Cigna Corporation
Q3 2010 Earnings Call Transcript

Published: 29 Oct 2010

[Operator:]

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

[Edwin Detrick:]

Good morning, everyone, and thank you for joining today's call. I am Ted Detrick, Vice President of Investor Relations. And with me this morning are David Cordani, our President and Chief Executive Officer ; and Tom McCarthy, CIGNA's acting Chief Financial Officer. In our remarks today, David will begin by commenting on CIGNA's third quarter results and our continued progress on executing on our growth strategy. He will also provide insights into the approaches that CIGNA has taken to improve engagement of individuals and health care professionals, with the goal of driving better health outcomes while reducing costs. Tom will provide a review of the financial results for the quarter and will discuss the full year 2010 financial outlook. Then David will make some comments regarding early thoughts on 2011. We will then open the lines for your questions. And then following our question-and-answer session, David will provide some brief closing remarks before we end the call. Now as noted in our earnings release, CIGNA uses certain non-GAAP measures when describing its financial results. A reconciliation of these measures to the most directly comparable GAAP measure is contained in today’s earnings release, which was filed this morning on Form 8-K with the Securities and Exchange Commission and is posted in the Investor Relations section of cigna.com. 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 couple of items pertaining to our third quarter results. Relative to our Run-off Reinsurance operations, our third quarter shareholders' net income included an after-tax, non-cash loss of $10 million or $0.04 per share related to the Guaranteed Minimum Income Benefits business otherwise known as GMIB. I would remind you that the financial impact of the Financial Accounting Standards Board's fair value disclosure and measurement accounting guidance on our GMIB results is for GAAP accounting purposes only. We believe that the application of this guidance is not reflective of the underlying economics, as it does not represent management's expectations of the ultimate liability payout. Because of the application of this accounting guidance, CIGNA's future results for the GMIB business will be volatile as any future change in the exit value of GMIB's assets and liabilities will be recorded in shareholders net income. And CIGNA's 2010 earnings outlook, which we will discuss in a few moments excludes the results of the GMIB business, and therefore, any potential volatility related to the prospective application of this accounting guidance. Now another component of our Run-off Reinsurance operations is the guaranteed minimum death benefit product, otherwise known as VADBe. Unlike the GMIB business, the financial results for VADBe are included in CIGNA's adjusted income from operations. Now during our second quarter call, we indicated that if the environment of sustained equity market volatility and low levels of interest rates were to continue, then we would need to strengthen our VADBe reserves, which would result in a charged earnings of up to $50 million after-tax. Because the low level of interest rates did persist during the quarter, we increased our VADBe reserves, which resulted in a recording of a non-cash, after-tax loss of $34 million or $0.12 per share in the third quarter. And with that, I will turn it over to David.

[David Cordani:]

Thanks, Ted, and good morning, everyone. Before Tom reviews our third quarter results and full year outlook, I'll take a few minutes to cover a couple of topics. I'll briefly comment on our performance in the context of our growth strategy. Last quarter, I profiled the International business, so this quarter, I'll profile our U.S. businesses. Here, I'll provide insights into the unique approaches we're taking to improve the delivery of care by engaging individuals and health care professionals in our effort to improve health and productivity. So let's get started. Relative to our third quarter, I'm pleased with our earnings of $1.10 per share and the results of each of our ongoing businesses

[Thomas McCarthy:]

Thanks, David. Good morning, everyone. In my remarks today, I will view CIGNA's third quarter 2010 results. I will also discuss our outlook for the full year 2010. In my review of consolidated and segment results, I will comment on adjusted income from operations. This is shareholders' income from continuing operations, excluding realized investment results, GMIB results and special items. This is also the basis on which I will provide the earnings outlook. Our third quarter consolidated revenues were $5.3 billion compared to $4.5 billion in the third quarter of 2009. Third quarter consolidated earnings were $299 million or $1.10 per share compared to $311 million or $1.13 per share in the third quarter of 2009. The third quarter results reflect strong earnings and revenue contributions from each of our ongoing businesses, that is International, Disability and Life and Health Care. And we continue to leverage our diversified portfolio of services to deliver value for the benefit of our customers and shareholders. In Health Care, third quarter 2010 earnings were $240 million. This result reflects the benefit of lower-than-expected medical cost trend and solid execution of our business strategy, with continued membership growth in our targeted areas that focus and sustain clinical quality for our clients and customers. Overall, health care medical membership was up nearly 80,000 members versus the second quarter of 2010, bringing our year-to-date organic growth to approximately 3.5%. Excluding the Medicare individual Private Fee-For-Service business, membership is up 2.9% on a year-to-date basis. This result reflects continued success with our guaranteed cost experience-rated and Middle Market ASO products, offset somewhat by dis-enrollment in our national account ASO business. The growth in our commercial risk business was focused in our targeted markets and customer segments, including the Middle Market, Select and Individual. Segments will also benefit from strong specialty product penetration. Health Care premium and fees grew 19% on a quarter-over-quarter basis. This increase reflects net membership growth and the change in membership mix, which includes a higher percentage of commercial and Medicare-related risk business. Excluding Medicare individual Private Fee-For-Service, our quarter-over-quarter growth in health care premium and fees was 12%. Turning now to Medical costs. Results in the quarter continued to demonstrate attractive medical costs trend and sustained clinical quality for our clients and customers. The Medical cost trend includes the impact of the lower-than-expected medical services utilization. As David mentioned, the majority of our customers, approximately 90%, are in funding arrangements whereby they directly benefit from medical cost improvements. Across our risk book of business, our third quarter multiple cost results include favorable prior period premium development of $30 million after-tax. Of this amount, $9 million is related to the prior year. Specific to guaranteed cost, our year-to-date medical care ratio or MCR was 80.7% on a reported basis or 81.7% excluding prior year claim development. Regarding our experience-rated products, we continue to see good growth in this business at attractive margins. Relative to new business and our experience-rated and guaranteed cost products, results to date continue to support our pricing targets and reflect good pricing underwriting discipline. ASO earnings in the quarter continued to reflect strong contributions from our specialty business. Now turning to operating expenses. We continue to focus on reducing our medical expense base and improving our competitive expense position, while maintaining our strong clinical delivery and service levels and funding strategic investments. Year-to-date, Medical operating expenses were down 2%, while we're growing our covered lives by about 3%. We will continue to take action to reduce our operating expense and create additional capacity for strategic investments. Over the balance of 2010, we will incur some increased costs to support our membership growth, accelerate strategic investments and support health care reform implementation. Overall, we expect a net reduction in Medical operating expenses in 2010 and expect to improve our competitive expense position. Now I will discuss the results of our other segments. In our Group Disability and Life segment, third quarter earnings were $60 million. This result was in line with our expectations and reflects the strength of our Disability Management and return-to-work programs. Revenues in the quarter were $758 million. Excluding the termination of two nonstrategic government life insurance programs, group revenues were up 9% in the third quarter of 2010 compared to the third quarter of 2009. This segment continues to deliver differentiated value for our clients and customers, as well as attractive margins. Turning now to our International segment. Third quarter earnings were $50 million. This was also in line with expectations and reflects continued growth in our Health, Life & Accident and Expatriate Benefits businesses. International revenues in the quarter's totaled $602 million, up 20% from the prior year quarter or 18% on a currency-adjusted basis. Our Health, Life & Accident business benefited from improved persistency and solid new sales in our targeted countries, driven by both product and distribution channel expansion. Our Expatriate Benefits business continues to deliver attractive results and solid membership growth and strong renewal rate actions in our existing business. This segment will also benefit, going forward, from the recently acquired Vanbreda International business. Overall, results in the third quarter were solid for each of the ongoing businesses in our diversified portfolio and demonstrate good execution of our growth strategy. Earnings for our remaining operations, including Run-off Reinsurance, Other Operations and Corporate recorded to a loss of $51 million for the third quarter. As Ted mentioned earlier, this improves reserves, strengthening our $34 million after-tax and our run-off VADBe book of business. Consistent with our discussion from the second quarter earnings call, this loss is primarily related to the sustained low interest rate environment. This increase in reserves does not have a material impact on our capital management outlook. Turning now to our investment portfolio. Results continue to be strong, relative to the current economic conditions. In the third quarter, we recognize net realized investment gain of $18 million after-tax, coupled with strong net investment income results. Our commercial mortgage loan portfolio continues to perform well in the challenging environment. And overall, we continue to be pleased with the quality and diversification of our investment portfolio. I will now discuss our capital management position and outlook. Overall, we continue to have strong balance sheet and good financial flexibility. Our subsidiaries remain well capitalized, statutory surplus consistent with our internal benchmarks and well in excess of regulatory minimums. During the third quarter, we deployed capital to repurchase 2.5 million shares of CIGNA common stock. And we invested approximately $400 million to fund the acquisition of Vanbreda International. Regarding our pension plan, given that interest rates are currently at very low levels, when we complete our year-end evaluation, we expect to adjust the discount rate used in determining our pension plan obligation. However, we do not expect this change to have a material effect on our funding contributions or our debt pension expense. Regarding current capital liquidity, we ended the quarter with cash and short-term investments of the parent company of approximately $635 million. This reflects outstanding commercial paper borrowing of approximately $100 million, as well as $225 million earmarked for the retirement of long-term debt maturing in January 2011. For the full year, we expect to end 2010 with parent company cash of $825 million. After considering our parent company cash target of $400 million, as well as commitments of $225 million for long-term debt maturities and $100 million for commercial paper maturities, our outlook implies that we would have approximately $100 million available for capital deployment. As we look to the future, we will continue to carefully evaluate capital deployment options to ensure we deliver sustainable value for the benefit of our customers and shareholders. As such, our capital deployment strategy remains the same. The strategy prioritizes the use of capital resources to first, provide capital necessary to support growth and the financial strength of our subsidiaries

[David Cordani:]

Thanks, Tom. And I'll make some comments in 2011. As you may expect given the dynamic legislative and economic environment, it's too early to provide explicit 2011 guidance. Specifically, regulations from Health Care Reform are still being developed and their impact has not fully settled. In addition, the timing and pace of the normalization of medical service utilization is also unknown. Having said that, today, I'll provide insights into our views on some of the key dynamics relevant to CIGNA for 2011. First, I would remind you of our position as a global health service company with a diversified portfolio of capabilities; second, that we are effectively executing our growth strategy, as evidenced by the solid business fundamentals and good growth in our targeted markets, which is driving attractive 2010 earnings from each of our ongoing businesses and provides us with favorable momentum going into 2011. Our International operations are generating double-digit revenue and earnings growth through the third quarter, reflecting improved customer retention and new sales and targeted geographies. We expect to continue to grow our revenues and earnings in our International business in 2011. For Group Disability and Life, we're reporting solid premium growth in 2010 from a continued demand for our differentiated Disability Management programs in a challenging environment. All in, we expect our Group results to be stable in 2011 relative to 2010. In Health Care, the legislative and economic uncertainties make it difficult for us to set expectations for 2011. However, let me make a few observations. We have good momentum stepping into 2011 off a very strong 2010. We're really achieving membership growth in our targeted areas of focus and sustained clinical quality for the benefit of our clients and customers. Also, we believe that our broad portfolio of health improvement products and services, which focuses on leveraging transparency and engagement with clients, customers and health care professionals to improve health, is well aligned with the intent of health care reform. We also have a higher mix of service-oriented, fee-based products and programs compared to our major competitors, which better positions us to adopt to this changing marketplace. These higher mix of self-funded and experience-rated business, where clients and customers directly benefit from medical costs savings, also means the impact of variability and utilization either on medical costs or the potential for customer rebates in 2011 will be less impactful for us than companies with larger risk-based medical membership. So all in, while it is too early to set expectations for 2011 results, we believe our diversified portfolio of products and services will serve us well, in this rapidly changing and dynamic environment. With that, we'll turn the call over to the operator for your questions.

[Operator:]

[Operator Instructions] And we'll go first to Matthew Borsch with Goldman Sachs.

[Matthew Borsch:]

Maybe I missed this last part on your health care earnings. Directionally for 2011, do you directionally, continue to stay down, flat, up? And on the Life Disability side, should we infer stable means you expect earnings would be more or less flat for that segment?

[David Cordani:]

Matthew, it's David. I don't think you missed anything, because we didn't provide anything explicitly for health care, so you didn't miss anything. First, on the second part of your question, we said that at this point, we would expect Group to be stable. Would note that as we've flagged in prior quarters, our Group Insurance business benefited by several items that we indicated were one-timers. Taking that into consideration, we'd expect that the strong 2010 results would be more indicative of a stable outlook for 2011. Specific to health care, we didn't say up, up, flat or down, because it really is too early to say. What we did highlight and feel very strongly about is that we're carrying momentum out of 2010. And secondly, it was 90% of our business, being experience-rated or service-oriented. There's a direct correlation between either favorable medical expense trend unfolding and/or neutralizing the impact of rebates, but we didn't classify it otherwise.

[Matthew Borsch:]

Maybe you could talk just a little bit about what you're seeing, if anything, in the market from smaller competitors, where maybe you've been approached perhaps or had discussions with plans or TPAs that might be considering pulling out or wanting to sell the business with all the reform changes coming. What are you seeing on that front?

[David Cordani:]

Matthew, at first just in the marketplace, broadly, from a demand standpoint, employers continue to seek pretty innovative products and programs, which is requiring companies to invest in capabilities around health improvement and engagement, transparency, the ability to communicate through your mobile devices and otherwise. So you take that into consideration with your comments relative to the reform implications more directly, it's a pretty disruptive and unsettled environment. To your macro question, are there kind of emergent in the marketplace of consolidation, I'm not going to comment specifically around what is indeed transpiring. More broadly, we're seeing good growth opportunities for ourselves. And overtime, as we've said in the past, we would expect to see the marketplace through opportunities for further smart consolidation opportunities that I just talked about.

[Matthew Borsch:]

Could you characterize if employers on the margin are sassing you to be maybe, maybe this is a wrong word, but tougher on medical management, a little more restrictive, given all the trend pressures combined with the economy that they're facing.

[David Cordani:]

Matthew, as you could impose in a couple of different categories, the preponderance of employers that we're interacting with are actually orienting a little differently. There's enough evidence now that says that if you get the right incentives aligned, if you get the right engagement programs, you actually get a better outcome in benefit than trying to double it on prior generation, if you will, medical management. Now there are some employers that either have further opportunity, because they have not done as effective with other services or programs, but I'd say the broader trend we're seeing are next evolution of what you might be calling medical management or individual-specific clinical programs that use incentives, engagement, work with physicians to improve engagements, lower costs by improving quality. That's really where the big trend is right now.

[Operator:]

We'll go next to Josh Raskin with Barclays Capital.

[Joshua Raskin:]

I know in the release you talked about favorable claims in the Run-off Reinsurance. I was just curious if you could quantify that. And then I know you're not talking about Health Care earnings, but maybe you could talk a little about membership trends particularly for January 1 in Health Care?

[Thomas McCarthy:]

Josh, it's Tom. So I think you're referring to the fact that the Reinsurance loss was less than the VADBe charge in the quarter, and it did include some minor favorable development in our workers comp book and some other normal quarterly fluctuations, nothing really of note to major driver there with the VADBe charge.

[Joshua Raskin:]

And could we say $7 million, sort of offsetting it .Would that be right ballpark?

[Thomas McCarthy:]

Yes, in the ballpark.

[David Cordani:]

Josh, it's David. The second part of your question, looking for membership trends to be specific?

[Joshua Raskin:]

Yes.

[David Cordani:]

So for us, 2010 -- first and foremost, the driving force behind our membership trends are very strong traction in our Go Deep strategy, which we're seeing attractive retention in growth rates in our key segments and our key market places. I think, maybe inferred in your question, as we look into 2011, built on the comments I made to Matthew before, what we're seeing is a continuation of demand for programs and services that show the ability to both improve quality and simultaneously either reduce cost and/or improve productivity on a go-forward basis. But for 2010, we're very pleased with the traction we're seeing on our Go Deep strategy, both geographically and by segment.

[Joshua Raskin:]

I guess, historically, at this time of year, you guys have given more explicit guidance around at least national accounts and understanding that, that's not necessarily a target market, still a big chunk of membership for you. So maybe even just some commentary on where your national accounts will play out?

[David Cordani:]

Sure, Joss, and first and foremost, relative to national accounts, our national accounts, continues to be an important and target business segment for us. The new ones that we continue to pull out is we're focused on those national account buyers, who value engagement and incentive-based programs to improve health. So let me give you a little more color on that. Last quarter, I told you that for 2011, at that point in time, the pipeline we had visibility to at that point was about the size of the pipeline we had from a year ago, and that was a healthy pipeline. Additionally, I've said that the amount of our business that was out to bid at that point in time in national accounts was about the size of the business that was out to bid a year ago. So in pattern, in terms of looks and portions of our business that was out to bid, additionally I flagged that there was a large case in our portfolio with lower margin that was out to bid. As we sit here in the third quarter, without, again, providing you explicit 2011 guidance, that pattern has played through, and as a result, directionally, we would expect that our national account performance in 2011 would look like our national account performance in 2010, with an important nuance. We continue to see a change in the makeup of our book of business, with more of the covered lives being engaged in incentive engagement and health-improvement and productivity-based programs year after year, which is our strategy.

[Joshua Raskin:]

So similar first quarter expectation in '11 relative to 2010?

[David Cordani:]

Again, I'm not giving you '11. If you'd think about, detail '11 -- if you just think about the pattern, the pattern right now, as I sit here today, looks like the pattern from a year ago as we look forward.

[Operator:]

We go next to Christine Arnold with Cowen and Company.

[Christine Arnold:]

You said the timing and pace of normal service utilization is unknown in comments on Health Care. Could you give us a sense for what you're expecting in your forward pricing for your guaranteed cost book of business? And then in the quarter, given that your loss ratio for the total Health Care division was much higher than guaranteed cost, can you tell us whether either the Medicare Advantage MLR stayed in that 96, 97 range, or were there experience-rated MLR upticks?

[David Cordani:]

It's David. I'll start on just the direction on medical costs, then I'll ask Tom to comment on the trend and then your MRI comment specifically. We're communicating. First, on the broad comments, the medical costs trend is, we're recognizing that we have seen that the rate of growth of medical costs or the trend is lower than what's expected, right? So the underlying utilization trend is lower than expected. And what we're flagging is that we don't, yet, believe that, that's a new normal for 2011. And if it does normalize, we're flagging that we're not sure when it does normalize back. So very importantly, just the rate of growth in utilization is at a lower level than was anticipated. We're seeing the impact of that, the 90% of our customers that are ASO and experience-rated are seeing the benefit of that. And we're flagging that there's some uncertainty as to whether or not that does refer back to a historic pattern or not. I'll ask Tom to comment on the specifics of what we're assuming from a pricing standpoint.

[Thomas McCarthy:]

First off, let me just reiterate. We're comfortable with the pricing and underwriting discipline we're seeing right now. And just looking at 2010 first, our pricing were generally at our expected medical trend. And as trend materialized favorably compared to our expectation, we saw the loss ratio improve. For 2011, we are expecting to deliver rates that are consistent with our expectation for medical costs. And again, that does include an increase in medical utilization from the current low levels. So that's kind of where we are on the pricing environment. To your specific question on the overall loss ratio, I'd say, Medicare Private Fee-For-Service is continuing to perform about as we expected, but there was a small uptick in the loss ratio, so that's probably being reflected in the results.

[Christine Arnold:]

And if I could ask you exactly where the prior-period development was? You said you gave some sort of some guaranteed cost. But if you could just break out those pieces in terms of prior year versus prior quarters, so I can normalize MLRs by business?

[Thomas McCarthy:]

Well, here's how I would answer that. Again, the number I gave you was across all the businesses, so $21 million, prior period; $9 million prior year. That's the first break. Essentially, all that prior period really ended up in guaranteed cost, some pluses and minuses in between share returns, Private Fee-For-Service and the other businesses. And the prior year was largely in guaranteed cost, also I think $5 million of the $9 million.

[Operator:]

[Operator Instructions] We go next to John Rex with JPMorgan.

[John Rex:]

Just continuing in that vein, you said you're pricing, consistent with your trend expectation your 2011 book, consistent with that for next year. So what is your trend expectation that you're incorporating for 2011?

[David Cordani:]

John, it's David. Again, without providing you 2011 guidance, we've not laid out a 2011 trend. So again, we are mindful of the fact that there's an appetite for those pieces, but we have not provided that trend explicitly.

[John Rex:]

I mean, can you give me an order max? So I should assume though that you're using a trend level that's higher than the 7.5% that you're seeing today? Would that be accurate?

[David Cordani:]

John, maybe a way of thinking about it is to look back over the last couple of years, see the medical trends performance that we've been able to deliver, the current year is maturing a little favorably to us right now. And as Tom referenced, the pricing assumption assumes somewhat of an uptick in utilization. And at this point as we look at our contract execution, our contract execution or rate execution for medical costs continues to be in line with our expectations, looking forward. So we've had a good history of hitting our trend expectations.

[John Rex:]

Okay, so I'll go with 8%. Moving beyond that, when I think about your book -- let's throw out rebate impact for a second. Your book is maybe the least impacted by rebates, if ever. So let's just throw that out, and let's say you have no rebate. I'm going to make that up, okay. So absent a spike in trend beyond kind of what you're incorporating there, why wouldn't -- give me like the top three reasons that you wouldn't have earnings growth in the Health segment in 2011?

[David Cordani:]

Again, the way we're thinking about the business going into 2011, reiterating a few points, then I'll try to illuminate one or two more points to be responsive to you. Again, we're pleased with the results in 2010, strong execution of our business plan and strategy, strong execution to Go Deep. We're growing lives in our key segments and servicing those lives well, from a service and clinical-quality standpoint. So there underlies your comments. If you neutralize the rebates, which you're entitled to, the next thing I'd ask you think about is, as you know, we philosophically do not project prior-year development, a favorable reserve development as well, so that would be the second item for you to consider in terms of your projection, up to you versus us. Absent those two items, then you're going to model out what you think is going to happen to us from a growth standpoint, from a pricing standpoint, from a specialty standpoint and from an operating expense and operating expense ratio standpoint. And that's up you to model. But John, I would limit to those two under the items to flag

[John Rex:]

I just want to clarify one other point you made. We should expect even inclusive of the large account national account loss, should we expect your membership to be up on January 1, your national account membership?

[David Cordani:]

So we didn't say that. What we said was if we look back a year and look at it where we stand today, the overall performance in terms of pipeline of new opportunities, portions of our business that are up-to-date, including the relationship you made reference to, it's about in pattern where it was a year ago. National account specifically, with no comments on Middle Market or Select segment. And very importantly maybe, John, as an indicator there, the Select segment, which are employers with 50 to 250 employees, we're still in the height of the 2010 selling season right now, and it continues to perform well for us from a retention, new business sales standpoint et cetera.

[Operator:]

We go next to Charles Boorady with Crédit Suisse.

[Charles Boorady:]

First, have you run the numbers on the NAIC model regs on minimal loss ratios, and roughly, what the impact to your earnings would have been or what the rebate might have been, had those regs taken effect this year?

[David Cordani:]

It's David. As you know, the regs continue to evolve and final dialogue's taking place. As you would expect, we run numbers, a variety of ways, a variety of times with a variety of combinations. Given the fact that we're not providing you 2011 guidance, I don't want to speak to that specifically, other than to state the obvious that on an absolute-size basis, it will be relatively smaller impact to us, as we sit here and understand the business point in time versus the marketplace in total.

[Charles Boorady:]

In CIGNA parlance, relatively small, I haven't heard before. But you've used the word material and defined that word before. Would you say it's material or not material to your earnings?

[David Cordani:]

I mean, Charles, I specifically didn't use that word because, again, you're back into me giving you some guidance for 2011. Again, you need to look at it from a relativity standpoint. But it's 10% of our book being guaranteed cost as we look to 2011. We've run the number a variety of ways, as I know you have as well. And at this point, we can't provide you explicit guidance on that.

[Charles Boorady:]

Second question on interest rates. You talked about the VADBe business, which was very helpful. Can you talk about the sensitivity of your bottom line results to low interest rates, including low mortgage rates? So if rates stay where they are, interest rates, mortgage rates indefinitely, what's the sort of annual net headwind to your bottom line that we should think about?

[Thomas McCarthy:]

So Charles, it's Tom. And there, you're thinking about the investment portfolio more broadly, I presume. And I would just point out that we tend to duration match our portfolio, so a small portion of it turns over each year. So we would expect to be having higher-yielding assets roll off and lower-yielding assets, replace them. But I wouldn't expect that would be a significant impact in the near term. Over time, that could be more of an issue, but not in the near term.

[Charles Boorady:]

So your mortgage portfolio does mature, and you get to pickup new mortgages at lower rates or some are refinanced. Is that going to have an impact to 2011 that we should think about?

[Thomas McCarthy:]

Again, we're not giving any 2011 guidance. But the way it...

[Charles Boorady:]

I guess, what's the sensitivity? I'm thinking on an annual basis. So if rates stay at this level, what kind of headwind should we think about in terms of the net impact to your -- I know, there a lot of moving parts, but I thought you might have just kind of model it out for us, give us a rough number to think about in terms of the annual headwind to earnings from a very low interest rate environment.

[Thomas McCarthy:]

Again, the portfolio turnover is pretty low. I wouldn't really have that as a high item on the list of things to think about.

[Operator:]

We go next to Doug Simpson with MS SB. [Morgan Stanley]

[Doug Simpson:]

I was wondering if you could just talk a little bit about Vanbreda. Just be curious, one, how should we think about sizing that business, given when it came in, in the quarter? I mean, can we basically assume it was in there for a month and try to extrapolate that? Anything you can give us there? And I guess, just, if I'm looking at the supplement right, it looked like Europe, the revenues were down a little bit sequentially, and just trying to understand sort of the geography of their footprint.

[David Cordani:]

It's David. I'll start with couple of comments on Vanbreda, then I'll ask Tom to talk about the directional earnings pattern. Just two comments first, we view that, that business and that acquisition is very attractive and quite strategic. There's some great complements geographically, business segment-wise. And as I referenced in prepared comments, positions us as a leader in the Expatriate space. Secondly, the business is benefited by both a very talented and tenured team of employees and very deep and long-standing customer and client relationships. And we're keenly focused on those, retaining that talented employee base, as well as retaining and building on the client relationship base. I'll ask Tom to talk a little bit directionally around what you're starting to see in terms of the reported results and how that will unfold between '11 and beyond.

[Thomas McCarthy:]

Doug, its Tom. Again for 2011, we're expecting contributions from Vanbreda to be in the range of $10 million to $15 million after-tax. We really expect d earnings to ramp up post that. In 2012, I think we're looking for $50 million or more in after-tax earnings. So that's a combination of both transition and integration costs, and the fact that we're taking some time to transition some of the relationships from some of Vanbreda's current partners. On your specific question on the disclosure and the supplement [ph], I think that the geographic breakdown there really just reflects our Health Life & Accident business. So it wouldn't include the impact of Vanbreda as part of the Expatriate benefit segment. And your assumption is right, we would expect a significant growth of revenue in Europe related to Vanbreda. But it wouldn't really show up in that particular chart.

[Doug Simpson:]

On Asia, just a competitive backdrop, do you guys bump in much into AIA or Pru [Prudential], or is there just not much overlap there?

[David Cordani:]

Doug, it's David. The competitive profile in Asia varies by country. So we have to look that on a country-specific basis. And when I think about your question, I'm going to go more to the Health, Life & Accident side of our business. We actually have a number of competitors in some ways, but in other ways, very few competitors, because we are typically operating at different distribution model, as you recall from prior conversations. So our direct-to-consumer, telemarketing, Internet, DirectTV and otherwise is a different distribution channel. But to your specific point, those are familiar competitors to us in some geographies.

[Operator:]

We go next to Carl McDonald with Citi.

[Carl McDonald:]

Another International question, we're just trying to understand what a good run rate is for earnings for this year? The earnings has been all over the place through the first three quarters. Maybe you can help us to -- what explains the difference?

[David Cordani:]

Carl, it's David. I think, most importantly, at a macro level, the earnings trajectory is what we're most pleased about and excited about, which is continuing to build off the double-digit top line and bottom line growth for the business. You're correct. It's a little bit lumpy this year, as we look to the overall results in the year. It implies and turn out to provide you kind of the underlying earnings pattern to project into 2011. I would bring you back to my prepared comments, where when we provided comments in 2011 relative to International, I explicitly said in the context of the earnings and revenue growth in 2011, we would expect to see further revenue and earnings growth off of a pretty attractive base in 2010.

[Carl McDonald:]

And separately on the experience-rated, you mentioned customers seeing the benefit of the lower costs trend. What's the timing on that? Would they see that benefit next year as those contracts reprice?

[David Cordani:]

Carl, no. I think that benefit will grow in overtime, as the experience-rating formulas get updated.

[Operator:]

We go next to Justin Lake with UBS.

[Justin Lake:]

Just first question on the balance sheet. If I'm calculating this correctly, it looks like PCP might have been up about three days sequentially. Can you talk to what the drivers are there? Did you see some kind of slowdowns in claims processing that we should know?

[Thomas McCarthy:]

Justin, it's Tom. There really isn't anything of note to call out in the quarter around claims processing or days claims payable. It's kind of a business-as-usual result.

[Justin Lake:]

Am I calculating that number out right as far as up three days sequentially?

[Thomas McCarthy:]

Justin, I might suggest a follow up with Ted going through that. Now we'd highlight we've had meaningful change in our book of business. When you're looking at the high deductible plans, the Private Fee-For-Service plans et cetera. But very important to your core point, no change in claim payment patterns for us, no slowdown in claim payment patterns that are meaningful to discuss at all.

[Justin Lake:]

The second question in operating costs. First, can you give us some order of magnitude on how much higher operating expenses will be in the fourth quarter, jumping off the third quarter run rate? And then an update on that target of $150 million to $200 million of costs savings you have out there for '11 and '12, with any kind of specifics around areas of trajectory over the three-year period?

[David Cordani:]

Sure, Justin. Relative to the first point of your question, for the fourth quarter, we typically will incur some additional costs to prepare ourselves for servicing expanded business and even the renewal pattern that takes place for business, so fourth quarter, you typically see an uptick. Secondly, as we've continue to grow the book of business throughout the year, there's additional variable costs required to be able to support that. So you'd see some offset in spending. Obviously, there's more than enough revenue, because we're just dealing with the variable costs that go along with that. And at the end of the day, what you should see is that our expense ratio will be demonstrating improvement in 2010 versus 2009. Specific to your second question in terms of the longer-term growth, our operating expense reduction objectives, we continue to stay focused on a few items

[Operator:]

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

[Joshua Marine:]

This is actually Josh Marine in for Kevin. Coming back to the International business, looks like the pretax margins in third quarter dropped from the first half of 2010 a little bit more sharply than they did in 2009. Can you comment on what's driving that and building off of that? What should we think about in terms of margins, longer-term, some of the headwinds and tailwinds we should consider?

[Thomas McCarthy:]

Josh, this is Tom. I'd say that's just normal variability. I would also acknowledge we are investing in expanding channels and new markets, so there's a little bit of that impact on the margin results. But I wouldn't read too much into the quarter-over-quarter comparison.

[Joshua Marine:]

And then how about the longer-term margin outlook in International? What are some of the headwinds and tailwinds we should be thinking about?

[Thomas McCarthy:]

I think we still expect to earn good margins. We would expect to continue to make strategic investments, so kind of the growth momentum is definitely a tailwind. And the investment in expanding into new markets and channels would be the major headwinds, I'd point out.

[Operator:]

We go next to Sarah James with Wedbush.

[Sarah James:]

I guess, I'll just continue on the topic of International. How should we think about the earnings contribution potential from this segment over the long term? And then what are some of the drivers to get there as far as the top line growth? Is this new market entrances, deepening your presence in existing markets? Or maybe you have a relationship with local government already or selling more products just into your existing book? And then what are the some of the hurdles that you would face in achieving this, either from a local regulatory front, or if we should be thinking more about it's just getting the right teams in place?

[David Cordani:]

Sarah, it's David. A few questions there, so let me try to piece them out. Relative to the long-term opportunity here, at a broad base, because we see it as quite attractive. And if you play through, if you kind of neutralize for potentially any acquisitions, and you look at the top line and bottom line growth trajectory of that business versus our attractive but lesser growth trajectory for the U.S. business, you would see it growing through a larger and larger portion of the CIGNA portfolio. And as I noted in the past, if you follow the math, it could be going from 20% to 30% of the portfolio over the next three- to five-year time horizon. And how is that driven? Our strategy is driving a few things to make that happen. One, leveraging our existing product portfolio in each of the countries we're in. And what that means is we don't use all of our products in every country we're in today, and we have further leverage in those countries. Two is leveraging each of our existing distribution channels in every country we're in. And what we mean there is we don not leverage in each distribution channel we have maturity in our portfolio in every country. Then third is designing and delivering new product. It's a fundamental part of how that business operates. And then fourth is entering new geographies. As Tom referenced earlier, there's an investment to enter those new geographies or develop these new products, and we've put that in our investment queue. As it relates to capabilities, we're actually benefited by a broad cadre local leadership in each country to build off of and license and regulatory configurations that we could build off. So we don't see an explicit headwind to our growth trajectory that I would highlight, other than continuing to execute our disciplined plan of growing in existing countries as part of our Go Deep and then expanding smartly in new countries as part of our Go Global.

[Operator:]

And our final question will come from Ana Gupte with Sanford Bernstein.

[Ana Gupte:]

Couple of questions on the cost trend again related to different drivers. So there was a period of controversy around what the reform provisions would contribute to costs trends. Let's just assume you're 50 bps is nonrecurring, so you get to 8%. Can you tell us what you might have assumed for the uptick from reform? And is the last four weeks in the fourth quarter giving you some window into the claims experience from dependent coverage and all those other things?

[David Cordani:]

Ana, it's David. First, just to frame when we think about the impact of reform. When we talked about this in the past, we've noted that a good percentage of our portfolio of businesses already has extremely comprehensive preventative care as an example. Probably, deals with a higher average annual coverage level and thresholds, so our portfolio of businesses, generally speaking was more comprehensive. And that's biased to the fact that we had national accounts and Middle Market customers as the predominant portion of our portfolio. Secondly, at a macro level, if we look at all the coverage that's mentioned and said, what would that mean if you had a relationship that moved from non-compliant to fully compliant with the new reg. There's a range of 100 to 300 basis points. I think, lastly, to your question, it's still early to look at emerging third quarter data and say, I can give you the crisp window in terms of whether or not that 100 to 300 basis points is the exact accurate number. And then the final comment is we seen no negative indicators to tell us that our assumptions are wrong today. But again, we're cautious because it's early on.

[Ana Gupte:]

And then one more driver. You talked about ACOs and you're doing a lot of pilots and so on. As you're looking into your contract renewals for 2011 and then just probably over the prior period, do you see any indication that the industry and yourself included might see some abatement in the unit cost trend, which has been the biggest driver of trend the inpatient side and largely in outpatient as well?

[David Cordani:]

Ana, David again. I actually see a little bit kind of a bifurcated trend possibly emerging. One is if one plays through yesterday's model, continuing more aggressively to play through yesterday's model, you could argue that actually you'd see increasing unit cost pressure given market dynamics. Conversely, as you play through broadly defined in ACO or medical home model, where you're redefining the financial incentives, you're more focusing on the total quality outcomes to generate the cost outcomes. Then I believe you had the opportunity to get what you referenced, which is a bit of abatement of the unit cost. And obviously, that second category is where we're focused with over 100,000 lives currently in ACOs, over 1,000 physicians in 11 states that we're operating in today. So we believe that, that type of activity of incentive alignment is critical to get to a more orderly trend on a-go forward basis.

[Operator:]

With that being our final question, I would like to turn the call back over to Mr. David Cordani for any additional or closing comments.

[David Cordani:]

Thanks. In closing, I want to emphasize three points about our businesses. First, our third quarter 2010 results were strong, which reflects the value we're delivering to our customers and clients we serve around the world; the importance of our diversified portfolio of businesses, as well as the strength and the fundamentals in each; and our effective execution of our growth strategy. Second as highlighted earlier in my comments, we're adding value by engaging individuals and health care professionals to enhance the quality of care and improve service while reducing costs. Our accountable care organizations and incentive-based programs are just two examples of how we're adding value. This approach to providing value is not a new focus for us. It is at the center of our mission to improve health well being and sense of security of the individuals we serve. This approach is more important than ever. And finally, I believe our diversified portfolio of businesses positions us for continued success in a rapidly changing and dynamic marketplace. We thank you for joining us today in our call.

[Operator:]

Ladies and gentlemen, this concludes CIGNA's Third Quarter 2010 Results Review. CIGNA Investor Relations will available to respond to additional questions shortly. A recording of this conference will be available for 10 business days, following this call. You may access the recording conference by dialing area code [phone] or our toll-free [phone]. The passcode for the replay is 7578405. Thank you for your participation. You may now disconnect.