Cigna Corporation
Q3 2007 Earnings Call Transcript

Published: 2 Nov 2007

[Operator:]

Ladies and gentlemen, thank you for standing by for CIGNA'sthird quarter 2007 results review. (Operator Instructions) We’ll begin byturning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

[Ted Detrick:]

Good morning, everyone, and thank you for joining today’scall. I am Ted Detrick, Vice President of Investor Relations and with me thismorning are Ed Hanway, CIGNA's Chairman and CEO; Mike Bell, CIGNA's ChiefFinancial Officer; David Cordani, President of CIGNA Healthcare; and Jon Rubin, CIGNA Healthcare’s ChiefFinancial Officer. In our remarks today, Ed will begin by discussing highlightsof CIGNA's third quarter and year-to-date results. We will also make somecomments regarding our growth prospects for 2008. Mike will then review thefinancial details of the quarter and provide the financial outlook for the fullyear 2007 and for 2008. David will discuss our medical membership results andoutlook. We will also make some comments regarding our consumer engagementcapabilities, which is improving the health and wellbeing of our members. Edwill then conclude our remarks by briefly commenting on healthcare reform, aswell as the opportunities in which we are focused to deliver profitable growthfor our healthcare business. We will then open the lines for your questions. As noted in our earnings release, CIGNA uses certainfinancial measures which are not determined in accordance with generallyaccepted accounting principles, or GAAP, when describing its financial results.Specifically, we use the term labeled adjusted income from operations, which isincome from continuing operations before realized investment results andspecial items, with special items being unusual charges or gains, as theprincipal measure of performance for CIGNA and our operating segments. Areconciliation of adjusted income from operations to income from continuingoperations, which is the most directly comparable GAAP measure, is contained intoday’s earnings release which was filed this morning on Form 8-K with theSecurities and Exchange Commission and is also posted in the investor relationssection of CIGNA.com. Now, in our remarks today we will be making someforward-looking comments. We would remind you that there are risk factors thatcould cause actual results to differ materially from our current expectations.Those risk factors are discussed in today’s earnings release. Before turning the call over to Ed, I will cover a few itemspertaining to our third quarter results and disclosures. In CIGNA's earningsrelease, we have included a $23 million after tax benefit related to thecompletion of an IRS examination. This benefit is reported as a special itemand therefore is excluded from adjusted incomes from operations in today’sdiscussion of both our third quarter results and our full year 2007 outlook. Inaddition, CIGNA's third quarter results include after tax income fromdiscontinued operations of $2 million related to the completion of that IRSexamination. Regarding our disclosures, I would note that in 2006, thefinancial accounting standards board issued statement number 157 entitled fairvalue measurements, which clarifies the measurement of and expands disclosuresregarding the fair valuing of certain assets and liabilities. Companies arerequired to implement statement number 157 effective with the first quarter of2008. Based on our current evaluation, we believe that statement157 changes the assumptions we use to fair value the assets and liabilities ofour guaranteed minimum income benefits business within our run-off reinsurancesegments. The initial implementation of statement 157 is expected tohave an adverse impact on CIGNA's results and this impact may be material toconsolidated results of operation but we do not expect it to materially impactCIGNA's financial condition. Also, because changes in the fair value of these assets andliabilities will be recorded in net income, CIGNA's future results for therun-off reinsurance segment may become more volatile subsequent to the adoptionof this statement. Lastly, I would also note that in the earnings outlook for2008, which Mike Bell will discuss in a few minutes, our outlook excludes anypotential volatility related to the adoption of this statement. With that, I’ll turn it over to Ed.

[H. Edward Hanway:]

Thanks, Ted. Good morning, everyone. I am going to starttoday’s call with a few brief comments on our third quarter results and I willthen discuss the highlights of our 2008 outlook. Mike will provide more detailson the third quarter results and our 2007 and 2008 outlook. After that, Davidwill comment on our medical membership results and review the 2007 and 2008membership outlook. He will also discuss out the strength of our consumerengagement capabilities, which are improving the health and wellbeing of ourmembers, have helped us achieve very good membership growth in 2007 and why webelieve we are well-positioned to successfully achieve our 2008 growth goals. In my closing remarks, I will comment on the healthcarereform debate and also briefly identify the opportunities we are pursuing toprofitably grow our business for the long-term. Overall, our consolidated third quarter results were strongand above our expectations. The results reflect growth in healthcare earningsand strong contributions from our other health and related benefits businesses. Third quarter adjusted income from operations was $323million, or $1.14 per share, and represented 37% earnings per share growthrelative to the third quarter of 2006. Year-to-date adjusted income fromoperations was $866 million, or $2.98 per share and represented 30% earningsper share growth relative to 2006. On a year-to-date basis, healthcare earnings excluding prioryear development have increased by 11%, or $50 million, compared to the sameperiod last year. The healthcare results reflect aggregate medical membershipgrowth, disciplined execution of our guaranteed cost renewal pricing action,and strong contribution from our specialty businesses. Year-to-date, healthcare membership, excluding membersgained from the Sagamore acquisition, has grown approximately 5.1%. Ouryear-to-date 2007 healthcare results demonstrate disciplined pricing, which weplan to maintain in 2008. Our group disability and life and international businessescontinued to deliver strong results. Year-to-date, our group disability andlife business reported earnings of $191 million, with premium and fees growingyear over year at an attractive rate of 13%. Our after tax margin in thisbusiness continues to be very strong. Our international business has reported year-to-dateearnings of $129 million on 17% growth in premiums and fees. Both our group andinternational operations have strong market positions with good opportunities. We also continued to be active with share repurchase. Todate in 2007, we have repurchased approximately 24 million shares for $1.16billion. But to reiterate, our third quarter consolidated resultswere strong and we have increased our full year 2007 consolidated earningsoutlook. Regarding our 2008 outlook, we expect full year membershipto grow organically by 3% to 5%. We expect approximately 2% to 3% growth willbe achieved in the first quarter. As Mike will discuss in detail, we expecthealthcare earnings, excluding prior year development, to grow in the lowdouble digits in 2008, similar to the earnings growth we are achievingyear-to-date in 2007. This earnings growth, coupled with a second consecutive yearof meaningful membership growth, validates that our capabilities related to theconsumer engagement area are resonating well in the marketplace. We expect continued good earnings in revenue growth in ourgroup and international businesses in 2008. Overall, we are pleased with ourprospects for membership and earnings growth across ongoing businesses in 2008. Mike will now cover the specifics of the third quarter aswell as our outlook for 2007 and 2008. Mike.

[Michael Bell:]

Thanks, Ed. Good morning, everyone. In my remarks today, Iwill review CIGNA's third quarter results. I’ll also discuss our outlook forfull year 2007 and for 2008. Inmy review of consolidated and segment results, I will comment on adjustedincome from operations, and this is income from continuing operations excludingrealized investment results and special items. This is also the basis on whichI’ll provide our earnings outlook. Our third quarter earnings were $323 million, or $1.14 ashare, compared to $268 million, or $0.83 a share in 2006. I’ll now review each of the segment results, beginning withhealthcare. Third quarter healthcare earnings were $173 million. This resultincluded after tax favorable prior year claim development of $5 million.Excluding prior year development, year-to-date healthcare earnings are $50million higher than the same period in 2006. Aggregate membership growth and lower per member operatingexpenses contributed to our earnings growth, as did execution of our guaranteedcost pricing actions over the last 12 months. The year-to-date results also include earnings growth fromour specialty businesses. These factors were partly offset by lower mail orderpharmacy volume and a $6 million after tax charge related to the CMS diseasemanagement pilot. Healthcare membership through nine months was 5.1% higherthan at year end 2006, excluding the 357,000 members relate to the Sagamoreacquisition. In the third quarter, experience rated membership grewsequentially, while guaranteed cost membership declined. The latter reflectedour focus on maintaining pricing discipline in an environment which continuedto be quite competitive. We currently expect full year membership to be 5% to 5.5%,excluding Sagamore. The upper end of this range is modestly lower than ourprevious expectation, reflecting the guaranteed cost competitive environment. Our year-to-date guaranteed cost MCR was 84.3% excludingfavorable prior year development and excluding the results from our voluntarybusiness. This result is 210 basis points better than the comparable 2006 MCR,reflecting strong execution of our renewal pricing actions. The guaranteed cost MCR improved in the third quarterrelative to the first half of the year, and we expect to achieve a full yearguaranteed cost MCR, excluding prior year claim development and voluntary of84% to 84.25%. Healthcare premiums and fees through nine months were up 11%versus 2006, reflecting medical membership growth, rate increases, and growthto Medicare Part D. Relative to operating expenses, our results for nine monthscontinued to reflect productivity improvements, partially offset by investmentsthat we are making in our growth initiatives. Overall, excluding prior yearclaim development, our year-to-date healthcare earnings are $50 million, or 11%higher than in 2006. I’ll now discuss the results in our other segments. Third quarter 2007 earnings in the disability and lifesegment were $63 million. This result reflected favorable mortality in grouplife and accident, effective operating expense management, and competitivelyattractive margins and disability. The segment’s third quarter earningsincluded a $3 million favorable after tax impact of reserve studies. In our international segment, third quarter 2007 earnings of$47 million reflected competitively strong margins and continued growth in ourlife accident and health and expatriate benefits businesses. Group andinternational continue to be important contributors to our consolidatedresults. Earnings in our remaining operations, including run-offreinsurance, other operations and corporate, were $40 million for the quarter.Run-off reinsurance earned $39 million, and this result reflected favorableitems which we do not expect to recur, including settlement activity andfavorable claim experience on run-off personal accident business. Before discussing our earnings outlook for the full year,I’ll comment briefly on our current capital position and our 2007 outlook. Our parent company capital position continues to be strongand our subsidiaries remain well-capitalized. At the end of the third quarter,cash and short-term investments at the parent were approximately $450 million. We continued our share repurchase program in third quarter,repurchasing 4.6 million shares of our stock for approximately $235 million. Todate in 2007, we have repurchased approximately 24 million shares for $1.16billion. With respect to the outlook, we continue to expect full year2007 subsidiary dividends to be approximately $1 billion. Our parent hasreceived approximately $750 million of subsidiary dividends through September. We expect other sources and uses of parent company cash forthe fourth quarter [to sum between] net source of approximately $100 million,and this estimate excludes any further share repurchase and any additionalM&A activity. We continue to have a long-term target for parent cash ofapproximately $250 million. Our capital management priorities remain consistent with ourprior communications. Our first priority is to maintain appropriate liquidityat the parent and to ensure that our subsidiaries remain adequately capitalizedto support growth and maintain their credit ratings. Our second priority for excess capital is to consideracquisition opportunities. We routinely review a range of acquisitionopportunities that would enhance our strategic position and meet our return oninvestment goals. We do not know when or if we would find additionalopportunities that would meet our criteria and absent these items, our prioritywould be to buy back our stock. In summary, we continue to have a strong capital positionand good financial flexibility. I’ll now review our earnings outlook. For full year 2007, wecurrently expect consolidated adjusted income from operations of $1.1 billionto $1.16 billion. This range is higher than the estimates we provided inAugust, primarily reflecting the strength of our third quarter results. I’ll discuss the components, starting with healthcare. Ourestimate for full year 2007 healthcare earnings is a range of $670 million to$710 million. The upper end of this range is modestly lower than the estimatewe provided in August, and this reflects the facts that I noted in discussingour third quarter results. Specifically, the lower mail order pharmacy volume,the charge related to the CMS disease management pilot and lower guaranteedcost membership are expected to be partly offset by a higher outlook for specialtyearnings, including [stop loss]. With respect to other key factors in the healthcare outlook,we expect medical cost trend for our total book of business to be in the rangeof 6.5% to 7.5% for the full year, and this is unchanged from the estimates weprovided in August. We expect guaranteed cost pricing yields to exceed trend andwe expect the guaranteed cost MCR, excluding prior year claim development inthe voluntary business, to be in the range of 84% to 84.25% for the full year2007. All in, we currently project full year 2007 healthcareearnings to be in a range of $670 million to $710 million. Turning to the balance of our segments, we expect ourremaining operations to contribute approximately $430 million to $450 millionof earnings for the full year 2007. This is higher than the outlook we providedin August, reflecting the strong third quarter results. For the full year, wecontinue to expect high single digit earnings growth in group. Our full year earnings growth expectation in internationalis now approximately 20%, which is higher than our previous estimates. So putting together all the pieces, we estimate that ourfull year 2007 consolidated adjusted income from operations will be in therange of $1.1 billion to $1.16 billion. As I discussed before, we do notpredict the amount or pace of repurchase and our estimates for earnings and EPSdo not reflect the impact of any further repurchase activity. On this basis, our estimate of full year EPS for 2007 is arange of $3.80 to $4 a share. Turning now to the full year 2008 outlook, we currentlyexpected consolidated adjusted income from operations in a range of $1.155billion to $1.215 billion. I’ll discuss the components, starting with healthcare. As Ednoted, we currently expect that our medical membership will increase by 2% to3% in the first quarter and 3% to 5% for the full year 2008. We expect over 90%of the first quarter membership growth to be in ASO. We currently expect medical cost trend for our total book ofbusiness to be in the range of 6.5% to 7.5% in 2008. We expect guaranteed costpricing yields to modestly exceed trend and we estimate that the full yearguaranteed cost MCR, excluding prior year claim development in our voluntarybusiness, will be approximately 83%. Our estimate for full year 2008 healthcare earnings is arange of $740 million to $780 million, and this range is $80 million, or 12%higher than our projected earnings range for 2007, excluding prior yeardevelopment. Our expected earnings growth in 2008 reflects several keyfactors. First, we expect that revenue growth, including the impact ofincreased membership and higher penetration of our specialty products, willdeliver approximately $50 million to $70 million of additional after taxearnings. Second, we expect guaranteed cost pricing action in excessof medical trend to improve the MCR by 100 to 125 basis points and we expectthis improvement to contribute approximately $25 million to $35 million ofafter tax earnings growth. Third, we expect to invest approximately $10 million net onan after tax basis in our segment expansion initiatives in the small group,individual, and seniors markets. Now while dilutive in 2008, we expect theseinitiatives to be accretive to earnings starting in 2009. Finally, we expect 2008 experience rated margins to beapproximately in line with full year 2007. So in total, we expect 2008 healthcare earnings to be in therange of $740 million to $780 million. Turning to the balance of our segments, we expect our remainingoperations to contribute approximately $415 million to $435 million of earningsin 2008. We expect our group disability and life and international businessesto continue to grow revenue while maintaining strong margins. Specifically, weexpect low to mid single digit earnings growth in group and low double-digitearnings growth in international. Earnings for the balance of our operations, which includerun-off businesses and the parent, are expected to be lower year over year,mainly due to the absence of the 2007 non-recurring favorability in run-offreinsurance. I would reinforce Ted’s comment that our 2008 outlook doesnot include potential additional volatility resulting from the implementationof the new fair value accounting standard as it relates to run-off reinsurance. Putting together all the pieces, we estimate that our fullyear 2008 consolidated adjusted income from operations will be in the range of$1.155 billion to $1.215 billion. As I mentioned before, we do not predict theamount or pace of repurchase and our estimates for earnings and EPS do notreflect the impact of any further repurchase activity. On this basis, ourestimate of full year EPS for 2008 is a range of $4 to $4.20 a share. In thinking about our expected EPS growth, it is useful toconsider the impact of the favorability in the run-off reinsurance business,which is included in our 2007 outlook and which we do not expect to recur in2008. In addition, our 2008 EPS estimates represent a compoundannual growth rate of approximately 14% relative to 2006. Relative to capital management, we expect to maintain strongdividend paying ability in our subsidiaries in 2008. As we’ve previouslystated, we expect to have extracted most of the excess liquidity from oursubsidiaries by the end of 2007, and in 2008 we would expect subsidiarydividends to be at a more normal level of approximately 75% of consolidatedearnings. We’ll provide more specifics relative to our 2008 capitalmanagement expectations in February. So to recap, assuming no further repurchase, our currentoutlook is for full year 2007 EPS to be in the range of $3.80 to $4, and ourEPS estimate for 2008 is a range of $4 to $4.20. Our outlook for 2008 reflectsattractive earnings growth in healthcare and continued strong performance inour group and international businesses. And with that, I’ll turn it over to David.

[David Cordani:]

Thanks, Mike. Good morning, everyone. As you’ve alreadyheard this morning, we continue to expect CIGNA Healthcare to achieve strongearnings growth for 2007. Inaddition, we anticipate continued membership and earnings growth in 2008 whilealso making investments in important growth areas. Later this month at our investor day, we will discuss ourlong-term growth strategy in some detail. Today, my remarks will be focused inthree areas

[H. Edward Hanway:]

Thanks, David. I want to underscore several points. First,our consolidated results for the third quarter were strong and reflect growthin healthcare earnings as well as strong contributions from our disability andlife and international businesses. Second, the earnings and membership growth we are achievingin our healthcare business in 2007 validates the strength of our valueproposition in the marketplace. Third, we will make significant investments in segmentexpansions in 2008, which will drive future profitable growth and enable us toachieve our mission to become the leading health and related benefits company. Lastly, I believe we have a strong market position that wecan leverage to achieve our membership and earnings growth goals for 2008. I’ll now make a few remarks on the healthcare industry froma public policy perspective. As you know, the U.S. healthcare environment hasbeen challenging in recent years and will likely remain so for some time. CIGNAis actively invested both in the debate around the future of our healthcaresystem as well as pursuit of new and enhanced capabilities required to succeedgoing forward. At CIGNA, we believe that every American should have accessto affordable, quality healthcare. We also believe that a coordinated publicand private partnership of all healthcare stakeholders is critical to creatinga value-driven market which will expand coverage to the uninsured and improvethe health of all Americans. It is important to note that current healthcare reformproposals of both parties are based on maintaining the employer-based healthinsurance system, which we view as positive. At CIGNA, we are preparing for theevolution of healthcare in the U.S. and we believe this evolution will createopportunities to support long-term growth for our healthcare business. Our focus for healthcare growth will continue to be theemployer-sponsored arena, where we will seek to grow membership through ongoingintroduction of innovative products and services and effective consumerengagement. In addition, we are adding capabilities and resources toexpand the segments where we see significant growth opportunities, some ofwhich may be enabled by healthcare reform, such as the small group,individuals, seniors and voluntary segments. We expect to capitalize on opportunities that complement ourcore medical products with specialty disease management and disability and lifeproducts. In summary, our prospects are attractive to organically growour business on a sustained basis. So while we are focused on pursuing thesegrowth opportunities, we will also consider supplementing our organic growthwith acquisitions should we find opportunities that meet our criteria. Overall, we expect our ongoing businesses to grow earningsin 2008 by approximately 10%, excluding prior year development and that’sconsistent with our long-term strategic goals. We will provide details related to our expectations for 2008and our long-term growth goals at our annual investor day in New York City onNovember 16th. In closing, our consolidated results are strong and weexpect this momentum to continue into 2008 and beyond. I am confident thatCIGNA has strong market positions in each of our health and related benefitsbusinesses and that we will leverage these positions to continue to createvalue for the benefit of our customers and shareholders. This concludes our prepared remarks. We will be glad to takeyour questions.

[Operator:]

(Operator Instructions) We’ll take our first question fromScott Fidel at Deutsche Bank.

[Scott Fidel -Deutsche Bank:]

First question, just on the 2008 guidance, and maybe if youcould help us think a bit about the glide path on reserve developmentexpectations for next year, and then Mike, you did touch a bit on sharebuy-backs, but how do you think the activity might trend out? Because obviouslythose are two pieces that have come in higher than the guidance in the lastcouple of years.

[Michael Bell:]

In terms of the 2008 guidance, I walked through in theprepared remarks the main drivers of the healthcare earnings growth year overyear and it’s really a combination of revenue growth and further improvement inthe guaranteed cost MCR. In terms of your particular question around prior period orprior year development, I would point out that prior year development has beenrelatively immaterial in 2007 for all reasons that we talked about. We haven’tbeen surprised that it’s been lower than prior years because the drivers of theprior year development, the higher prior year development in the prior years nolonger really applied to this year, particularly the fact that medical coststrends had stabilized as opposed to declining. Our membership has generallystabilized. Shrinkage in membership tends to drive favorable prior yeardevelopment. Given that our membership is now much more stable, that’s acontributor to the lower level, and also our operational improvements have alsostabilized. So for all of those reasons, we’re not surprised that it’s lower in2007. There’s nothing explicit in our expectations for 2008 aroundprior year development but if I had to speculate, I would suspect that prioryear development will also probably be immaterial in 2008. In terms of your question on buy back, I think you know thatwe don’t comment on share buy back repurchase activity just as a matter ofpolicy.

[Scott Fidel -Deutsche Bank:]

Okay, and then just as a follow-up, maybe if you could talkabout just on the sources and uses of cash expectations for 2008 -- anyparticular items you would spike out there? And then just a bit more topical,actually this morning UnitedHealth announced that they are going to acquireFiserv’s health business and just your thoughts around how that deal mightimpact the ASO environment and basically how much you compete with Fiserv atthis point.

[Michael Bell:]

I’ll deal with the parent company cash question. First, interms of 2008, I would like to wait until a combination of the investor day andthe year-end analyst call to be real specific in terms of 2008. But what Iwould suggest at this point is that our 2008 expectations for subsidiarydividends are at this point in line with our longer term expectation thatapproximately 75% of our consolidated earnings should translate into subsidiarydividends from the operating companies to the parent, which means that theremaining one quarter of the earnings would essentially entail retainedearnings in the operating subs to support their growth. In 2008, we expect tobe pretty close to that. There are some other moving parts. We expect to extract someadditional capital from the operating subsidiaries that group insuranceoperates in, but again there’s some other moving parts that I’ll give you somemore detail on on a future call.

[David Cordani:]

On the Fiserv question, I’ll start and see if Ed wants toadd to that. I’ll not speculate specifically on why they purchased Fiserv butmore broadly, don’t generally see them in the mainstream business model today.Two, there’s continued demand for lower cost or more efficient ASO typeofferings and leaner ASO type offerings, so you will see some activities fromcertain competitors around that, whether they are [pure admin], buying smallTPAs and trying to leverage those capabilities. And the third comment is as Ed and myself have previouslyindicated, we expect to see further pressure on the second tier players as theycompete to make sure their value propositions are competitive, and I think yousee some of that playing out here. Ed.

[H. Edward Hanway:]

I think that’s right. I don’t know that we see any materialimpact to our business. I think as you suggested, some of the direction we’veseen, some of the areas we’ve taken advantage of, I think other people haverecognized as well and that’s likely the motivation, but I think we feel verywell positioned to continue to meet the needs of that particular part of themarket.

[Scott Fidel -Deutsche Bank:]

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

[David Cordani:]

I would just say the, both in my prepared remarks and ingeneral, the competitive pricing environment is pretty meaningful right now.The fee only competition is pretty meaningful and back to our strategy, it’swhy we are so passionate about having a very diversified specialty portfolio,because if you are solely competing on an ASO only service proposition, that’sa very difficult standalone service proposition to compete against and webelieve you’ll continue to see pressure there. So for us, continuing to expand our specialty capabilitiesis an integral part of our business model.

[Scott Fidel -Deutsche Bank:]

Thank you.

[Operator:]

Next we’ll go to Matthew Borsch with Goldman Sachs.

[Matthew Borsch -Goldman Sachs:]

Good morning. Sorry if you covered this in your remarks, buton the decline in commercial risk enrolment, was that a -- can you just commenton what was driving that?

[Michael Bell:]

Generally what’s driving that is the competitive pricingenvironment and the fact that we are committed to maintaining our pricingdiscipline. Now obviously overall our aggregate membership increasedsequentially and as we’ve talked about, we expect our aggregate membership tocontinue to increase in 2008.

[Matthew Borsch -Goldman Sachs:]

Got it, okay. So it was not -- you wouldn’t characterize itas a couple of large accounts, or was it more sort of erosion across the boardin markets where you are maintaining pricing discipline?

[Michael Bell:]

The latter, Matt, as opposed to any particular sizableaccounts.

[Matthew Borsch -Goldman Sachs:]

Okay, got it. And just coming back to the topic of Fiserv,the acquisition there, and I’m going to comment a little bit just on acompetitor here and in a couple of respects. You know, the question comes upwith these acquisitions, well, why did they do it and why didn’t you do it?That’s sort of my first question. And the second is on capital deployment, one of your competitorshas talked about going to a substantially higher debt-to-capital level to funda greater level of share repurchase activity. Just wondering where you might bein terms of contemplating perhaps a similar move now or in the future. And if you could just remind us where your targetdebt-to-cap is relative to where you are now. Thanks.

[Michael Bell:]

Let me deal with your second question first. In terms ofdebt leverage, which we measure as debt to total cap, at the end of thirdquarter we were at 28% and there has been no change in our targeted range of20% to 30% during normal times. In fact, absent significant acquisitions, weexpect to be reasonably close to that 25% level. Now, in the event of anacquisition, we could conceivably go higher than the 30% on an interim basis,but we are quite serious about our long-term plan to be close to that midpointof that 20% to 30%.

[Matthew Borsch -Goldman Sachs:]

And why is that?

[Michael Bell:]

The main reason is to protect our ratings. It’s veryimportant to us that we continue to have operating subsidiary ratings,particularly CG Life, in that strong A level, and we believe that’s importantbecause it’s important to our national accounts customers. And based on ourdiscussions with the rating agencies, we think the combination of the strongresults and the strong capital in our operating subsidiaries, coupled with thatkind of parent company leverage and parent company cash, with a long-termtarget of $250 million, that that combination of elements puts us where we needto be in terms of the ratings.

[Matthew Borsch -Goldman Sachs:]

Got it.

[H. Edward Hanway:]

In terms of M&A and what and what not, as Mike said, wedo constantly review a broad range of opportunities. The criteria we use toevaluate their attractiveness to us really hasn’t changed. We’ve been veryconsistent and said we’ll consider things that are strategic, that add realvalue for us. Sagamore, for example, is a good example of that. We’ve said thatthey have to be economically attractive to shareholders and then we also wantto be able to integrate those acquisitions without distracting us from the goodorganic growth that we’ve been generating in the operation. So as a practical matter, when an acquisition meets thosecriteria, we’re much more interested than not.

[Matthew Borsch -Goldman Sachs:]

Okay, got it. Thank you.

[Operator:]

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

[John Rex:]

Just a first question on your fourth quarter guidance forthe healthcare segment. It’s a rather wide earnings range, a $40 million on amidpoint $180 million business. It just implies you have really limitedvisibility on your 4Q and I’m curious what’s driving your hesitancy on yourguidance for that segment for the fourth quarter ’07.

[Michael Bell:]

I would ask you not to read in too much to that particularrange. I think it is fair to say that it’s probably wider than what we’ve donein the past but that was not an intent to signal something in particular. I would say that we are in the process of evaluating anumber of issues related to operating expenses and in particular, getting readyfor the growth that we expect in 2008, so there’s a little more volatility inthat area than normal, but I would ask you not to overreact to that.

[John Rex:]

Was that just -- we really shouldn’t think about a $40million range then?

[Michael Bell:]

Well, I’ll stick with the range that we’ve put out there butmy point is that wasn’t a conscious attempt to signal a significant amount ofuncertainty.

[John Rex:]

And then on the experience rated business, I think in yourcomments you said that you didn’t expect it to improve in -- now, I know it’sbeen clearly ’07 performance has been well below ’06, because that was kind ofa record year of experience rated, but even -- we’re still kind of lagging theresults that you used to get out of experience rated business and does thatkind of signal, that kind of reset the way we should think about earningscontribution for the segment? Is that reset from what maybe you use to get overthe prior to -- over the last number of years?

[Michael Bell:]

Just to be clear, the 2007 and 2008 margins in this businessare in fact in line with what we’ve earned over a long period of time. Now, itis fair that 2005 and 2006 earnings in this business was particularly strongand essentially represented a recovery from the challenged results we had inthose areas in 2003 and 2004. But just to be clear, we feel real good about the earningsthat we are generating in experience rated. We feel good about the fact that weare on a path for top line growth in 2008, a combination of the expected continued membershipgrowth, as well as premium growth on the existing accounts. And so our expectation is to have top line growth in thehigh single digits next year for experience rated, and the fact -- you couplethat with all-in margins consistent with what we expect to generate here forfull year 2007 and that means good earnings growth in this book of business. Sowe feel good about the results.

[John Rex:]

Okay, so the margins in ’07 and ’06 are -- it kind of alwayslooked to me like ’06 margins were considerably higher than in ’07 onexperience rated, but that’s a mistake?

[Michael Bell:]

No, John. Let me just say it again. You are absolutelyright. The 2006 margins and earnings, for that matter, were stronger inexperience rated than what we expect to achieve in 2007, but the point is that2007 and 2008, we expect the all-in margins to be approximately equivalentbetween the two periods, which means good earnings growth, since we expect topline growth in that business.

[John Rex:]

Okay, and then just one last thing, the implied share countin your guidance, it would look like you are using your full year ’07 weightedaverage shares, which would be up from where you were as you reported the 3Q.Is that just conservatism on the guidance or is there some reason we shouldactually expect the share count should trend up from where you were at 3Q07?

[Michael Bell:]

John, a couple of things. First of all, remember that in theimplied share counts in our guidance, there is no repurchase activity in anyfuture period. In addition, just because of the common stock equivalents,depending upon what happens to our stock price, we do have some expansion incommon stock equivalents modeled over the period. Obviously you are free to useyour own estimates in that area.

[John Rex:]

Thank you.

[Operator:]

Next we’ll go to Charles Boorady at Citigroup.

[Charles Boorady -Citigroup:]

Thanks. Good morning. First, just a housekeeping question onhow you calculate your adjusted EPS. In the second quarter, you excluded a$0.19 charge for reinsurance and in this quarter, you are including a favorablereserve development in that same segment. Is that inconsistent or can youexplain that?

[Michael Bell:]

In terms of special items, we have been consistent that anysingle special item greater than $20 million, either plus or minus that weexpect to be non-recurring and want to talk about as a separate item and urgeyou not to think about it in terms of the ongoing earnings of the business.We’ve been very consistent with that. In this particular quarter, there were a number ofnon-recurring items in reinsurance that led to the positive result in thequarter, and it’s a good economic result. It’s just not expected to berecurring. The point is that none of those individually summed up tomore than $20 million after tax and that’s why we didn’t break it out. Onceagain, you are free to do whatever you want in terms of your own models,obviously.

[Charles Boorady -Citigroup:]

Okay, that helps. And on international, at this growth rate,if it continued, it would eclipse life and disability next year and it wouldeclipse healthcare in three-and-a-half years. I know you are not expecting thisgrowth rate to continue but maybe you could talk a little bit more about theopportunities to grow in terms of how big you see it in the next, say, three tofive years. And are you able to invest enough capital to keep it growing? Orare you constraining its growth by not allocating enough capital to thatsubsidiary? And then, also related to capital allocation for growth, youtalked about pretty significant potential expansion in Medicare advantage, andI know you are not giving us a target on enrolment, per se, but how muchcapital do you foresee needing to support the growth in the next year? I assumeyou’ll be growing in some new markets.

[H. Edward Hanway:]

Let me start on international. We are very pleased with thegrowth we are seeing there. I would remind you that this is a reasonablycapital efficient business, meaning it tends to be a high return, low capitalintensity business. So we very much like not only the earnings growth but theactual return on the capital we do have invested there. In terms of the outlook, we talked about again double-digitgrowth next year. I think that we feel that in the markets that we areparticularly focused on, and that includes Asia, what you are seeing there isincreased penetration and a growing middle class that our products reallyappeal to. So I think we feel we have ample opportunity to continue to growthis business. We have a very tight focus on the kinds of business that we arewriting and as you also know, we have continued to pare back in markets wherewe see less growth opportunity so we can maintain that focus. So for example, in much of Latin America, we pulled backthere because the growth opportunities are just nowhere near as significant asthey are in Asia. I think we feel very, very good about results to date butmaybe more importantly, continue to believe that we could see good growth inthat block of business and that that growth will be very capital efficient.

[Charles Boorady -Citigroup:]

What’s your market share roughly, Ed? Just so we get a sensefor how much the untapped opportunity is for you still.

[H. Edward Hanway:]

That’s really hard to measure for a couple of reasons. One,remember the lines of business that we are in are truly kind of specialtyoriented. I’m not sure I could give you a good sense for market share. I think what I can say to you is in terms of penetratingthat middle class that is growing in places like Korea and Taiwan and China andIndonesia and Thailand, there is lots of opportunity to continue to grow thesebusinesses. These are products that that population really looks at asincome replacement, essentially. In places where there isn’t much of a socialsafety net, so if you look at hospital cash products or critical illnessproducts, personal accident products, as the middle class grows they arelooking for some security. These products are a fairly low cost way to providesome of that. And so there’s continued good growth traction.

[Charles Boorady -Citigroup:]

Do you think you are setting your targets too low? Or do youhave internal targets that are higher than what you are telling us for thatsegment next year?

[H. Edward Hanway:]

I think you can assume that given the kinds of returns weare generating on this business, we continue to push pretty hard. And I wouldalso point to things like remember we made an acquisition in Thailand I guesslast year. That was to position us more effectively in a market where we thinkthere is going to be ongoing growth. In China, for example, as recently asprobably 18 months ago, we were only licensed to do business in two regions.Today we are at six with probably two more to come in the next year. We have pretty aggressive goals to continue to grow thisbusiness.

[Charles Boorady -Citigroup:]

That’s great, and then just on capital for MA expansion, isthat going to be a significant use of capital in ’08?

[David Cordani:]

I would say that it is not a significant use of capital in’08 and specifically, the Medicare expansion in ’08 is a continuation of ourbuild, so we will grow PDP but we will launch the private-fee-for-service,focused on accommodating the needs of our employer sponsors. I think looking beyond that, we hope that that’s a goodproblem to have with the growth we expect over the long term and we’lldimension a little bit of that at our investor day, but for 2008, do not lookat it as a material consumption of capital.

[Charles Boorady -Citigroup:]

Thank you.

[Operator:]

Next we’ll go to Gregory Nersessian at Credit Suisse.

[Gregory Nersessian -Credit Suisse:]

Good morning. Just a quick question on the membershipexpectations for next year. Thank you for the breakout in terms of your 1-1expectations, but then beyond that, I’m just wondering if you could give us asense for directionally how you expect the guaranteed costs to track next year?And then also, any initial expectations on the MA enrolment, given yourcommentary on your activity there?

[David Cordani:]

Relative to growth, again, we’ll start the year, knock onwood, with a good number, 2% to 3% growth, balanced very nicely again betweenour national and our regional segment. We expect that the makeup of it, as weindicated in the opening remarks, is primarily ASO, so de minimis flat orslightly down on the guaranteed cost side of the house, mostly ASO. And as Mikementioned, we are seeing some good emerging traction on the experience rated. As we look to the full year, we would expect consistent withprior full years, the regional segment will take over and carry the remainderof the growth pattern. So national segment will stay approximately in patternto the 1-1 number, and we’ll see better growth through the latter part of theyear in the regional segment. And as a result, we expect to see some guaranteed costs,sales growth in the latter part of the year and continuation on the experiencerated results. Relative to the Med advantage, as I mentioned before, it’sreally a build year for us, so we expect modest overall contribution to theprivate fee-per-service members, not a material driver of our overallmembership, and maybe you could think about it in the 10,000 to 20,000 liferange for us during the full year as we build out the capabilities. It’spossible to exceed that with some large off 1-1 wins, but we’re not banking onthat at this point in time.

[Gregory Nersessian -Credit Suisse:]

Okay, great, very helpful. And then my second question was,could you just go through the components of trend? A couple of the othercompanies in the sector had mentioned that they had seen their in patienttrends tracking lower. I’m wondering if you’re seeing that as well, and thenjust generally if you could go through the rest of the components also.

[Jon Rubin:]

Relative to the components of the 6.5% to 7.5% that’s builtinto our expectation for 2008, first I’ll provide a high level component rangeat this point. In-patient and out-patient, so facility overall, we’d expect totrend at high single digits, and that’s relatively consistent with what we’ve seenthis year, probably a little bit better. Professional, low to mid single digitsand pharmacy, mid to high single digits. Now, by our year end call, we should have better visibilityon the book of business changes that impact net medical cost trend, so we’ll beprepared to provide more specificity on trend components at that time.

[Gregory Nersessian -Credit Suisse:]

Okay, great. Now, If I could sneak in one more, theguaranteed cost -- I’m sorry, the commercial HMO yields looked lower thisquarter sequentially and the growth rate was lower. Is that a function of mixshift or the timing of enrolment that either came on or lapsed in the quarter?Could you touch on that as well?

[Michael Bell:]

It’s all of the above that you described, particularly themix shift piece. I would really urge you to, as you think about our guaranteedcost block, to think about the commercial HMO and the open access productsessentially in a single bucket, since what we’ve seen over the last severalyears is the market increasingly more interested in open access products asopposed to the traditional HMO, and so I would suggest that you look at thosein aggregate.

[Gregory Nersessian -Credit Suisse:]

Thank you.

[Operator:]

We’ll move next to Joshua Raskin at Lehman Brothers.

[Joshua Raskin -Lehman Brothers:]

A couple quick ones; I just want to make sure I heard youright, Mike, when you said that the aggregate run-off reinsurance developmentwas less than $20 million -- I’m sorry, was that in aggregate it was less than20 or there were no individual items over 20?

[Michael Bell:]

The latter, Josh. There were no individual items less than 20. In aggregate, run-off reinsurancereported earnings of $39 million for the quarter and that was a combination ofa couple of different settlements and then some favorable run out in personalaccident.

[Joshua Raskin -Lehman Brothers:]

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

[Michael Bell:]

At this point, Josh, what we’re modeling is approximatelybreak-even in 2008. Now, there’s a fair amount of uncertainty in this businessand that, coupled with the FAS-157 fair value, however that ends up playingout, will add volatility. But at this point, I would suggest to you thatbreak-even is a reasonable expectation.

[Joshua Raskin -Lehman Brothers:]

And then just secondly, the Medicare health support pilots,it sounds like you guys took the $6 million charge. What’s the status of thatpilot? Are you guys -- was that just sort of not meeting the end points, so notrecognizing the revenue or is this more a termination of the project?

[Jon Rubin:]

Relative to the MHS pilot and the charge, the charge reallyreflects the recent quarter’s performance as currently evaluated by CMS, whichis below our expectations and inconsistent with previous quarters. This has ledto our revising our forecast related to the performance guarantee liability forthe three year program, and as a result, we’ve taken the charges, you’ll note,as approximately $6 million in the third quarter. Now, we have been notified by CMS that during the process ofevaluating the performance methodology, as recommended by a consultant, RTI intheir July report to Congress, but given the uncertainty, we took thisappropriate charge in the quarter. But I would note this is independent of anyfuture decisions that we may make regarding continuation of the program.

[Joshua Raskin -Lehman Brothers:]

Okay, so it still sounds like you guys are relatively ontrack, just had a blip in the third quarter and took down some of the revenuesthere.

[Jon Rubin:]

That’s correct.

[Joshua Raskin -Lehman Brothers:]

Okay, and then last question, if I could sneak one in, thePDP membership based on the bidding and the benchmarks that have come out,where do you think your PDP ends up next year?

[Michael Bell:]

I would suggest at this point that a range of 325,000 to350,000 members is reasonable.

[Operator:]

Next we’ll go to Christine Arnold at Morgan Stanley.

[Christine Arnold -Morgan Stanley:]

Good morning. A couple of questions, first on your operatingexpenses; how much improvement in operating expenses have you built in,recognizing you did say that you’d be making some investments in capabilities?

[Michael Bell:]

First, in terms of productivity, what we are modeling for2008 right now is operating expenses on a PMPM basis, excluding the segmentexpansion, so excluding what we are investing in individual, small group andseniors. We are expecting PMPMs on that basis to be up modestly, very modestly,0% to 1% in 2008 versus full year 2007. So the implicit assumption underneaththat is that the productivity gains that we expect to achieve as part of ourmulti-year plan will essentially be offset by increasing expenses to supportmarket-facing capability, so including the higher technology expenses. And really, Christine, what this reflects is the fact thatwe’re cognizant of the need to balance earnings growth with additionalinvestments to support our long-term market position, and at this point wethink the current 2008 plan strikes that balance. But this is certainlysomething that we are going to continue to evaluate throughout the year andwe’ll also provide some additional detail to you at the investor day.

[Christine Arnold -Morgan Stanley:]

Am I thinking about this wrongly? Because I’m kind ofthinking that you guys have targeted down 2% to 3%, even with some of yourmarket facing investments the last couple of years, and you have99-point-something-or-other percent of membership on state platforms, so I washoping to see more operating expense leverage in ’08. Am I thinking about thehistorical targets wrong?

[Michael Bell:]

I think you are thinking about it right. I think what willbe useful will be having some more discussion here in two weeks at our investorday on some of those investments that we are making in market facingcapabilities, as well as the net productivity gains that we continue to expectto get in 2009 and 2010, and we will update those -- we continue to believethere is favorability to be capture there on a net basis in ’09 and ’10 and wewill update those estimates for you in two weeks.

[Christine Arnold -Morgan Stanley:]

So this is a timing issue? We’re going to see more of thebenefit of the transformation in ’09, ’10, and then more spending in ’08? Isthat fair?

[Michael Bell:]

I think it’s fair to say that there are timing issues.Again, I would rather not go into more detail until we can give it greatercontext.

[Christine Arnold -Morgan Stanley:]

And is it fair to say that you expect guaranteed costenrolment to be down full year ’08? Or do you expect that to dip entering theyear and then rise after that?

[Michael Bell:]

At this point, we certainly expect some modest downwardpressure in first quarter of ’08. In terms of the remainder of the year, it’shard to gauge, since it will depend in large part to the competitive pricingenvironment. We do expect to maintain our pricing discipline over the remainderof the year. We have built in some modest increases 2Q through 4Q at thispoint into the model, but again that is one that is very much in a stat offlux, given the pricing environment.

[Christine Arnold -Morgan Stanley:]

So you are more dedicated to the MLR target than to theenrolment?

[Michael Bell:]

I think that’s a fair comment.

[Christine Arnold -Morgan Stanley:]

Thank you.

[Operator:]

Our last question will come from Justin Lake at UBS.

[Justin Lake:]

Thanks. I just wanted to flesh out a little bit more aroundthis competitive price unit you are discussing. Can you give us any detail inregard to are there specific segments of your book that are getting competedagainst? Is it in specific geographies? Is it not-for-profits or for-profitsthat are taking business? Is there anything you could tell us that might giveus some help in understanding what’s going on?

[David Cordani:]

A few color comments; first, we see it very pronounced inthe guarantee cost segment and candidly, as I look at my competitors’ results,most competitors are demonstrating de minimis guarantee costs growth. So we seeit in guarantee cost, first off. Secondly, by way of a region of the country, if we were topoint to a region of the country, just to give you a little bit more flavor,the Southeast and the southern most Southeast, so Georgia and on throughFlorida, tends to be an extraordinarily competitive market right now that wesee around the country. I think the third part of your question, do we see it morefor-profit versus not-for-profits, that pattern has been there for quite sometime, so at any given point in time in any state, you might see anot-for-profit getting a bit more aggressive and dealing with a little bit ofcapital being returned. I see that as more of a continuation, little flare-upsin some locations. But more broadly, we see a very competitive landscape and toMike’s prior point, we are committed to maintaining that pricing andunderwriting discipline that’s required in this market. My final comment would be we also feel very good in that wehave such a diversified funding mechanism portfolio, so we are not guaranteecosts only. We are seeing some traction emerging on the experience rated, andwe are seeing the ability to carry a highly penetrated ASO alternative furtherdown market, so we are not a one-trick pony, for lack of a better description,in the marketplace right now.

[Justin Lake:]

Maybe you can just spend a moment then talking about thecomponents of that commercial HMO book, as far as maybe what’s specificallysitting in there? Is it large employers or mid-market? Is it a lot ofgovernment business? Just to get a little flavor for what we should be thinkingthere as far as maybe the competitive segment.

[David Cordani:]

I’ll start there. So for our -- you said commercial, so I’mgoing to expand that to risk, because as Mike said, you need to look at ourrisk open access and risk HMO. That’s how we look at the block. Historically, our book has been predominantly middle marketwith some actual national account business in there, and as you might expect,if it is national account business, it is going to be slices. First and foremost, we’ve tried to take a very targetedapproach in the slice national account space and to the extent we didn’tbelieve it was a good, long-term proposition for us or the employer exit someof that business. So point one is we are predominantly middle market in ourbook of business today. Again, we define middle market as commercial employers,a few hundred to 5,000. Historically, there’s been some national account businessthere and we’ve whittled that down a bit over the last couple of year timehorizon. Secondly, as we’ve talked about our expansion initiatives,looking forward, we see some very attractive opportunity for us to expandfurther under 200 and then ultimately under 50, with the guarantee costpricing. But as you stand today, we have primarily middle marketbusiness in that segment that makes up an approximately million members, or 10%of our total membership portfolio today.

[Justin Lake:]

That’s helpful. When you talk about larger commercial employers,is it conversions to ASO that you are seeing? Is it a reduction in the slicewhere they pushing people more to a single plan offering, or -- is it someonejust coming in and saying you know what, we’re willing to do that at a muchlower price point?

[David Cordani:]

I would say two things; one, first broadly in themarketplace, we continue to see the ASO funding mechanism and alternativefunding mechanisms continue to work their way down in side segments as ageneral theme. Secondly, specific to large employers, historically you wouldhave a large employer that might take a guaranteed cost alternative in one ortwo or three of their geographies as an alternative, or run a guaranteed costHMO side by side with a ASO PPO in a market. Over a long term, that side-by-side alternative isn’tnecessarily a winner. You are exposed to a bit more adverse selection, so thetwo themes we see in the national account, or even the high and the middlemarket, absolutely seeing more and more ASO penetration moving down market, andsecondly, just a recognition that potentially a side-by-side with a sliceproposition of guaranteed costs with ASO is not necessarily a long-term winnerfor us.

[Justin Lake:]

If I could just sneak in one more, last year around thistime, you gave us some really good detailed numbers around your pipeline growthyear over year, case sizes, close ratios. Can you run those by us again? Iapologize if I missed them earlier on.

[David Cordani:]

I’ll provide you a little color there and we will embellishon this at our investor day, but two predominant segments here, national andregional. As we came into 2008 with the national segment, we expect to see agood pipeline about the same size as the prior year and remind you that theprior year pipeline was up significantly. We said the average case size that weare looking at a few quarters ago looked to be a bit larger and that’s whatunfolded. And for national accounts, for our best look at our 1-1business, our close ratio is pretty strong for ourselves. Including on that weexpect the retention rates to be in our historical average for the nationalsegment, which is in the low to mid 90s. For the regional block of business, again which we define abit more broadly than our competition, so we go 200 to 5,000 commercialemployers, and then single site large employers. As we sit here today, thatpipeline is up somewhat, absent some large cases and it’s up order of magnitude10%, which we are happy with because last year it was up meaningfully and it wasvery attractive. As we sit here today, that close ratio against the regionalbook is about equal to where it was last year, and again we feel good aboutthat.

[Justin Lake:]

You said the close ratio in national accounts, was that upor down?

[David Cordani:]

For going into 2008, it’s up somewhat.

[Justin Lake:]

Thanks a lot.

[Operator:]

Ladies and gentlemen, this does conclude CIGNA's thirdquarter 2007 results review. CIGNA investor relations will be available torespond to additional questions shortly. A recording of this conference will beavailable for 10 business days following this call. You may access the recordedconference by dialing 888-203-1112, or 719-457-0820. The passcode for thereplay is 47167839. Thank you for participating. We will now disconnect.