信諾集團 (CI) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's third-quarter 2011 results review.

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

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

(Operator Instructions)

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

We will begin by turning the conference over to Mr.

Ted Detrick.

Mr.

Detrick, please go ahead.

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

We appreciate you being with us at this earlier hour.

I am Ted Detrick, Vice President of Investor Relation, and with me this morning are David Cordani, our President and Chief Executive Officer, and Ralph Nicoletti, CIGNA's Chief Financial Officer.

In our remarks today, David will begin by briefly commenting on CIGNA's third-quarter results in the context of our growth strategy.

In addition, David will discuss our pending acquisition of HealthSpring and how this further positions us for continued growth in long-term shareholder value.

Next, Ralph will review the financial results for the third quarter and provide an update on CIGNA's financial outlook for full year 2011.

Finally, David will explain how the continued effective execution of our focused strategy, coupled with our diversified portfolio of businesses, provides CIGNA with momentum as we enter 2012.

We will then open 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 measures when describing its financial results.

A reconciliation of these measures to the most directly comparable GAAP measures 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 will review a couple of items that we discussed on our call earlier this week and disclosed in a Form 8-K filed on October 24.

Relative to our Run-Off Reinsurance operations, our third-quarter shareholders net income included an after-tax non-cash loss of $134 million or $0.50 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 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 expectation 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.

Because of this, CIGNA's 2011 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.

Also, as we previously disclosed, effective January 1, 2012, CIGNA will adopt new guidance regarding the accounting for the deferral of certain costs related to the acquisition of new or renewal insurance contracts.

This accounting change restricts the amount of costs that can be capitalized, and accelerates the recognition of certain acquisition costs that previously would have been deferred.

CIGNA will adopt this accounting change on a retrospective basis in the first quarter of 2012, recasting prior periods and recording a one time non-cash charge of approximately $250 million to $300 million directly to shareholders' equity.

We estimate that the impact to full year 2011 of adopting this new guidance would be to reduce earnings for our International business in the range of $60 million to $70 million after tax.

We remind you that this accounting change has no impact on the fundamentals of this business.

That is, there is no effect on revenues, future cash flows, our statutory capital position, or the lifetime profitability of our policies.

This accounting change will not take effect until January 1, 2012, therefore the impact of this change is not reflected in the full year 2011 outlook that Ralph will discuss in a few moments.

However, when David provides commentary on 2012, it will be on a basis that assumes retrospective adoption of this accounting change with both 2011 and 2012 recast on a comparable basis.

In addition, when we discuss our full year 2011 outlook and provide commentary for 2012, it will be on a basis which excludes the pending acquisition of HealthSpring and any additional future capital deployment, and assumes breakeven results for our run-off Guaranteed Minimum Death Benefits business known as VADBe for all future periods.

And with that, I will turn it over to David

Thanks Ted and good morning.

This quarter marks another strong performance from our ongoing businesses, and the announcement of the acquisitions of FirstAssist in the UK and HealthSpring here in the US.

I'll briefly touch on our meaningful move into the seniors and Medicare segments with the combination of HealthSpring with you today, and if you have additional questions we will cover them during our Q&A period.

In a few moments, Ralph will take you through our results and provide you with an update on our full year 2011 outlook.

Before he does this, I'll briefly comment on our quarter's performance and share with you how our business strategy continues to build value for our clients, healthcare professionals, and customers, all while generating sustainable, profitable growth for the benefit of our shareholders.

Then we will review how CIGNA will maintain this momentum in 2012.

Let's jump in.

The headline is we delivered another strong quarter from our ongoing businesses.

Our operating results demonstrated top line and bottom line growth as a result of effectively executing on our strategy and delivering on our fundamentals of pricing discipline and clinical and service excellence.

In our third quarter of 2011, we reported consolidated adjusted income of $370 million or $1.36 per share, excluding the effective VADBe, with consolidated revenue growth of 6.5%, reflecting positive contributions from each of our ongoing businesses.

As we all know, 2011 continues to be a dynamic year in the global economy.

From a healthcare perspective, the aging population, declining health status, unsustainable healthcare economics, and the evolution to consumerism are all catalysts for change.

Regardless of the outcome of the legislative reform back here in the United States, the future of healthcare will continue to evolve at an accelerated pace.

This is a change that CIGNA has embraced in our strategy to go deep, go global, and go individual, and in our continued focus on the customer.

Our consultative selling approach continues to add differentiated value, as it enables us to understand our clients' needs and anticipate the future needs so we can design highly personalized integrated solutions combined with flexible funding options.

Within our US operations, our health and productivity programs continued to deliver compelling growth across each of our customer segments on a year-to-date basis.

In our select segment, which we define as clients with 51 to 250 employees, we've grown our medical customer base by 14%, the majority of which is ASO.

In our middle market segment, which we define as clients with 251 to 5,000 employees and single site clients with more than 5,000 employees, we've grown our medical customer base by 4%.

In our national segment, which we define as clients more than 5,000 employees across multiple sites, we've experienced a decline as a result of repositioning this segment, yet, we are expanding existing relationships and winning new clients whose strategies align with health and productivity improvement.

With our physician partners, we continue to be an innovator with the emergence of accountable care organizations.

Our unique collaborative approach creates the right engagement and offers quality driven incentives to healthcare professionals, clients, and customers.

Last month, we launched our 15th patient-centered initiative.

Our ACO programs today encompass more than 115,000 customers and over 1,800 physicians across 13 states.

They are developing a track record of delivering measurable health improvements, greater customer satisfaction, and quantifiable cost savings.

And in our disability business, we delivered top line growth of 10% year-over-year, as employers continue to value our leading return to work programs.

In our International portfolio, we have delivered strong top line growth of 34% year-to-date, reflecting solid, organic premium and fee growth.

Today we have well over 7 million individual health, life, and accident policies as we supplement the health incentive security solutions for our customers around the world.

Our expertise in leveraging our direct consumer distribution methods is driving our success here.

We're also continuously evaluating opportunities to invest in new global markets where there is increasing demand for our services.

Earlier this month, I was in Istanbul to celebrate the opening of our office in Turkey which represents another attractive high-growth market for us.

We also committed capital to acquire FirstAssist insurance, a leading travel and protection company based in the UK.

The acquisition will enhance our international portfolio by expanding our presence in the UK, increasing the number of affinity partners we have access to, and providing new capability to offer travel insurance solutions across the world.

In addition, there are exciting and strong cross-selling opportunities between the 2 organizations.

We can now offer our existing customers protection against the unexpected medical and travel related emergencies and extend our health, life, and accident products to FirstAssist's customer base.

Now returning to our news about our HealthSpring acquisition, as expected, we have received great feedback from our customers, healthcare professional partners, employees, and the investment community regarding the quality of this company.

In fact, Monday after our call with you, HealthSpring CEO, Herb Fritch and I had the opportunity to spend the afternoon with almost 1,000 of its employees in Nashville, Tennessee.

These highly talented and passionate team members have great enthusiasm about how our combination together can fuel further growth.

The addition of HealthSpring is well aligned with our strategy.

As one of the largest and fastest growing US Medicare Advantage plans, HealthSpring will provide CIGNA expertise and proven physician engagement models for sustainable growth in the future.

While both Companies are operating from a position of strength and have attractive growth prospects on a stand-alone basis, we believe that together, we will generate even greater value for customers and shareholders.

Specifically, we have identified 5 main advantages this combination creates.

First, is accelerating growth for HealthSpring's existing business by providing a feeder pool into their Medicare Advantage solutions for 65 year old retirees from CIGNA's employer sponsored plans.

Second, by leveraging our combined customer footprint to fuel HealthSpring's growth by expanding and deepening its presence in geographies, as well as entering new ones.

Third, maximizing HealthSpring's highly effective physician engagement model and capabilities to accelerate our retail programs as we look toward a post-2014 exchange environment.

Fourth, is leveraging CIGNA's specialty in clinical capabilities for the benefit of HealthSpring's customer base.

And fifth, is delivering operating expense synergies of the combined Company.

As we begin to work closely with Herb and his leadership team, you can expect to hear more about our growth strategy in the senior segment.

Now before I hand it over to Ralph, I want to reiterate a few key points about this quarter.

Our third quarter results delivered strong top line and bottom line growth, reflecting our disciplined focus on executing our growth strategy.

We are delivering differentiated solutions by engaging and incenting customers and effectively partnering with physicians.

And we continue to invest for our future success.

Examples include the pending acquisition of HealthSpring, the launch of our business in Turkey, and the pending acquisition of FirstAssist, the launch of our new branding campaign, and ongoing smart innovation and technology.

Based on the strength of our third-quarter results, we feel confident in achieving our increased outlook for 2011, our full year strategic, financial, and operating goals.

With that, I'll turn the call over to Ralph to review our third-quarter performance, and then I'll come back and provide some early insights into 2012.

Ralph?

Thanks David, and good morning everyone.

In my remarks, I will review CIGNA's third-quarter 2011 results, link these results to our growth strategy, and provide some additional comments on the updated full year 2011 outlook we shared with you earlier this week.

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

This is shareholders' net income, excluding realized investment results, GMIB results, and special items.

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

Our third quarter consolidated revenues grew to $5.6 billion.

This is an increase of 6.5% over the third quarter of 2010.

Revenues reflect premium and fee increases of 4% in Health Care after excluding the impact of our planned exit from the individual Medicare private fee-for-service business, 5% in group Disability and Life, and 33% in International, driven by continued growth in our targeted customer segments.

Our third-quarter consolidated earnings were $370 million or $1.36 per share, excluding the impact of VADBe.

That represents EPS growth of 11% over the third quarter of 2010.

These results reflect strong earnings from each of our ongoing operations as we continue to leverage our global diversified portfolio of businesses and capitalize on differentiated opportunities to deliver value to our customers and shareholders.

Turning to Health Care, third quarter 2011 premiums and fees grew 4% on a quarter-over-quarter basis, excluding the impact of the exited Medicare business and earnings were $248 million.

The premium and fee increase reflects solid growth from each of our ongoing lines of business.

We also achieved year-to-date medical membership growth of 1.7%, adjusting for the planned non-strategic exits.

Third-quarter earnings for Health Care reflect contributions from sustained growth in our medical and specialty businesses and the impact of favorable prior period claim development.

Turning to medical costs, medical cost in the quarter include favorable prior period claim development of $25 million after tax across our risk book of business, primarily from lower than expected medical utilization trend.

Of this amount, $5 million is related to the prior year.

Specific to guaranteed costs, our medical care ratio in the quarter was 80.9% on a reported basis.

Excluding prior year claim development, the guaranteed cost medical care ratio for the first 9 months of 2011 was 80.4%, including the effect of recording our rebate accrual.

Overall, we are pleased with the results in our medical risk businesses, and they continue to reflect good pricing and underwriting discipline, as well as sustained clinical quality for our clients and customers.

For the third quarter of 2011, total operating expense ratio was 27.2% which is consistent with our expectations.

Now we will discuss the results of our other segments.

For group Disability and Life, third-quarter earnings were $62 million.

This result was in line with our expectations, as this business continues to deliver value through our market leading disability management model which focuses on early customer engagement and leverages CIGNA's proven clinical capabilities.

Premiums and fees grew 5% quarter-over-quarter, including solid growth in our targeted disability business.

Earnings include the impact of favorable life and accident claims experience, partially offset by higher disability claims incidents.

CIGNA's International businesses continued to deliver very attractive growth and strong margins.

The results reflect strong retention and further product penetration of existing customers, as well as targeted new sales.

Premiums and fees grew 33% quarter-over-quarter, driven by improved customer retention and new sales within the health, life, and accident business, particularly in Korea and Taiwan, and the expatriate benefits businesses, including contributions from Vanbreda International.

Our top line growth drove strong earnings of $79 million in the quarter.

That represents earnings growth of 58% over the third quarter of 2010.

The third-quarter results also reflect continued strategic investments for future growth.

The results for our remaining operations, including Run-Off Reinsurance, Other Operations, and Corporate totaled to an after-tax loss of $64 million for the third quarter.

As we previously mentioned, this includes a reserve strengthening of $45 million after tax related to our run-off VADBe book of business.

This loss is primarily related to the impacts of a continued low interest rate environment and volatile equity markets.

This increase in reserves does not materially impact our capital position or outlook.

Our third-quarter results reflect continued strong revenue and earnings growth in each of our ongoing businesses.

Now I will discuss our investment portfolio.

Results in the quarter include solid net investment income and net realized investment gains of $9 million after tax.

Overall, we continue to be pleased with the quality and diversification of our investment portfolio.

Our strong investment management capabilities and disciplined approach to risk management have consistently delivered attractive risk-adjusted returns for our clients and shareholders.

Now turning to our outlook.

Based on the strength of our third-quarter results, we now expect full year 2011 consolidated adjusted income from operations of $1.385 billion to $1.445 billion.

This range reflects an increase of $30 million to $50 million from our ongoing businesses primarily reflecting the increase in our Health Care outlook.

We now expect full-year earnings per share to be in the range of $5.05 to $5.30 per share, which is an improvement of $0.05 to $0.10 per share over our previous expectations.

This outlook includes the third-quarter VADBe reserve strengthening of $0.16 per share and assumes breakeven VADBe results in the fourth quarter of 2011.

I will now discuss the components of our 2011 outlook starting with Health Care.

We now expect full year Health Care earnings in the range of $965 million to $995 million, which is an improvement of $35 million from our previous expectations.

This increase reflects the impact of favorable prior period claim development recognized in the third quarter and continued effective execution of our growth strategy.

Relative to medical membership, we continue to expect full year 2011 membership growth of approximately 2%, excluding the planned market exits.

And based on our current view of business mix, we expect to deliver a full year total Health Care operating expense ratio of approximately 27% as compared to 27.7% in the prior year.

Turning to medical costs for our guaranteed cost book of business, we now expect the full year medical cost ratio to be approximately 79.5% which is 50 basis points lower than our previous expectation of 80% and includes the benefit of the prior year claim development.

This improvement is net of our rebate accrual related to the minimum loss ratio requirements.

We now expect our full year medical cost trend for our total book of business to be in the range of 5.5% to 6% which is modestly lower than our previously -- than our previous outlook.

Moving to other components of our outlook, recognizing our performance to date in 2011 we have also slightly increased our expectation for full year earnings from the International and Disability and Life businesses.

The outlook for our remaining operations, including Run-Off Reinsurance, Other Operations, and Corporate is now expected to be a loss of $135 million to $145 million which includes the third quarter VADBe reserve strengthening of $45 million after tax.

So all in for full year 2011, we now expect consolidated earnings per share in the range of $5.05 to $5.30 per share.

I will now cover our capital management position and outlook.

We continue to have good financial flexibility as our subsidiaries are generating significant free cash flow to the parent reflecting strong return on capital in each of our ongoing businesses.

As we have indicated previously, a key component of our capital deployment strategy is strategic M&A, with a focus on acquiring capabilities and scale to grow in our targeted areas of focus.

HealthSpring clearly aligns to this strategy.

We believe that the financing structure that we have put in place for the HealthSpring acquisition allows us to maintain good financial flexibility.

We plan to finance the acquisition with cash on hand of $850 million and a combination of debt and equity financing.

Subsequent to the acquisition, we expect to maintain approximately $500 million of capital at the parent to meet short-term liquidity needs.

We believe this financing structure will allow us to maintain a strong balance sheet and good liquidity and our capital position has been affirmed this week by the rating agencies following our announced acquisition of HealthSpring.

Regarding our pension plan, we will update our pension liability at December 31, 2011 -- as of December 31, 2011.

If the discount rates and asset returns remain at their September 30 levels, we would record an increase to pension liability.

However, this change does not have a material impact on either our annual pension funding amounts or pension expense.

Overall, our capital position and outlook remain positive, our subsidiaries remain well capitalized, and we continue to evaluate each of these levers to ensure we deliver sustainable value for the benefit of our customers and shareholders over the long term.

Now to recap.

Our third-quarter 2011 consolidated results reflect the strength of our global diversified portfolio of businesses and continued effective execution of our growth strategy, with strong revenue growth in our targeted customer segments.

Our investment portfolio continues to deliver strong results.

Finally, we are confident in our ability to achieve our increased full year 2011 earnings outlook and carry that momentum into 2012.

With that, I will turn it over to David who will provide you with insights into our expectations for 2012.

Thanks, Ralph.

Turning to 2012, as Ted pointed out in his opening remarks, my comments around 2012 will exclude the impact of certain items including, most notably, the pending acquisition of HealthSpring.

When we have more clarity on the timing of the HealthSpring close, we will provide specifics for our 2012 outlook.

At this point, we expect to provide that guidance in early 2012.

Having said that, I will provide some early insights.

To set the stage, we expect to maintain the momentum we have built over the last 2 years, since implementing our go deep, go global, and go individual strategy to deliver continued growth.

We expect to see revenue growth in each of our ongoing businesses.

This is driven by a continued expansion of our client and customer relationships, as our value proposition continues to resonate very well in the marketplace.

Focusing on healthcare membership, in the second quarter call we noted a positive trajectory in the national account business for 2012.

We now expect growth in national accounts in 2012 driven by strong client retention, expansion of existing relationships, and the addition of new relationships.

We expect to deliver continued growth in our middle market and select segments driven by continued increased interest in our industry leading clinical engagement programs and our differentiated funding arrangements.

In total, we expect to grow by at least 400,000 healthcare customers in 2012, predominately in ASO relationships.

Stepping back, we view the global economy and economic environment will continue to be dynamic.

The economy will present challenges including employment levels and interest rate environment conditions.

In the face of this environment, we expect to achieve solid earnings growth in each of our ongoing businesses through continued focus and strong execution of our strategy.

More specifically, our results will reflect top line growth, operating expense efficiencies, and strong fundamentals, including pricing discipline, clinical and service quality.

All in, we expect consolidated earnings and EPS growth in 2012 versus 2011.

And with that, we will move to take your questions.

(Operator Instructions)

Charles Boorady, Credit Suisse.

It sounds like you're seeing an outlook for terrific organic growth in your commercial business in 2012.

I'm wondering if you can share a bit more about any assumptions for in-group attrition or in-group growth, if you are assuming employment growth?

And also a little bit more on where you're seeing that growth, which end markets, which size employer, which geography, or which specific products?

Specific to the first part of your question, at this point in time we don't project we're not projecting any major change in the economic outlook.

So in-group growth, if you think about the unemployment levels as a major driver of change, at this point our assumptions are for the level of unemployment to be about equal to 2011.

And therefore no major swings in net in-group growth.

To the macro part of your question, we look at 2012 as a continuation of a few years of continued strong progress in our select and our middle market segments, where our ASO value proposition resonates quite well.

But more broadly where we see the consumer and engagement capabilities and health improvement and productivity capabilities resonating, the change, as look into 2012, beyond the maintenance of that very strong performance is a meaningful uptick in our national account segment.

As you recall, we've gone through a couple years of repositioning and seeking to focus on those employers that value incentive engagement based capabilities to improve health and productivity.

We're pleased to see the retention rates, the in-group growth there by selling additional sites for national account customers and then the addition of meaningful national account customers.

A continuation of strong progress in select and middle market, and then a move to some momentum building and the national accounts is the way I'd position it.

And on geography, David?

Geography is reasonably balanced when you think about the national accounts.

As you recall, our select segment focus is a bit tighter geographical focus.

The go deep strategy really guides us into key geographies.

Middle markets is reasonably broad, and national account is much more of a national proposition.

I would not call out any geographies as the driving force of our growth.

Scott Fidel, Deutsche Bank.

Just wanted to follow-up and ask a question on the HealthSpring, and maybe if you could talk a little bit about the margins that you're assuming that you think HealthSpring can generate and the long-term.

Clearly, the company has generated above-average margins and been able to a sustain that, and just interested on your view on that.

And if you also can frame the expected EPS accretion that you expect from HS excluding transaction costs, or at least give us some of the key swing factors that you think that we should be thinking about in terms of EPS accretion.

I'm going to start macro on the margins, and then I'm going to ask Ralph to give you the direction on the accretion.

Broadly speaking on the margins, at this point we're not providing '12 guidance, and it's a pending acquisitions I'm going to leave you wanting for a little bit.

I would suggest that if you look at HealthSpring, they've been able to generate very attractive margins on a relative basis.

And that is a direct result of their ability to effectively partner with physicians, improve clinical quality outcomes, as a result, lower costs, and return those costs to individuals in terms of better quality, better service, and in many cases more comprehensive benefit richness that goes along with it and in part, earn meaningful margins.

At this point, we would suggest that the overall margin profile, within reason, would not change materially as we look forward over the coming several years.

On accretion there's a few ways to look at this.

With all in costs, that being integration costs, transition costs, and ongoing amortization, we do expect the transaction to be accretive in the first full year.

If you look at it on a full-year basis, excluding the 1-time integration and transaction costs, it will be highly accretive.

If you exclude the amortization so you're on a cash accretion basis, we would expect to see it very solidly accretive, approaching double digits.

Highly strategic and financial attractive both near-term and long-term.

So close to double-digit accretion ex transaction costs.

On a cash basis.

On a cash basis.

Then a follow-up question going back to VADBe.

Clearly you had to add $45 million to reserves in the third quarter.

Over the course of the last year and a half or so, you've talked about trying to develop an exit strategy for VADBe.

Interested in terms of how the HealthSpring acquisition could affect that strategy if at all.

And an update on your efforts to try to minimize the volatility that we see every time the equity markets get volatile in the VADBe business.

We accomplished a lot in addressing the run-off businesses here.

We did create the separate structure with Arbor.

We continue to refine our hedging strategies.

We increased a level of capital in that business earlier part of 2011.

Very committed to continue to explore different options for this business to manage those liabilities.

We have the capabilities to address opportunities that come about.

The exposure is manageable and don't believe that the HealthSpring acquisition is going to necessarily impede us in any way of addressing that.

And Ralph, what was your RBC ratio at the end of Q3?

Over 300%.

I don't have the exact number.

On a company action level.

Josh Raskin, Barclays.

Question relates to hospital contracting.

2 questions related to that.

Maybe you could talk a little bit about what you're seeing in terms of rate increases to the hospitals, and how that compares to previous years.

Do think that's having any impact on your membership growth?

It seems like you guys have seen a little bit of a inflection there in recent years around the growth.

I understand the go deep and go individual strategy.

I'm just curious how the hospital contracting has played into the membership impact as well.

Appreciate your comment.

As we look and benchmark over the past several years, we have seen in key geographies meaningful progress in terms of our overall medical cost position.

In large part aided by contracting improvement.

As we've discussed in the past, some of that has come from geographic focus.

Some of it has come from partnering with the hospitals and collaborating around revenue management processes, working to ease some administrative burdens that go along with that, and partnering on some clinical programs and protocols.

Our early look into 2012 hospital contracting and broader physician contracting is in line with our expectations carrying into the year.

On a national basis, we suggest no major change in the year-over-year pattern; slight movements here or there.

But the headline is in line with our expectations and a good continuity of what we've seen over the last several years,.

And we would appoint a lot of that back to more effective communication in partnering with the hospitals and physicians.

Does that mean similar rate increases in '12 for the hospitals relative -- or payment increases relative to what you're seeing this year?

If you take it on average nationally, yes.

A follow-up question on HealthSpring.

Could you talk a little bit about the timing of the acquisition, just why now?

Is there some change in the Medicare world that's happened recently?

With the exception of private-fee-for-service, haven't really been big in Medicare Advantage for a long time.

I'm just curious, why now?

And then RADV audits.

Any expectation around that?

Did that play into the timing as well?

If we go back to our strategy, which we laid out a little over 2 years ago, the latter part of 2009 when we walked it through with you all, we articulated 3 areas that we viewed were very attractive to growth for us on a go forward basis and would largely pursue inorganically Further our global profile, seniors including Medicare, and retail, including individual capabilities.

It's been an important part of strategy.

We also said that, that was a 3 to 5 year strategy and that we would be patient within reason to find models and capabilities that we thought were truly differentiated and able to be sustained -- deliver sustained differentiation.

With HealthSpring on strategy for our book of business and our portfolio.

Most important, we view that HealthSpring brings a significantly differentiated proposition in the way it partners with physicians and view that it's an opportunity for sustainable value for customers going forward.

RADV, did not factor in materially to our timing in any way, shape, or form.

(Operator Instructions)

Justin Lake, UBS.

I appreciate the commentary on 2012.

I was hoping you might, in terms of how you think about the healthcare, the outlook.

Any reason for us or anything we should consider in terms of the typical growth rate for these businesses?

I think you talked about Health Care and group business as being mid-single-digit growers; International being a double digit grower.

Anything there that we should consider as far as headwinds, tailwinds to that growth or should we expect something typical to that in 2012?

We're not going to provide detailed guidance, and I appreciate your question in terms of trying to dig in another notch.

Let me see if I can help out a little bit.

Over the long-term your macro conclusions are the right macro conclusions as it relates to headwinds, tailwinds.

Not going to go through by business unit headwinds, tailwinds.

I'll give you 2 or 3 items for consideration in terms of forming 2012.

Strong momentum in 2011 and the objective to carry momentum in 2012.

That was our objective last year; it's our objective this year.

As it relates to 2012, consideration in terms of the underlying patterns of medical costs and disability occurrence across our line of business.

Consideration of the level of aggressiveness of the pricing environment.

We have demonstrated and committed to demonstrating pricing discipline across all of our lines of business, and we will seek to do so in 2012 as well.

As I mentioned in the prepared remarks, the overall economic environment as we take that into consideration.

Relative to our prepared remarks, we indicated that we expect our ongoing businesses to grow earnings and we expect that to contribute to EPS growth on an overall basis.

Your long-term assumptions are correct.

Some moving pieces may be in between, but we feel good around building momentum coming out of the air.

You mentioned the pricing environment.

Maybe can flesh that out as far as what you're seeing there?

And then specifically talk to Vanbreda and the contribution there next year?

I think you had previously spiked that out as an expectation of $35 million of accretion.

As it relates to the pricing, as we've noted in the past for several years, we've indicated that the pricing environment is competitive.

Having said that, we've seen some pockets recently of elevated competitiveness, especially noted in the risk business.

We view that the diversity of our product portfolio helps us from that standpoint.

I'd note that for our 2011 projection, the majority of our progress and success has been an ASO.

As I noted in the 2012 early projection in our estimate here, the majority of that 400,00 life growth is going to be ASO.

We've seen some elevation competitiveness in geographic pockets.

As it relates to Vanbreda, at this point we're not providing detailed 2012 guidance.

I would suggest that for 2011 the Vanbreda results have played out well for us.

I'll remind you of the strategic rationale of why we pursued this.

It positioned us as the by far the leading player as it relates to expats and the needs for the globally mobile, and very importantly, strategically positioned us in a new segment which are the IGOs, intergovernmental organizations.

When we provide more detailed guidance for 2012, early part of the year, we'll talk about this in a little more specificity.

Follow up on HealthSpring.

You mentioned how positively the Street views HealthSpring's -- and the entire managed care community views HealthSpring's management team.

I'd certainly second that.

And so I was just hoping you might be willing to share with us how long the contractual lock appears among those key managers, especially Herb Fritch.

Justin, you're sneaking a lot questions, but they're good ones so I appreciate it.

Relative to the HealthSpring leadership team.

I feel passionate about it.

How impressed I've been and our team as been with Herb specifically and his leadership.

The passion coupled with capabilities are extremely impressive.

Secondly, we might take pause at this.

I think the opportunity for our 2 organizations together, beyond contractual relationships which I'll comment on in a moment, are going to be delineated in terms of our shared view of both the responsibility and opportunity to drive change in the healthcare marketplace.

That's what motivates Herb; that's what motivates his leadership team.

That's the driving force in terms of their effectiveness to partnering with the physicians.

We share that passion.

Our ability to continue the direction that they have, fuel further growth and fuel further innovation, that's the big opportunity.

Having said that, in some of the filings you'll be able to see that Herb and key members of his team have signed on for a variety of level of years, and that's a contractual formality that exists.

We feel good about that as well, but what's most important is the philosophical alignment and collectively going out and building the next stage of what the marketplace needs.

Christine Arnold, Cowen.

On HealthSpring, do you see an opportunity to apply the way that they're contracting with physicians and other providers to your commercial business over time?

And how does that dovetail with your ACO strategy?

On these 400,000 members, could you speak to the specialty sell-through for those, particularly the smaller end of the market where it seems like that's a lot of the earnings opportunity?

On the first part, one of the value creators we see for our 2 organizations is just what you said; expanding the focus and the ability to bring that physician partnership incentive and alignment model to the commercial space.

We see it 2 different ways.

We see offering and capabilities to be brought forth for today's commercial employer market with a product and choice alternative.

We see an exciting set of opportunities to bring forward for what we'll call the evolving retail or individual market, and you could use illustratively to 2014 exchange as an ability to think about that.

We see that as a very important part of the opportunities in front of us, and Herb and his team share that.

Early interaction that Herb has had with his physician partners, they see that and embrace that opportunity.

As a relates to our ACO model, we see them as highly aligned.

In some ways, Herb's model is more sophisticated than and has driven incentive alignment further and faster.

But the overall ACO model we have, as I mentioned, we've entered our fifteenth very recently, shares the exact same framework.

It's incentive alignment.

It's the use of targeted information to drive quality and service improvement.

It's care coordination capabilities like case managers, nutritionists, and the like.

So philosophically we align.

I would suggest that his model is a bit more sophisticated.

As it relates to the 400,000 members, you should assume that our basic rule of thumb still holds.

In the select segment, the level of specialty pull-through is extraordinarily high.

In the middle market, generally speaking, the level, especially pull-through, is high; a little less so than specialty.

In the national account space, generally speaking lower.

The last comment I'll make is a string to pull throughout.

Generally speaking, when we sell consumer directed or high engagement based capabilities, the level specialty pull-through is higher regardless of the segment because the employer understands the benefit of integration and the benefit of the overall program delivery.

So good trajectories there.

Can I assume that there's more specialty sell-through in 2012 versus 2011 given that you're selling more -- you're not shrinking national, but you're selling more select [more med] or is that reading too much?

No, Christine, I would not say that.

On the positive, I would say there's a continuation of our progress in the select segment in the middle market, and you should view that there's therefore continuation of the specialty trajectory.

Secondly as I mentioned before, the increase in our outlook is driven by an improvement in our national account outlook.

With the national accounts, on average there's less specialty pull-through, but on overall portfolios, we lift this 400,000 covered life, we'll have lift in our specialty portfolio as well.

Carl McDonald, Citi.

Wanted to clarify the comment that you'd grow earnings in 2012.

That's making the adjustment for the change in international accounts in accounting?

So in other words, growth off of the $480 million to $505 million for 2011?

Correct.

As Ted mentioned in his prepared remarks, the base will be reset, the trajectory though is what we're referencing.

You talked last quarter about seeing increased interest from risk accounts converting to ASO.

Now that we're actually through a lot of the selling season, be interested in a result there?

Did the risk employers look at it and decide not to do it or did you see more conversions than are normal?

If you think about our 2011 membership outlook, the majority of our membership performance in 2011 is ASO.

As a reference for 2012 within the 400,000 net growth off healthcare customers, we said the vast majority of that is ASO.

If you look at the pattern, what we've seen in the marketplace is continued increased demand for more transparent products, of which ASO is the most transparent product in the portfolio.

We've seen an increasing demand as you go down market, moving beyond the -- I'll call it the traditional middle market accounts of 500 to 800 employees, down to the select segment of 250 or 200 or 150 and beyond employees.

For CIGNA, ASO continues to be the largest portion of our traction and trajectory and we see increasing demand in the marketplace, both in the traditional middle market space but also down market in the select segment space.

Ana Gupte, Sanford Bernstein.

My question is again about the HealthSpring acquisition and to what extent did group retiree conversions play into your strategic and financial rationale for doing the deal?

As we think about 2013 or even 2012, what is the pipeline that you are seeing for this?

To what extent do you think the CIGNA HealthSpring combination would be able to capture some of that?

Around the type of employers that are doing this, given that you don't have a broad national footprint, is this more than national accounts?

Is it more state governments?

And if it is more about having a national footprint, how are you planning to build that out?

First, I guess the first 2 are tied together which are relative to the group retirees.

Simple answer is yes.

Did it factor into our strategic thinking?

Yes and absolutely.

And we think about 2 ways.

We think about the large cadre of emerging Medicare eligibles.

Think about the pre-65 retirees and soon-to-be retirees and beginning to position to coordinate having continuity of service as best you can as they age into Medicare-eligible status.

In addition, yes a large pipeline of Medicare-eligible -- current Medicare-eligible retirees, and an opportunity to systematically have a set of offerings and a pipeline from that standpoint.

As it relates to the marketplace looking forward, we think over time, as I mentioned in our prepared remarks, that having the HealthSpring solution and solutions that will continue to evolve will bode very well for both the existing marketplace that HealthSpring targets as well as bringing additional pipeline of opportunities off of our book of business.

Your question then goes to the type of employers.

I'd merge this up against our go deep strategy.

Everything we have been focused on over the last 2 years has been around go deep.

HealthSpring understands, knows, and has done an extraordinary good job with go deep.

Herb's team and our team talks the same language.

So this will be about focus, focus, focus.

And then as we indicated in our prepared remarks, we'll talk about expanding their platform in key geographies where we see the highest need for our clients and customers and the highest opportunity going forward.

After doing this deal, would you be more open to considering a sale of your [capitis PBM]?

Have you totally ruled out the vitality re-type transactions?

Do they not apply to your book as the way to field some capital and improve your balance sheet?

We continue to believe that our PBM is performing very well, and is an important part of our clinical value proposition.

We've built a lot of structural flexibility into our PBM because that space continues to grow from -- I'll call to more traditional aspects of retail and mail order to putting in place the specialty programs et cetera.

Relative to the opportunities that present themselves with HealthSpring coming into the fold, we see further opportunity to add value through the PBM space, and over time we're going to seek meaningful opportunities to add value of over that space.

We're cognizant that HealthSpring has a different relationship.

We'll make sure we have a detailed understanding of that relationship and make sure that whatever we're doing, first and foremost, puts their customers, or soon to be our customers, first.

And then evolve our PBM strategy.

But most importantly, there's several significant opportunities for further value creation there.

As it relates to your broad question on capital, you should you view that we continue to look at a variety of mechanisms for, I'll call it capital flexibility.

And as Ralph noted in his prepared remarks and in his follow-up relative to VADBe, we believe we do and will continue to have good capital flexibility on a go forward basis.

So we would not roll out that as a concrete example, but we also would not limited that as a sole example of how to get additional capital flexibility.

Peter Costa, Wells Fargo.

I'd like to expand a little bit on the capital question.

Post the HealthSpring closing, a couple of questions about what your capital priorities will be.

First on Arbor, couple things to specifically address.

Will you replace $150 million in capital that's now used up here by the $170 million, or arguably used up?

Will cash be coming out of HealthSpring, or will you have to put more cash into HealthSpring, or will you have to put more cash into HealthSpring in terms of refinancing some of the debt or whatever?

And then share repurchases going forward and further international acquisitions, is that something to expect to see?

And then just finally, paying down your acquisition debt.

Where will that be in terms of priorities?

First, our capital deployment priorities really remain unchanged.

We want to support the internal business, pursue acquisitions that are both strategic and financially attractive, and then look at opportunities beyond that to return value to shareholders.

Regarding HealthSpring specifically and the capital there, as we looked at the capital levels of the business today, what we have modeled is that we will over time increase that capital level, but that could be done within the cash generation of the business.

We would not envision infusing additional capital from the parent level into the business to bring up the capital ratio from where it is.

We have looked at that, and we believe that there is sufficient cash flow within that operation to step that up.

Regarding overall capital and deployment, as we set up the equity and debt financing going forward, our plan would be to bring our debt-to-capitalization ratio down to more of our historic target levels in that 25% to 30% range in a reasonable period of time.

And then as we do that, that becomes a near-term priority to bring some of that level down.

That also enables us to have enough flexibility to look at other opportunities, both in and outside the US consistent with our strategies.

And I think importantly, throughout all this, both businesses generate very strong cash flows.

We would expect to be seeing cash moving up to the parent from the subsidiaries of both companies.

How long do think it will take before the cash moves up from HealthSpring?

It's hard to say with the rate and pace exactly, but we would think certainly over the next 24 months we'll see movement.

And certainly movement up in the RBC ratio, but in that timeframe we would also expect to see some generation up to the parent as well.

You touched on it before about the market overlaps between yourselves and HealthSpring.

And what you do outside of HealthSpring's market, will you continue to use the Humana JV, or will that go way altogether?

What else will you do in terms of acquisitions?

Will M&A be something that you'll pursue in Medicare?

Relative to the market overlap, we do not have overlap relative to CIGNA and HealthSpring as it relates to Medicare solutions and geographies.

From a regulatory standpoint, that should aid us in the process.

From a geographic-focused standpoint and understanding which markets are most important to their growth and our growth, we have shared alignment around that and a way to approach to market.

As it relates to M&A and growth of the markets, it will be over time a combination of organic growth of markets, leveraging our collective capabilities, and opportunistically acquiring additional footprints that benefit the organization.

As it relates to the Humana alliance, as you recall we put the Humana alliance in place to accommodate the needs of our employer clients and customers.

As you reference, it's more of a national solution.

At this point time, we would expect post closing of the HealthSpring acquisition that both solutions would coexist and that we would work with the Humana leadership to ensure that the solution we have is mutually beneficial to both organizations over time.

Kevin Fischbeck, Bank of America Merrill Lynch.

Question on the HealthSpring deal.

I've got a pretty good sense of what HealthSpring is going to be able to do, but the one missing piece in my model when thinking about it is the amortization number.

Do you have any guidance on what amortization might pro forma the deal?

At this point in time, it hasn't been finalized yet.

There could be a range of estimates in there, so I'd prefer not to lock into any one particular estimate.

I think importantly, as we said, with amortization or excluding amortization we think the transaction will be accretive.

I think that's very important.

But the actual amortization estimate really needs to be still finalized.

Okay, and then maybe then if you could just comment a little bit on cost trend?

You took your cost trend estimate down for the year, but any commentary directionally on Q3 cost trend versus Q2 and what the major drivers of trend are right now?

The cost trend on medical costs has been largely consistent for the first 3 quarters of the year here.

So what we saw in Q3, it was largely similar to Q2.

Regarding our outlook for this year, our assumption is that we would start to see the utilization trends in particular begin to move back to more historical levels.

That's what we've anticipated in our guidance for the full year.

I don't know, David, do you want to add any color on anything you've seen in the marketplace?

We have noticed and it's important in the utilization trend, is within our portfolio of clients, specifically for those clients of some of the more innovative clinical programs attached, we continue to see an uptick in utilization of many of what we'll call the important in right services.

So wellness, prevention, medication compliance rates, et cetera.

And all that is taking place in a book of business that, as Ralph mentioned, is showing a good overall medical cost trend.

It's important to note that when we talk about utilization decelerating, it's important to understand that the right types of utilization of services of prevention, wellness, when supported with the appropriate clinical programs are actually upticking.

That benefits individuals and it benefits clients.

So you're expecting trend to return, but right now you're not seeing a change in trend?

That's correct.

David Windley, Jefferies and Company.

Hi, thanks for taking the questions.

on the HealthSpring acquisition, if they're early in small push, but nonetheless push into Medicaid, would you change our soften your views that have been somewhat cautious about Medicaid, and what would be your outlook for the Medicaid business?

Since those views were views that I put forth, I guess I'll address that question.

As we go back to the senior solution when walked through our strategy, we did indicate that when we secure a seniors platform, we viewed that was an opportunity in targeted geographies to selectively explore the Medicaid population, especially ABD population.

We have a shared philosophy and a shared orientation with Herb and his team that it's a market-specific decision.

And you're going to leverage the seniors capability, the infrastructure, and then very importantly the clinical capabilities and programs.

What we were trying to be clear on is that as CIGNA was configured, we did not believe we had differentiated capabilities to enter the Medicaid space.

While we saw it is a growing market, we did not have the capabilities to differentiate and ultimately win.

But if we saw to, we would do it off of a differentiated senior solution and do it opportunistically in key geographies.

That's the direction you should expect to see going forward.

And on rebates, 2-part question here.

Comment on what portion of your book of business is in rebate status, if you could just give us percentage of sales or something like that.

In your comments around hospital contracting, you were, I thought, careful to comment that pockets of geography might be different, but on average looking in line.

I'm wondering if rebate status can have some influence on being creative on your hospital contracting side, geography-by-geography.

Relative to contracting, my comments and geography were not meant to be coded.

When you are managing a national portfolio, clearly you're going to have higher and lower results, so that was the reference I was making.

But on total, that the pattern of contracts in 2012 early look is not materially different than the pattern of contracts in 2011.

And by the way, that's consistent with our 2011 relative to 2010 performance in general.

As it relates to the orientation whether or not rebates correlate to the contracting piece, I would say generally speaking no.

And would remind you that the size of our book of business, we have 9%, 10% guaranteed cost of the total population of our portfolio.

When you take that and whittle it down and go to any specific geography and any specific cell you're dealing with from a rebate standpoint, from a CIGNA point of view, it would not be that significant to influence in any way, shape, or form.

Obviously, there's a lot of moving parts to that in pieces, but in the quarter, just for perspective, we recorded an additional $19 million in the quarter after tax on rebates.

So year-to-date $44 million after tax is what we have on the rebate accrual.

John Rex, JPMorgan.

With respect on some of your '12 commentary, you refer to your current trend running 5.5% to 6.5% as you look at '11 now.

Where do you anticipate commercial trend to run in '12.

Does your renewal pricing that you have locked in so far match that?

I think our prepared remarks said 5.5% to 6% for 2001.

Yes, so you said 5.5% to 6.5%, we're 5.5% to 6%.

We've seen that continued downtick in that.

Very importantly we continue to see for prevention, wellness, some key service utilization, some uptick there.

We've not provided 2012 specific guidance.

You should assume that as we've talked directionally, we are making directional assumptions that the rate and pace of utilization increases throughout the course of 2012 relative to what it's been in 2011, more to historic levels.

Time will tell whether or not that's correct.

Our basic assumptions are not a step function on January 1, but that it would transpire throughout the course of the year.

General assumption is that our pricing assumptions would be pricing more toward our projected trend and continue to get trued-up as we learn more on each monthly cycle.

If I look at trend in this country over the last 50 years, it's averaged about 8%.

Is that commensurate with what you would call historic levels?

John, not going to put a number out there.

What I might ask you to think about is if that's your way of -- if you take our 5.5% to 6% for example.

Of which we've said 2012 relative to 2011 contracting is about intact in terms of rate pace size.

If you assume that 2011 had a lighter overall utilization rate, whatever your personal assumptions are in terms of normal utilization, then you could put it on top of the 5.5% to 6% and move it up to your projection.

Clearly, it won't provide you guidance, it will provide more clarity for you, but that's the way we would think about it.

You know what I'm trying to do here, I'm trying to understand my margin for error here.

Can I withstand 100 basis points of trend reacceleration in your guidance or can I withstand 50?

I'm trying to get an order of magnitude so we can get a sense of how much margin for reacceleration for the '12 could withstand.

Trying to be helpful here first as you know but important to reorient.

80% plus of the business ASO approaching 10% in terms of shared returns, round numbers 10% guaranteed cost.

To set the frame in terms of the exposure to trend acceleration in any given point in time, in our guaranteed cost business or risk business, our case size continues to be higher than average versus the industry because, for example, we're not in the under 50 market.

The relevance there is that we use case-specific experience to set rates on a go forward basis.

As you know, greater than 50% of our overall portfolio business renews on January 1.

As you're thinking about an environment where, if we have 3 quarters of 2011 with moderate utilization, we're assuming that 2011fourth quarter has some uptick in utilization.

My comment relative to 2012 suggests we're projecting an increase in utilization but not on January 1; ratably throughout course of the year.

You can draw your conclusion.

Our conclusion is that we are less exposed than most as it relates to accelerated changes in either direction for medical cost, largely because we have a highly transparent portfolio and our incentives are directly aligned broadly speaking with our employer clients.

Matt Borsch, Goldman Sachs.

On the pricing where you talked about elevated competitiveness, can you give us any granularity there in terms of whether you're seeing that in the risk business more from the public or more from the not-for-profit carriers?

If you think it's largely driven up by the MLR rebates.

And of course I would be interested if you could spike out any geographies?

What we've seen is, broadly speaking, is a continuation of a competitive environment, as I've indicated.

Within that, I flagged an uptick in level of competitiveness in some key pockets.

I referenced earlier that it was specifically that we've seen in the risk space.

Relative to CIGNA I noted that in 2011 the majority of our growth has been in the ASO space, and when we flagged our 400,000 customer growth for 2012, we said the vast majority of that would be ASO.

And in part, we've seen pockets of movement in the risk portfolio that we've backed away from and we're leveraging our ASO space a little bit more aggressively.

If it's public or private, we would say both.

And geographies, take Southern California as a good concrete example, and maybe the tri-state region on the East Coast here as a second example.

Great, that triangulates with what we've heard as well.

I missed part of the call here.

Could you just remind us what the adjustment is for the rebates for 2011relative to your statement that earnings will grow in 2012?

Year-to-date our accrual was $44 million on an after-tax basis.

At this time, I would like to turn the call back to Mr.

Cordani for any additional or closing comments.

I want to thank everybody for participating in our call.

In closing, I'll briefly highlight key quarterly performance highlights in our 2012 outlook.

Our third quarter operating results delivered strong top line and bottom line growth.

We continue to invest for our future success, including the pending acquisition of HealthSpring.

Based on the strength of our third quarter results, we are confident in achieving our increased outlook for 2011.

Given our sustainable profitable growth during the past 2 years, we expect to continue this momentum into 2012, with revenue growth from each of our operating businesses and we expect to grow our healthcare membership by at least 400,000 customers in 2012.

And in 2012, we expect to achieve solid consolidated earnings in EPS growth.

We thank you for joining us on the call today and look forward to speaking with you in the future.

Have a great day.

Ladies and gentlemen, this concludes CIGNA's third-quarter 2011 results review.

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

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