you could break out those pieces in terms of prior year versus prior quarter, so I can normalize the MLRs by business?
- Acting CFO
Well, here's how I would answer that.
Again, the number I gave you was across all of the businesses, so $21 million prior period, $9 million prior year.
That's the first break.
Essentially, all of that prior period really ended up in guaranteed costs.
Some pluses and minuses between share returns, private fee for service and the other businesses.
And the prior year was largely in guaranteed costs also, I think about $5 million of the $9 million.
- Analyst
Thanks for that.
Operator
Thank you, Ms.
Arnold.
(Operator Instructions).
We go next to John Rex with JPMorgan.
- Analyst
Thanks.
Just continuing in that vain.
You said your pricing consistent with your trend expectation, your 2011 book consistent with that for next year, so what is your trend expectation that you're incorporating for 2011?
- President, CEO
Good morning, it is David.
Again, without providing you 2011 guidance, we've not laid out a 2011 trend.
We're mindful of the fact that there is an appetite for those pieces, but we have not provided that trend explicitly.
- Analyst
Can you give me an order max?
So, I should assume though that you're using a trend level that's higher than the 7.5% you're seeing today?
Would that be accurate?
- President, CEO
John, maybe a way of thinking about it, you can look back over the last couple of years.
See the medical trend performance that we've been able to deliver.
The current year is maturing a little favorably to us right now.
And as Tom referenced, the pricing assumption assumes somewhat of an uptick in utilization.
And at this point, as we look at our contract execution, our contract execution or rate execution for medical costs continues to be in line with our expectations looking forward.
So, we've had a good history of hitting our trend expectations.
- Analyst
Okay.
So, I'll go with 8%.
But moving beyond that, when I think about your book, let's throw out rebate impact for a second.
Your book is going to be the least impacted by rebates of everyone, so let's throw that out and say you have no rebates, I'm going to make that up.
So absent a spike in trend beyond what you are incorporating there, give me like the top three reasons that you wouldn't have earnings growth in the health segment in 2011.
- President, CEO
Well, you were trying to do a David Letterman exercise.
- Analyst
I didn't go for top 10.
- President, CEO
No, it's very fair.
Just, again, the way we're thinking about the business going into 2011, reiterating a few points, and I'll try to illuminate one or two more points to be responsive to you.
We're pleased with the results in 2010, strong execution of our business plan and strategy, strong execution of the Go-Deep, we're growing lives in our key segments, and servicing those lives well from a service and clinical quality standpoint.
So, there underlies your comments.
If you neutralize the rebates, which you're entitled to, the next thing I would ask you to think about is, as you know, we philosophically do not project prior year development or favorable reserve development as well.
So that would be the second item for you to consider in terms of your projection, up to you versus us.
Absent those two items, then you're going to model out what you think is going to happen to us from a growth standpoint, from a pricing standpoint, from a specialty standpoint, and from an operating expense and operating expense ratio standpoint, and that's up to you to model.
But John, I would limit to those two as the items to flag.
One is your rebate item, two is your posture on reserve development, which is influenced by obviously the medical costs as they're going to unfold.
- Analyst
Okay.
I just wanted to clarify one other point you made.
So, we should expect, even inclusive of the large account, national account loss, should we expect your membership to be up on January 1, your national account membership?
- President, CEO
So, we didn't say that.
What we said was, if we look back a year and look at it where we stand today, the overall performance in terms of pipeline of new opportunities, portions of our business that are out to bid, including the relationship you made reference to, it is about in pattern where it was a year ago.
National accounts specifically with no comments on middle market or select segment, and very importantly, maybe John, as an indicator there, the select segment which are employers with 50 to 250 employees, we're still in the height of the 2010 selling season right now, and it continues to perform well for us from a retention, new business sales standpoint, et cetera.
Operator
Thank you, Mr.
Rex.
We go next to Charles Boorady with Credit Suisse.
- Analyst
Thanks, good morning.
I'll keep it to two.
First, have you run the numbers on the Nyack model regs on minimum loss ratios?
And roughly, what the impact to your earnings would have been, or what the rebate might have been had those regs taken effect this year?
- President, CEO
Charles, good morning.
It is David.
As you know, the regs continue to evolve and final dialogue's taking place.
As you would expect, we've run numbers a variety of ways, a variety of times, with a variety of combinations.
Given the fact that we're not providing you 2011 guidance, I don't want to speak to that specifically, other than to state the obvious that, on an absolute size basis, it will be relatively smaller impact to us as we sit here and understand it at this point in time versus the market place in total.
- Analyst
In CIGNA parlance, relatively small.
I haven't heard before, but you've used the word material to define that word before.
Would you say it is material or not material to your earnings?
- President, CEO
Charles, I specifically didn't use that word because you'll back into me giving you some guidance for 2011.
Again, you need to look at it from a relativity standpoint, but it's 10% of our book being guaranteed costs as we look to 2011.
We run the number a variety of ways, as I know you have as well, and at this point we can't provide you explicit guidance on that.
- Analyst
Second question on interest rates, you talked about the VADBe business which was very helpful.
Can you talk about the sensitivity of your bottom line results to low interest rates, including low mortgage rates?
So, if rates stay where they are, interest rates, mortgage rates, indefinitely, what's the annual net headwind to your bottom line that we should think about?
- Acting CFO
So, Charles, it is Tom.
There, you're thinking about the investment portfolio more broadly, I presume.
And I would just point out that we tend to duration match our portfolio, so a small portion of it turns over each year, so we would expect to be, having higher yielding assets roll off and lower yielding assets replace them.
But I wouldn't expect that would be a significant impact in the near term.
Over time, that could be more of an issue but not in the near term.
- Analyst
So, your mortgage portfolio, those mature and you pick up new mortgages at lower rates or some are refinanced.
Is that going to have an impact to 2011 that we should think about?
- Acting CFO
Again, we're not giving any 2011 guidance, but --.
- Analyst
I guess, what's the sensitivity, and I'm thinking on an annual basis.
So if rates stay at this level, what kind of headwind should we think about in terms of the net impact to your --?
I know there are a lot of moving parts, I thought you might have just modeled it out for us, give us a rough number to think about in terms of annual headwind to earnings from a very low interest rate environment.
- Acting CFO
Again, the portfolio turnover is pretty low.
I wouldn't really have that as a high item on the list of things to think about.
- Analyst
Okay, thanks.
Operator
Thank you, Mr.
Boorady.
We go next to Doug Simpson with MSSB.
- Analyst
Hi, good morning, everyone.
Was wondering if you could just talk a little bit about Vanbreda.
Just be curious, one, how should we think about sizing that business, given when it came in in the quarter?
Can we basically assume it was in there for a month, and try to extrapolate that, anything you can give us there.
And if I'm looking at the supplement right, it looked like Europe, the revenues were down a little bit sequentially, and just trying to understand the geography of their footprint.
- President, CEO
Doug, good morning, it is David.
I'll start with a couple of comments on Vanbreda, then I'll ask Tom to talk about the directional earnings pattern.
Just two comments.
First, we view that business and that acquisition as very attractive and quite strategic.
There are some great complements geographically, business segment-wise, and as I referenced in prepared comments, positions us as the leader in the expatriate space.
Secondly, the business is benefited by both a very talented and tenured team of employees.
And very deep and long-standing customer and client relationships, and we're keenly focused on both, retaining that talented employee base, as well as retaining and building on the client relationship base.
I'll ask Tom to talk a little bit directionally around what you're starting to see in terms of the reported results, and how that will unfold between 2011 and beyond.
- Acting CFO
Hi, Doug, it's Tom.
Again, for 2011, we're expecting contributions from Vanbreda in the range of $10 million to $15 million after tax.
We really expect the earnings to ramp up post that in 2012, I think we're looking for $50 million or more in after tax earnings.
That's a combination of both the transition integration costs, and the fact that we're taking some time to transition some of the relationships from some of Vanbreda's current partners.
On your specific question on the disclosure in the staff supplement, I think that the geographic breakdown there really just reflects our health, life and accident business, so it wouldn't include the impact of Vanbreda as part of the expatriate benefits segment.
And your assumption is right.
We would expect a significant growth of revenue in Europe related to Vanbreda, but it wouldn't really show up in that particular chart.
- Analyst
Okay, and if I could just sneak in a second one on Asia, just a competitive backdrop.
Do you guys bump it much into AAA or [Pru], or is there not much overlap there?
- President, CEO
Doug, it is David.
The competitive profile in Asia varies by country.
So, we have to look at that on a country specific basis.
When you think about, when I think about your question, I'm going to go more to the health, life and accident side of our business.
- Analyst
Right.
- President, CEO
We actually have a number of competitors in some ways, but in other ways, very few competitors because we are typically operating a different distribution model as you recall from prior conversations.
So, our direct to consumer telemarketing, Internet, direct TV and otherwise, is a different distribution channel.
But to your specific point, those are familiar competitors to us in some geographies.
- Analyst
Okay, great, thanks.
Operator
Thank you, Mr.
Simpson.
We go next to Carl McDonald with Citi.
- Analyst
Thank you, I have another international question, which is, I'm trying to understand what a good run rate is for earnings this year.
The earnings have been sort of all over the place through the first three quarters, maybe you can help us, what explains the difference?
- President, CEO
Good morning, it is David.
I think most importantly, at a macro level, the earnings trajectory is what we're most pleased about and excited about, which is continuing to build off of the double digit top line and bottom line growth for the business.
You're correct, it is a little bit lumpy this year, as we look to the overall results of the year.
Going to pause and try not to provide you kind of the underlying earnings pattern to project into 2011.
I would bring you back to my prepared comments where, when we provided comments on 2011, relative to International, I explicitly said in the context of the earnings and revenue growth in 2011, we would expect to see further revenue in earnings growth off of a pretty attractive base in 2010.
- Analyst
And separately, on the experience rated, you mentioned customers seeing the benefit of the lower cost trend.
What's the timing on that?
Would they see that benefit next year as those contracts reprice?
- Acting CFO
Carl, no, I think that benefit would roll in over time, as the experience rating formulas get updated.
- Analyst
Thank you.
Operator
Thank you, Mr.
McDonald.
We go next to Justin Lake with UBS.
- Analyst
Thanks, good morning.
Just first question, on the balance sheet, if I'm calculating this correctly, it looks like DCP might have been up about three days sequentially.
Can you talk to what the drivers are there?
Did you see some kind of slowdown in claims processing that we should note?
- Acting CFO
Justin, it is Tom.
There really isn't anything of note to call out in the quarter on claims processing or days claims payable.
It is kind of a business as usual result.
- Analyst
Okay.
Am I calculating that number out right, as far as up three days sequentially?
- President, CEO
Justin, I might suggest as a follow-up with Ted going through that.
I would highlight, we've had meaningful change in our book of business.
When you're looking at the high deductible plans, the private fee for service plans, et cetera.
But very important to your core point, no change in claim payment patterns for us.
No slowdown in claim payment patterns that are meaningful to discuss at all.
- Analyst
Okay.
Then second question on operating cost, first, can you give us some order of magnitude on how much higher operating expenses will be in the fourth quarter jumping off the third quarter run rate?
And then an update on that target of $150 million to $200 million in OP cost savings that you have out there for 2011 and 2012, with any kind of specifics around areas of trajectory over the two-year period?
- President, CEO
Sure, Justin.
Relative to the first point of your question, for the fourth quarter, we typically will incur some additional costs to prepare ourselves for servicing expanded business, and even the renewal pattern that takes place for business.
So, fourth quarter, you typically see an uptick.
Secondly, as we've continued to grow the book of business throughout the year, there is additional variable costs required to be able to support that.
So, you'd see some offset in spending.
Obviously, there is more than enough revenue, because we're just dealing with the variable costs that go along with that.
And at the end of the day, what you should see is that our expense ratio will demonstrate an improvement in 2010 versus 2009.
Specific to your second question, in terms of the longer term growth, operating expense reduction objectives, we continue to stay focused on a few items.
One, what we'll call reducing our medical operating expenses.
Two, making smart trade-offs in decisions in further investing in strategic capabilities, either technology or additional growth capabilities.
And three, as Tom said in his prepared remarks, continuing to improve our relative competitive position.
And as we look forward, as you expect, I am not going to give you a number now because we're not providing 2011 guidance, as we look forward, we continue to see good expense improvement opportunities in a few areas.
Vendor management, targeted outsourcing and real estate, as well as in a couple of areas of employment-related costs.
When we provide 2011 guidance, we'll explicitly talk about where the net reductions are going to come from for 2011, and any trade-offs we'll make for further investments.
- Analyst
Okay, great.
Thanks.
Operator
Thank you, Mr.
Lake.
We go next to Kevin Fischbeck with Bank of America Merrill Lynch.
- Analyst
Good morning.
This is actually Josh [Marrens] in for Kevin.
Coming back to the International business, looks like the pretax margins in third quarter dropped from first half of 2010 a little bit more sharply than they did in 2009.
Can you comment on what is driving that?
And building off of that, what should we think about in terms of margins, longer term, some of the headwinds and tailwinds we should consider?
- Acting CFO
Josh, this is Tom.
I would say that's just normal variability.
I would also acknowledge we're investing in expanding channels and new markets, so there is a little bit of that impact on the margin results.
I wouldn't read too much into the quarter-over-quarter comparisons.
- Analyst
Okay.
And then how about the longer term margin outlook in International?
What are some of the headwinds and tailwinds we should be thinking about?
- Acting CFO
We still expect to earn good margins.
We would expect to continue to make strategic investments.
So, kind of the growth momentum is definitely a tailwind, and the investment in expanding into new markets and channels would be the major headwind I would point out.
- Analyst
Okay.
Thank you.
Operator
Thank you, sir, we go next to Sarah James with Wedbush.
- Analyst
Thank you.
I guess I'll just continue on the topic of International.
How should we think about the earnings contribution potential from this segment over the long-term?
And then what are some of the drivers to get there, as far as the top line growth?
Is this new market entrances, deepening your presence in existing markets where maybe you have a relationship with local governments already?
Or selling more products just into your existing book?
And then what are some of the hurdles you would face in achieving this, either from a local regulatory front, or if we should be thinking more about, it's just getting the right teams in place.
- President, CEO
Sarah, good morning.
It is David.
A few questions there, so let me try to tease them out.
Relative to the long-term opportunity here, at a broad basis, we see it as quite attractive.
And if you play through, if you kind of neutralize for potentially any acquisitions, and you look at the top line and bottom line growth trajectory of that business versus our attractive but lesser growth trajectory for the US business, you would see it growing to a larger and larger portion of the CIGNA portfolio.
As I noted in the past, if you follow the math, it could be going from 20% to 30% of the portfolio over the next three to five year time horizon.
And how is that driven?
Our strategy has us driving a few things to make that happen.
One, leveraging our existing product portfolio in each of the countries we're in.
What that means is, we don't use all of our products in every country we're in today, and we have further leverage in those countries.
Two is leveraging each of our distribution channels in every country we're in.
And what we mean there is, we are not leveraging each distribution channel we have matured in our portfolio in every country.
Third is designing and delivering new product.
It is a fundamental part of how that business operates.
Fourth is entering new geographies, as Tom referenced earlier, there's an investment to enter those new geographies or develop those new products, and we put that in our investment queue.
As it relates to capabilities, we're actually benefited by a broad cadre of local leadership in each country to build off of, and licensed and regulatory configuration that we can build off of.
We don't see an explicit headwind to our growth trajectory that I would highlight, other than continuing to execute our disciplined plan of growing in existing countries as part of our Go-Deep, and then expanding smartly in new countries as part of our Go-Global.
- Analyst
Great, thank you.
Operator
Thank you, Ms.
James.
Our final question will come from Ana Gupte with Sanford Bernstein.
- Analyst
Thanks, hi, good morning.
A couple of questions on the cost strength again, related to different drivers.
So, there was a period of controversy around what the reform provisions would contribute across strands, so let's assume your 50 bips is nonrecurring, so you get to 8%.
Can you tell us what you might have assumed for the uptick from reform, and is the last four weeks in the fourth quarter giving you some window into the claims experience, from the [pending] coverage and all of those other things?
- President, CEO
It is David.
Good morning.
First, just to frame, when we think about the impact of reform.
When we've talked about this in the past, we noted that a good percentage of our portfolio businesses already has extremely comprehensive preventive care as an example.
Probably deals with a higher average kind of annual coverage level and thresholds.
So, our portfolio of businesses, generally speaking, was more comprehensive, and that's biased to the fact that we had national accounts and middle market customers as the predominant portion of our portfolio.
Secondly, at a macro level, if we looked at all of the coverage dimensions and said, what would that mean?
If you had a relationship that moved from noncompliant to fully compliant with the new regs.
There is a range of 100 to 300 basis points.
I think lastly to your question, it is still early to look at emerging third quarter data, and say, does that give you the crisp window in terms of whether or not that 100 to 300 basis points is the exact accurate number.
My final comment is, we've seen no negative indicators to tell us that our assumptions are wrong to date, but again we're cautious because it is early on.
- Analyst
Thanks.
One more driver.
You talked about ACOs, and you're doing a lot of pilots and so on.
As you're looking into your contract renewals for 2011, and then just broadly over the prior period, do you see any indication that the industry and yourself included, might see some abatement in the unit cost trend, which has been the biggest driver of trend on the inpatient side and largely in outpatient as well?
- President, CEO
David, again, I actually see a little bit of a bifurcated trend possibly emerging.
One is, if one plays through yesterday's model, continuing more aggressively to play through yesterday's model, you could argue that you would actually see increasing unit cost pressure given market dynamics.
Conversely, as you play through broadly defined in ACO or medical home model where you're redefining the financial incentives, you're more focusing on the total quality outcomes to generate the cost outcomes, then I believe you have the opportunity to get what you referenced, which is a bit of abatement to the unit cost.
And obviously that second category is where we're focused, with over 100,000 lives currently in ACOs, over 1,000 physicians and 11 states that we're operating in today.
So, we believe that that type of activity of incentive alignment is critical to get to a more orderly trend on a go-forward basis.
- Analyst
Thank you.
Operator
Thank you, Ms.
Gupte.
With that being our final question, I would like to turn it back over to David Cordani for any additional or closing comments.
- President, CEO
Thanks.
In closing, I want to emphasize three points about our businesses.
First, our third quarter 2010 results were strong, which reflects the value we're delivering to our customers and clients we serve around the world.
The importance of our diversified portfolio of businesses, as well as the strength of the fundamentals in each, and our effective execution of our growth strategy.
Second, as I highlighted earlier in my comments, we're adding value by engaging individuals and healthcare professionals to enhance the quality of care and improve service while reducing costs.
Our accountable care organizations and incentive based programs are just two examples of how we're adding value.
This approach to providing value is not a new focus for us.
It is at the center of our mission to improve health, well-being and sense of security of the individuals we serve.
This approach is more important than ever.
Finally, I believe our diversified portfolio of businesses positions us for continued success in a rapidly changing and dynamic market place.
We thank you for joining us today on our call.
Operator
Ladies and gentlemen, this concludes CIGNA's third quarter 2010 results review.
CIGNA Investor Relations will be available to respond to additional questions shortly.
A recording of this conference will be available for 10 business days following this call.
You may access the recorded conference by dialing 719-457-0820 or toll free 888-203-1112.
The passcode for the replay is 7578405.
Thank you for your participation.
You may now disconnect.