Cigna Corporation
Q1 2010 Earnings Call Transcript

Published: 7 May 2010

[Operator:]

Ladies and gentlemen, thank you for standing by for CIGNA's First Quarter 2010 Results Review. [Operator Instructions] We'll begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

[Edwin Detrick:]

Good morning, everyone, and thank you for joining today's call. I'm Ted Detrick, Vice President of Investor Relations. And with me this morning are David Cordani, our President and CEO; and Annmarie Hagan, CIGNA's Chief Financial Officer. In our remarks today, David will begin by briefly commenting on CIGNA's first quarter results and discussing the progress we have made to date with our growth strategy. He will also provide his perspective on health care reform and the opportunities we expect to pursue in the post-reform environment. Annmarie will provide a detailed review of the financial results for the quarter and will discuss the full year 2010 financial outlook. She will also provide an update on our achievements and expectations related to our expense reduction and capital management goals, as well as our growth strategy. We will then open up the lines for your questions. Now as noted in our earnings release, CIGNA uses certain non-GAAP financial measures when describing its financial results. A reconciliation of these measures to the most directly comparable GAAP measure is contained in today’s earnings release, which was filed this morning on Form 8-K with the Securities and Exchange Commission and is posted in the Investor Relations section of cigna.com. Now in our remarks today, we will be making some forward-looking comments. We would remind you that there are risk factors that could cause actual results to differ materially from our current expectations, and those risk factors are discussed in today’s earnings release. Now before turning the call over to David, I will cover a few items pertaining to our first quarter results and disclosures. Relative to our Run-off Reinsurance operations, our first quarter shareholders net income included after-tax income of $5 million or $0.02 per share related to the Guaranteed Minimum Income Benefits business, otherwise known as GMIB. I would remind you that both the impact of the Financial Accounting Standards Board's fair value disclosure and measurement guidance on our GMIB results is for GAAP accounting purposes only. We believe that the application of this guidance 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. CIGNA's 2010 earnings outlook, which we will discuss in a few moments, exclude the results of the GMIB business and therefore, any potential volatility related to the prospective application of this accounting guidance. Now regarding our disclosures, beginning with the first quarter of 2010, we have expanded our quarterly statistical supplement to provide additional information in two important areas. That is the Medical operating expenses for our Health Care segment and premium and membership detail for our International segment. The Medical operating expenses, we now provide a breakdown of the expenses by major functional category that is consistent with how our management team and Board of Directors analyze our expenses and measure our progress in executing on our cost reduction strategy. For the International segment, we now provide a breakdown of premium revenue by line of business, as well as an announcement of premiums by geographic concentration for our Health, Life and Accident operations. We also now disclose Medical membership for our Expatriate and International Health Care businesses by funding type. We believe these expanded disclosures are beneficial in providing investors and analysts with enhanced transparency into our diversified portfolio of Global Health Service businesses. And with that, I'll turn it over to David.

[David Cordani:]

Thanks, Ted, and good morning, everyone. Before Annmarie reviews our first quarter results and full year outlook, I'll briefly comment on our progress to date with our growth strategy supported by our strong first quarter results, and I'll provide our perspective on reform and the opportunities we expect to pursue. So let's get started. As I reflect on the strategy worked that our management team undertook last year, I could say today that, overall, I'm pleased with the progress we have made in a short period of time. I asked our business leaders to take a hard look in each of our businesses, and we made some tough fundamental choices, all with a goal of creating a portfolio of strategically aligned businesses that have the potential to deliver meaningful earnings growth on a sustained basis. As a reminder, our enterprise strategy has three major components. They are

[Annmarie Hagan:]

Thanks, David. Good morning, everyone. In my remarks today, I will review CIGNA's first quarter 2010 results and highlight the progress we are making on our global-growth strategy. I will also provide an update to our full year outlook. In my review of consolidated and segment results, I will comment on adjusted income from operations. This is shareholders income from continuing operation, excluding realized investment results, GMIB results and special items. This is also the basis from which I will provide our earnings outlook. Our first quarter consolidated earnings were $281 million or $1.01 per share, compared to $188 million or $0.69 per share in the first quarter of 2009. This reflects the strength of our global portfolio with each of our ongoing businesses reporting year-over-year earnings growth. I will now review each of the segment results beginning with Health Care. First quarter 2010, Health Care earnings were $167 million. This result primarily reflects Commercial and Medical membership growth, which brings strong Specialty contribution and a guaranteed cost-loss ratio that was in line with our expectations. Medical operating expenses are reflective of our continued commitment to service excellent and investment in our strategic growth areas. We remain on track to deliver a full year Medical operating expense reduction of $55 million pretax. I'll now discuss the specific drivers of the Health Care results. Health Care membership increased 2.8% in the quarter; excluding growth in our Medicare Advantage Private Fee for Service business, membership was up 2%. This result reflects focused execution of our strategy with membership growth coming primarily in our Middle Market and Select segments. In addition, the membership result reflects better-than-expected disenrollment level due to stabilization in the employment markets. As a result of this membership growth in the quarter, Health Care premiums grew 18% on a year-over-year basis, including growth in our Medicare Advantage Private Fee for Service and Medicare Part D products. I'll now provide an update on our Medical cost results. Specifically, I will review our guaranteed cost results, our total risk results and provide some commentary on our Medical claims payable reserve. Overall, Medical cost in the first quarter were in line with our expectations. Our first quarter guaranteed cost Medical care ratio, or MCR, was 82.9%, including favorable prior-year claim development of approximately $7 million after tax. Excluding this favorability, our guaranteed cost MCR was approximately 84%, which is in line with our full year expectations of 83 1/2% to 84 1/2%. Regarding our flu-related claims, the level of paid claims were lower than expected in the quarter. However, given the uncertainty associated with flu-related claims, we have maintained our expectation for a 60-basis-point flu impact in our full year 2010 outlook for the guaranteed cost book of business. In our core guaranteed cost book of business, we experienced an increase in Medical membership of 82,000 compared to year-end 2009, driven by improved retention rates and new sales. We are pleased that we secured this level of growth, while maintaining our pricing and underwriting discipline. Regarding our consolidated risk results, we saw a significant membership and revenue growth in both Medicare-related and Commercial risk products in the quarter. This change in business mix, as well as the seasonably high loss ratios associated with the Medicare products, contributed to a total MCR that is higher than we have historically seen. Specifically, the total risk MCR for the quarter was 84.9%, compared to 81.4% in the first quarter of 2009. Considering this new mix of business, results were in line with what we would have expected. This 350-basis-point increase in the total risk MCR is primarily driven by two main pieces

[Operator:]

[Operator Instructions] We will take our first question from Matthew Borsch with Goldman Sachs.

[Matthew Borsch:]

Could you -- and sorry if I missed something here, but could you comment on your views on the not yet published medical cost ratio regulations, and how you think those might or might not impact a number of areas

[David Cordani:]

It's David. You said a mouthful on the questions. So in terms of the laundry list of products. First, as you know, the implementation of the legislation. So the conversion of it from a legislative framework to regulation is fluid. And as we noted in our prepared remarks, we're working collaboratively with the regulators. As you might suspect, we're looking at a variety of scenarios. And as of even this week, the most recent external view of CIGNA's loss ratio performance suggests that we are compliant with, or in line with the regulations. But we continue to work through a variety of scenarios right now, but today, we feel like we're -- the mix of our portfolio is in reasonably good stead, relative to the way the regulations or intended outcome.

[Matthew Borsch:]

And on a different topic, can you give us some sense of where your results on the big growth you had in Private Fee for Service are coming in and how you're monitoring those, relative to your target?

[Annmarie Hagan:]

Sure, Matthew. It's Annmarie. Relative to our Private Fee for Service business, there has been no change, really, since we've discussed this product last time. As you remember, we had significant growth, and we had talked about before about the risk profile of the business being in that kind of 0.86% range, which, as you'll recall, anything less than 1% is on the better side of the risk profile. The demographics are coming in, as we expected. And as you probably know, the actual reporting of claims on this type of business comes in rather slowly. So to date, we have seen nothing that would make us change our expectation, relative to the full year breakeven.

[Operator:]

We will go next to Josh Raskin with Barclays Capital.

[Joshua Raskin:]

I just want to make sure I understand all the moving parts on the International segment, as that was obviously a big driver. So it sounded like there was that $5 million with sort of the Hong Kong capital management tax change, or -- so I mean, I think, it was what you said. And then there was -- in the press release, you talked about $7 million of FX impact, but you also said that, that was as expected. So should we assume that FX changes are actually in the guidance? And then the third part of it, in the press release, there were some discussion around the favorable claims experience for the Expat business. I was wondering if you could quantify what that was.

[Annmarie Hagan:]

Sure, Josh. It's Annmarie. First, our International operations, as I noted in my prepared remarks, had a very strong quarter, and we're very pleased with the execution against the growth strategy. If you recall, when we kind of rolled forward our International results from 2009 to 2010, we did expect to have favorable foreign exchange. So that $7 million worth of FX was contemplated in our outlook, and we would expect to see some of that, as we go through the balance of the year. The Hong Kong item is a one-timer $5 million. Having said that, if you recall, we did some of this with Korea last year. So we continue to effectively manage our capital to get the most effective tax rates that we can on this International book of business. That will have a go-forward reduction in the effective tax rate. And then finally, relative to the claims experience, the Expat business had some volatility. As you know, that business bounces around from quarter to quarter. You might recall that the fourth quarter had some adverse experience. The first quarter had some strength. So while you might be encouraged to take the International number and run rate gap for the year, I would recommend that, from a prudent perspective, we would consider that there will be some further claim volatility, as we move through the year. And as a result, as I indicated in our opening and prepared remarks, we took the combined earnings in those two businesses up by $10 million.

[Joshua Raskin:]

So what was the actual favorable experience in the Expat in the quarter?

[Annmarie Hagan:]

Order of magnitude, $5 million.

[Joshua Raskin:]

So you're suggesting maybe you take out $5 million for that, $5 million for Hong Kong. And then it sounds like FX may continue, but maybe not the same degree or something. So maybe International is closer to $60 million-ish or so of the run rate. Is that fair?

[Annmarie Hagan:]

Order of magnitude, that's not far off. Considering also that there could be some normal claims volatility, in addition to the $5 million.

[Joshua Raskin:]

And then just a quick follow-up on the other questions, do you guys have an expectation for your Medicare medical loss ratio, and what the impact, from a mix perspective, is on that full year 83.5% to 84.5%?

[Annmarie Hagan:]

Josh, the 83.5% to 84.5% is our core guaranteed cost loss ratio only. And as I indicated in my prepared remarks, excluding prior-year development, that number -- it was reported at 84%, which is right in the middle of the range. So it wouldn't impact that number at all. What I also indicated in our prepared remarks was that the total medical care ratio was up in the quarter because of the higher mix of the Part D and the Private Fee for Service. Order of magnitude, the PFFS is into the high 90s range, and the Part D, as reported in our staff supplement, is slightly over 100. That has some seasonal nature to it as well. But through the first quarter, it's about 250 basis points on the total MCR, which is not the 83.5% to 84.5% number.

[Joshua Raskin:]

And I would say, the high 90s, there's seasonality in Private Fee for Service as well?

[Annmarie Hagan:]

Yes, there is. I mean, many companies, we would expect some type of a risk adjuster, as we go forward in the year. Understand that many companies might accrue for that. But given that we're new in that business, we've taken a prudent approach, and during the first quarter, have not contemplated the amount of risk adjuster we'll get, as we go through the year, on Private Fee for Service. So that business improved from a loss in the first quarter to profits through the next three quarters, bringing us to the break-even number that we have announced we expect.

[Operator:]

We will go next to John Rex with JP Morgan.

[John Rex:]

I just want to focus on the commercial book here for a second. The gains are still -- I mean, I guess, the last many years, you've always taught us to be a little afraid of when companies' booking outsize gains and commercial risk versus the rest of the industry. And you gave some good commentary there, in terms of what you're doing in reserves. But can you quantify for us a little bit kind of on order of magnitude, in terms of the more conservative posture that you're taking on the new business there versus the renewing business? Just help us kind of understand how you're approaching that at the outset here.

[Annmarie Hagan:]

Sure, John. It's Annmarie. Relative to the new business, I understand your concerns. But we are quite pleased with the growth we got in both the Middle Market and Select segments. There are targeted geographies, but there are targeted segments. And the growth is in the geographies, which are most beneficial to us. So I think that's important to keep in mind. Relative to the conservatism in the normal renewal block for our core guaranteed cost, we ended last year in the around 84% range. So embedded in the estimates for new business. New business is typically, say two to three points higher, from an MCR perspective, than your renewal block. And then as you go on, you get more insight as to the experience and would just adjust that accordingly.

[John Rex:]

And was that biased? Were the gains biased in a few geographies when you think about kind of the success there? And again, these are just from the context of no one else in the industry showing risk gain this year. Maybe help us describe a little more kind of where it's coming from.

[David Cordani:]

It's David. To your point, biased in a few geographies, I would just take the word biased out and stay focused. So our Select segment, which is the predominant driver of the guaranteed cost book, is highly focused in a finite number of geographies, I think 10 to 15 major markets. Secondly, if we step back, I'm thinking about those markets as the key geographies we wanted to focus on, post the Great-West acquisition. And third, think about the challenge we had to restart the distribution engine, post the acquisition and in the recession. So we're very targeted on a finite number of geographies, I think 10 to 15 specific go-to-market products. And very importantly, one of the things we were able to learn and leverage from the Great-West acquisition was their own orientation around going deep on key brokers. So it's highly focused on cohorts and brokers in individual markets. So as Annmarie referenced, we're quite pleased with the focus we've had in moving the business in the key geographies. From a pricing standpoint as well, if you think about those brokers, there's typically a lot of transparency with the Great-West brokers because of the ASO business and the ASO stop-loss business. And now, we've been able to bring a different funding mechanism to have two alternatives to work with those targeted brokers. So the key is focus geographically, products and on brokers.

[John Rex:]

And then just one follow-up on kind of the min MCR impact question. So just can they be -- regardless of where your position on the loss ratios at the moment right now, is your understanding that books like the Great-West book, the voluntary benefits book and the expat book will even be subject to the minimum MCRs?

[David Cordani:]

John, we continue to work through a variety of scenarios. What is most clear is what is included, starting with the, call it, traditional guaranteed cost framework. As I referenced before, we view the processes quite fluid, and we're coordinating in a very detailed fashion with the NAIC, with the regulators, et cetera, and we're working through a variety of scenarios. As we currently understand the picture today and as I referenced earlier, the external view is in line with our internal view, and that is that our current loss ratio profile is, generally speaking, in line with the directions the regulations are heading. But I would just stress, it's fluid at this point in time, and we continue to work very closely with the regulators and NAIC on it.

[John Rex:]

And you include the voluntary book in that, in terms of the loss ratios being in line with the regulations?

[David Cordani:]

Under a variety of our scenarios, John, you would expect that we would be looking at it with and without a variety of product lines. So again, looking at a variety of scenarios here.

[Operator:]

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

[Christine Arnold:]

Just a follow-up on -- and I don't mean to be a pest, but I kind of can't help it. If we think about the MLR floors, are you saying that the guaranteed cost MLR is in line with expectations, but everything else is fluid? Or that everything is in line with the MLR floor?

[David Cordani:]

It's David. Again, my general statement was there was an external view, snapshot of the industry, and I commented that CIGNA's current performance and loss ratio is in line with the regulations. Second, as I referenced before, it's still a fluid and dynamic process. And third, I think very importantly, we don't believe you should look at any product line in a vacuum. There's inter-dependencies on product lines. And as we're working with the regulators and NAIC, we have a ton of transparency, in terms of the makeup of our portfolio. The conclusion we hold today is that, as currently configured with our broad portfolio of businesses, directionally, we're in line with the expectation of the regulations, but we're going to still work very closely with the regulators and the NAIC until disclosure.

[Christine Arnold:]

And then on the commercial yield, looked like it was under 5% in the quarter. And I know, now that you're pursuing some of the Great-West membership, you'll see mix issues. I mean, you see an increased deductible. Can you speak to how you look at that yield versus kind of being down last year? And how do you manage the selection issue if you're going to Great-West members and saying that you can be self-insured, with stop-loss, you're fully insured? Can you just speak through those issues please?

[Annmarie Hagan:]

Sure, Christine. I'll start on the yield, and then I'll hand it over to David to provide some color on the selection issues. As it relates to the yield, you're right, in our staff supplement, we have yields in the 2% to 3% quarter-over-quarter, et cetera. And you're also correct in noting that it is a business mix issue. So we look at it in a couple of components. If you look at the fundamental core guaranteed cost, which would include the lower end of the market, the Select segment, with the new products that we've introduced during the past year and a half, those numbers would exclude the ASO side of the house. But the core guaranteed cost, that yields in the neighborhood of 5% to 6%. And then as you introduce the individual, of where we've been growing more significantly, and the voluntary, that mix change brings it down to that 2% to 2.5% yield. And that is in line with our expectations and our pricing and underwriting metrics.

[David Cordani:]

Christine, from a selection standpoint, as I referenced before, what's working for us right now, what's key to us, going forward, is the focus, both geographically, as well as on a subset of brokers to be able to work with. And our go-to-market approach for the Select segment, be it ASO or guaranteed cost, is to be highly consultative. So we look at alternatives. In some markets, our lead product is the ASO stop-loss. In other markets, our lead product is guaranteed cost. And yet, in other markets, they were actually co-habitating side by side. But the key there is working with the brokers, high transparency, and as Annmarie has made reference before as well, very important to us is consistency of pricing and underwriting execution. So you don't have large ebbs and flows year-over-year or on renewal cycle. And thus far, that approach is working for us.

[Operator:]

We will go next to Justin Lake with UBS.

[Justin Lake:]

First question, just a follow-up on Private Fee for Service. You mentioned the -- when you put out a release talking about your cooperation with Humana on a employer-based product. I'm curious if you can talk a little bit about that and how you're viewing the Private Fee for Service products in general, on the individual side as well, from a bidding standpoint? Are you setting up networks? Do you expect to be in that segment in 2011?

[David Cordani:]

It's David. So two parts of your question. First, relative to the Humana relationship. I would put a framework over the top of it and that is, CIGNA has long since viewed the ability to partner with key players as critical to us. So whether you look at the Humana relationship, which I'll come back to in a moment, our various other alliances in the United States or partnerships we have outside the United States, we feel quite strongly about the importance of that framework and the ability to do so, for the benefit of our customers. In the case of the Humana alliance for Medicare Advantage group programs, we're delighted because we've been able to secure a best-in-class solution for the benefit of our clients to be coordinated with our distribution model. And then ultimately, one of the benefits beyond the single point of contact for an employer is as individuals approach Medicare eligibility, you have a lot of continuity and coordination of care, program preparation, et cetera. So we're delighted about bringing the two organizations together, from an alliance standpoint. Now separating that to the other part of your question on Private Fee for Service, that alliance does not address the individual Private Fee for Service block. And as you probably know, inferred in your question, our posture with CMS will need to be closed in the approximate June time frame. And we're currently going through a finite number of alternatives with CMS and would expect to have closure and clarity on that in June, and obviously, update you on our expectations for '11 and beyond in the second quarter call.

[Justin Lake:]

And then just a quick question on the commercial mortgage book. That number continues to pick up, even though it was fairly modest in the first quarter here. I'm just curious, from a capital standpoint, can you run us through again the impact there, as far as when you need to recognize that and when that might start affecting your occupancy ratio?

[Annmarie Hagan:]

Justin, it's Annmarie. From a capital perspective, we cover that in our Connecticut General Life statutory surplus. And as I've noted many times before, we're well capitalized there, well in excess of regulatory minimums, et cetera. Given the relatively minor movement that we've had in the problem loan portfolio over time, I'm not worried at all about the statutory surplus impact of those mortgage loans. When we recognize that is when it has become clear to us that we will not receive the cash flows that are expected on those businesses. So as you and I have talked before, I believe that we identify things as potential problems, as soon as there is any indication. Having said that, there are many times where the potential problems actually get settled and resolved with no impairment analysis. So that, in effect, would -- the statutory surplus in Connecticut General, I think, is now in the $4.4 billion, $4.3 billion number. And these movements from mortgage loans have been in the $20 million to $30 million, aggregating up to $300 million or so. So that is not necessarily on my worry list, Justin.

[Justin Lake:]

So you don't expect that to be an issue for parent company cash at all this year?

[Annmarie Hagan:]

No.

[Operator:]

[Operator Instructions] We will go next to Doug Simpson with Morgan Stanley.

[Doug Simpson:]

Could you just update us on the pension funding outlook? Just remind us how that would factor in the thinking around deployment looking out a couple of years.

[Annmarie Hagan:]

Sure, Doug. It's Annmarie. As you know, we are required to fully fund the pension under the Pension Protection Act over the next five years or so. In 2010, we consistently indicated that we'll be contributing $150 million after tax. On a before-tax basis, that's $210 million, and I would note that, that is in excess of what is required. So we are making voluntary contributions to the pension plan. And if you kind of factor that through, given our unfunded liability in the $1.5 billion range, assuming all other assumptions around returns and interest rate kind of work out, as you know, there are a lot of moving parts, we'd have that fully funded, in accordance with the Pension Protection Act requirement. So you could guess at around, before tax, $250 million a year, consistent with this year.

[Doug Simpson:]

And is there anything -- what should we be watching for on those other factors? Obviously, it creates moves that would help you out, in terms of the funding levels. Anything else we should be watching?

[Annmarie Hagan:]

The only other very important is the discount rate that we would use.

[Doug Simpson:]

And can you just remind us how that's -- has that changed in the last three years? I mean, what drives -- how does that get determined?

[Annmarie Hagan:]

Yes, we actually -- and I just want to clarify, when you said rates move, I'm guessing, you meant the investment returns?

[Doug Simpson:]

Yes.

[Annmarie Hagan:]

Yes, so we have an investment return of about 8%. And as you know, last year, by the end of the year, we experienced significantly higher than that 8%, which helps out the unfunded position. The other thing is the discount rate. So as interest rates move, you would have to adjust your interest rate up or down your discount rate. And you might recall, at the fourth quarter, we had to adjust it downward, which actually costs us $150 million to $200 million on the unfunded liability. As those rates improve, there will be opportunity there to close the gap as well. And the final thing I'll note is that you are aware that we did freeze the pension plan. So from a accumulation of benefits perspective, that's no longer a risk.

[Operator:]

We will go next to Kevin Fischbeck with Bank of America Merrill Lynch.

[Kevin Fischbeck:]

Can you just remind us what your individual membership is in your small group, I guess, defined as less than 100 membership is?

[David Cordani:]

It's David. Combined, you should think about both of those combined as slightly less than 1% of our total membership. So think about round numbers, just shy of 50,000 for the under 50 and over 50,000 for the individual business. So think about total, about 110,000 members in both those lines.

[Kevin Fischbeck:]

And you talked a bit about the cash and the uses of cash, is there something that you're waiting for in particular, when you think about deploying that capital? Is there some time frame where we should think we'll see that more likely between the [ph] (1

[David Cordani:]

Kevin, it's David. So Annmarie walked through our capital deployment priorities, and we talked through the strategic priority of the financial strength, the financial flexibility. So headline number one, and inferred in your question, we're quite pleased with the position we were able to end 2009 in, as well as building momentum as we step into 2010, from a capital efficiency, subsidiary-capital level and free-cash-flow level. And we will continue to use the guide post that we laid out, in terms of our capital deployment strategy, to making sure we have the right internal funding and then evaluating M&A alternatives, and then finally, evaluating repurchase. So I appreciate your question. We recognize that we're in a stronger position than we had been in the past, which we like, and we'll continue and evaluate the alternatives.

[Operator:]

We will go to Ana Gupte with Sanford Bernstein.

[Ana Gupte:]

Two questions on cost reduction. You mentioned, Annmarie, I think, your G&A, you're successful in the $55 million this year. It appears you're moving more to a retail mix as possibly slow for this year. Are you seeing any upward pressure, just from your selling cost ratio in 2010? And then can you comment on your multi-year strategy to bring your G&A down?

[Annmarie Hagan:]

Yes, as you indicated, we are on track for $55 million, continuing to identify those cost reduction initiatives or key. Could you just clarify for me on the retail side? I wasn't sure about that.

[Ana Gupte:]

The growth in commercial, individual, the growth in individual private fee, I would expect this putting pressure onto broker commissions, which may change, given reform and all of that. But in light of reform and x reform, are you seeing pressure upward?

[Annmarie Hagan:]

Yes. As a matter of fact, as you know, when the Individual business has written their commissions are higher in the first year, but then are reduced as we move ahead. Relative to Private Fee for Service, while commissions are typically higher, we did get a significant portion of our members that had been in other plans in previous years. So the commission structure was a little less than kind of a normal brand-new Private Fee for Service member. Having said both of those things, if you look at the new disclosures we have in our staff supplement, the main area where we have opportunity to reduce our expenses is kind of excluding those type of segment expansion and specialty lines. We would contemplate our Private Fee for Service more in a specialty type of coverage, where our opportunity is in that kind of routine medical guaranteed cost ASO book of business. That's the number that we look at to evaluate our competitive position and our competitive GAAP, and that kind of subtotal there, not to be technical on you here, but that's where we focus on saving the dollars. And the other thing, as the commission expense goes up, so does the revenue. And as you know, the earnings on that is on the individual book, et cetera, would be attractive. So we look at those more, on an earnings perspective basis, as contributing. And then the medical operating expenses, that's where we're focused on reducing to improve the competitive GAAP. Is that helpful?

[Ana Gupte:]

Yes, that's helpful. A follow-up on the cost side again, because that's the crux of getting affordability. Others are reporting 10% inpatient, 12% outpatient, most of it is unit cost. Is your go-deep strategy getting you to more competitive hospital discounts? Or are you also looking to get into more narrow networks and dropping hospitals which seems to be playing out in the media lately?

[David Cordani:]

Ana, it's David. The go-deep strategy is quite important to us, as you made reference to. So the markets we've chosen to focus on are a consolation of either those markets that we are currently most competitive in, on an all-in medical cost basis, and/or we have a line of sight over the next couple of years to be fully competitive, relative to the best-in-class benchmark competitor. A part of that process is, and as I referenced in the prepared remarks, making sure we're actually working a little differently with key delivery partners, be it the large physician groups and/or the hospitals to try to align our incentives, our information with their programs and services. To the last part of your comment, we have not, generally speaking, embarked upon a strategy to have narrow networks. Rather, our market strategy of transparency and choice, by providing visibility to our employer customers and our individual customers, relative to cost quality differences, were possible, and allowing for choice to drive the utilization patterns.

[Operator:]

Our last question for the conference today will come from Carl McDonald with Oppenheimer.

[Carl McDonald:]

How do you think about the future of the limited-benefit product? Is that something we should anticipate just goes away in 2014 with the insurance requirements? Or are there certain products within that business that can stick around?

[David Cordani:]

It's David. So I think by your statement of limited medical product, you're excluding what the industry knows as voluntary life, disability, et cetera. And I think, inferred under your statement, we should assume that, that product allows pretty significantly over a short period of time, making sure that there are some solutions that work for the individuals that currently utilize those products. And then it probably takes a step function post-2014, as additional alternative is, and subsidies are available to individuals. So we view that, that product portfolio and solution portfolio will evolve at a pretty accelerated rate over the next several years.

[Carl McDonald:]

And then on the loss ratio, using your commercial loss ratio, and putting MA at high 90s and using the PDP loss ratio you gave, it looks like something in either specialty or the experience-rated book was higher. Anything worth spiking out there?

[Annmarie Hagan:]

It's Annmarie, Carl. There's nothing really worth spiking out there. I would just note that we did have new business growth in both the Guaranteed Cost and the Shared Returns business. So as I indicated earlier, typically, we would reserve that a little bit of a two to three points higher loss ratio on that new business growth until there's more clarity and certainty around the ultimate loss ratio. But I think, all in, as I mentioned, 2/3 is the mix, and then the balance of the increase in the ratio was in the new business, both Guaranteed Cost and Share Returns.

[David Cordani:]

And Carl, I would just reinforce, as Annmarie made in both in her prepared remarks and her prior comment, for the core Commercial Guaranteed Cost business, the overall loss ratio, on an operating basis, going forward, is directly in line with our expectations. So we feel good about it stepping into the year.

[Operator:]

And that being our final question, I'd like to turn the call back to David Cordani for any additional or closing comments.

[David Cordani:]

First, thank you to everyone for joining us today. And I simply want to emphasize four key points from our conversation. First, is that our first quarter 2000 (sic) [2010] results are strong due to the result of our strategic focus. They demonstrate the strength of our diversified portfolio of businesses, and very importantly, provide a strong and solid start to achieving our full year 2010 goals. Second, our capital position and balance sheet are strong, and our investment portfolio continues to produce good results. Third, we believe that we are well positioned as a global health service company. We will continue to execute our growth strategy, which leverages the strength of our very diverse global portfolio of businesses, which include a well-established operation and portfolio outside the U.S. that currently serves employers and a growing middle class of individuals; our Disability business, with return-to-work programs that lead the industry and improve employee productivity; and our U.S. Health Care business, which focuses on health improvement and is heavily weighted towards service offerings. Finally, as outlined earlier, we are using this time of disruption to identify and leverage additional growth opportunities as we look to the future. Again, thanks for joining today's call.

[Operator:]

And that does concludes the call. Again, thank you for your participation. Ladies and gentlemen, this concludes the CIGNA First Quarter 2010 Results Review. CIGNA Investor Relations will be able to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call, and you may access the recorded conference by dialing [phone] or [phone]. The pass code for the replay is 2269444. Thank you for your participation. You may now disconnect.