CIGNA CORPORATION SECOND QUARTER 2007 INVESTOR TELECONFERENCE PHILADELPHIA, PA WEDNESDAY, AUGUST 1, 2007

Transcription

1 Page 1 CIGNA CORPORATION SECOND QUARTER 2007 INVESTOR TELECONFERENCE PHILADELPHIA, PA WEDNESDAY, AUGUST 1, 2007 H. EDWARD HANWAY CHAIRMAN AND CHIEF EXECUTIVE OFFICER MICHAEL W. BELL EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER DAVID M. CORDANI PRESIDENT, CIGNA HEALTHCARE JONATHAN N. RUBIN, FINANCIAL OFFICER, CIGNA HEALTHCARE EDWIN J. DETRICK VICE PRESIDENT, INVESTOR RELATIONS NOTE: CIGNA has made editorial changes to this transcript. As used herein, CIGNA refers to CIGNA Corporation and/or its consolidated subsidiaries.

2 Page 2 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 CIGNA and its representatives may from time to time make written and oral forward-looking statements, including statements contained in press releases, in CIGNA s filings with the Securities and Exchange Commission, in its reports to shareholders and in meetings with analysts and investors. Forward-looking statements may contain information about financial prospects, economic conditions, trends, and other uncertainties. These forward-looking statements are based on management s beliefs and assumptions and on information available to management at the time the statements are or were made. Forwardlooking statements include but are not limited to the information concerning possible or assumed future business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, trends and, in particular, CIGNA's productivity initiatives, litigation and other legal matters, operational improvement in the health care operations, and the outlook for CIGNA's full-year 2007 results. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words believe, expect, plan, intend, anticipate, estimate, predict, potential, may, should, or similar expressions. You should not place undue reliance on these forward-looking statements. CIGNA cautions that actual results could differ materially from those that management expects, depending on the outcome of certain factors. Some factors that could cause actual results to differ materially from the forward-looking statements include: 1. increased medical costs that are higher than anticipated in establishing premium rates in CIGNA s health care operations, including increased use and costs of medical services; 2. increased medical, administrative, technology or other costs resulting from new legislative and regulatory requirements imposed on CIGNA s employee benefits businesses; 3. challenges and risks associated with implementing operational improvement initiatives and strategic actions in the health care operations, including those related to: (i) offering products that meet emerging market needs, (ii) strengthening underwriting and pricing effectiveness, (iii) strengthening medical cost and medical membership results, (iv) delivering quality member and provider service using effective technology solutions, and (v) lowering administrative costs; 4. risks associated with pending and potential state and federal class action lawsuits, purported securities class action lawsuits, disputes regarding reinsurance arrangements, other litigation and regulatory actions challenging CIGNA s businesses and the outcome of pending government proceedings and federal tax audits; 5. heightened competition, particularly price competition, which could reduce product margins and constrain growth in CIGNA s businesses, primarily the health care business; 6. significant changes in interest rates; 7. downgrades in the financial strength ratings of CIGNA s insurance subsidiaries, which could, among other things, adversely affect new sales and retention of current business; 8. limitations on the ability of CIGNA's insurance subsidiaries to dividend capital to the parent company as a result of downgrades in the subsidiaries financial strength ratings, changes in statutory reserve or capital requirements or other financial constraints; 9. inability of the program adopted by CIGNA to substantially reduce equity market risks for reinsurance contracts that guarantee minimum death benefits under certain variable annuities (including possible market difficulties in entering into appropriate futures contracts and in matching such contracts to the underlying equity risk); 10. adjustments to the reserve assumptions (including lapse, partial surrender, mortality, interest rates and volatility) used in estimating CIGNA's liabilities for reinsurance contracts covering guaranteed minimum death benefits under certain variable annuities; 11. adjustments to the assumptions (including annuity election rates and reinsurance recoverables) used in estimating CIGNA s assets and liabilities for reinsurance contracts that guarantee minimum income benefits under certain variable annuities;

3 Page significant stock market declines, which could, among other things, result in increased pension expenses of CIGNA s pension plans in future periods and the recognition of additional pension obligations; 13. unfavorable claims experience related to workers compensation and personal accident exposures of the run-off reinsurance business, including losses attributable to the inability to recover claims from retrocessionaires; 14. significant deterioration in economic conditions, which could have an adverse effect on CIGNA s operations and investments; 15. changes in public policy and in the political environment, which could affect state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for CIGNA's health care products and services; and amendments to income tax laws, which could affect the taxation of employer provided benefits, and pension legislation, which could increase pension cost; 16. potential public health epidemics and bio-terrorist activity, which could, among other things, cause CIGNA s covered medical and disability expenses, pharmacy costs and mortality experience to rise significantly, and cause operational disruption, depending on the severity of the event and number of individuals affected; 17. risks associated with security or interruption of information systems, which could, among other things, cause operational disruption; and 18. challenges and risks associated with the successful management of CIGNA s outsourcing projects or key vendors, including the agreement with IBM for provision of technology infrastructure and related services. This list of important factors is not intended to be exhaustive. Other sections of our most recent Annual Report on Form 10-K, including the Risk Factors section, the Cautionary Statement in Management s Discussion and Analysis of Financial Condition and Results of Operations, our Form 10-Q for the quarter ended March 31, 2007 and June 30, 2007 and other documents filed with the Securities and Exchange Commission include both expanded discussion of these factors and additional risk factors and uncertainties that could preclude CIGNA from realizing the forward-looking statements. CIGNA does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

4 Page 4 Ted Detrick, VP CIGNA Investor Relations: 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 Ed Hanway, CIGNA s Chairman and Chief Executive Officer; Mike Bell, CIGNA s Chief Financial Officer; David Cordani, President of CIGNA HealthCare; and Jon Rubin, CIGNA HealthCare s Financial Officer. In our remarks today, Ed Hanway will begin by discussing highlights of CIGNA s second quarter results. Mike Bell will then review the financial details of the quarter and provide the financial outlook for the full year David Cordani will discuss our medical membership results and outlook. He will also discuss how we have differentiated ourselves in the health care marketplace, by continuing to improve the competitiveness of our products and services. Ed will then conclude our prepared remarks by discussing how CIGNA is taking an active role in the future direction of the U.S. healthcare system. He will also comment on the long-term growth prospects for our health and related benefits businesses. We will then open the lines for your questions. Now as noted in the earnings release, CIGNA uses certain financial measures which are not determined in accordance with generally accepted accounting principle, or GAAP when describing its financial results. Specifically, we use the term labeled adjusted income from operations, which is income from continuing operations before realized investment results and special items, with special items being unusual charges or gains as the principal measure of performance for CIGNA and our operating segments. A reconciliation of adjusted income from operations to income from continuing operations, which is 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. Those risk factors are discussed in today s earnings release. Now before turning the call over to Ed, there are a few items that I will cover pertaining to our second quarter results. First, as a reminder, our comments today reflect a three-for-one split of our common stock, which occurred during the second quarter. I also note that CIGNA s earnings release included a special item which was an after-tax charge of $56 million pertaining to our Run-off Reinsurance operations. The charge was for an increase in reserves based on changes in assumptions regarding annuitization election rates and policy lapse rates for agreements that reinsure guaranteed minimum income benefit contracts issued by other insurance companies. The nature of this special item charge was previously disclosed in a Form 8-K that we filed with the Securities and Exchange Commission on May 30th of this year. The charge is reported as a special item, and therefore is excluded from adjusted income from operations in today s discussion of both our second quarter results and our full-year 2007 outlook. In addition, CIGNA s second quarter results also included a net loss from discontinued operations of $19 million, which consists of two items. The first item is a loss of $23 million from discontinued operations, related to the anticipated sale of our life, accident and health operations in Chile. The second item is income from discontinued operations of $4 million, related to realized gains on the disposition of certain directly owned real estate. Finally, one last item, later today CIGNA HealthCare will issue a news release stating that it has acquired Sagamore Health Network, which is the largest leased health care provider network in the state of

5 Page 5 Indiana. The acquisition gives CIGNA access to approximately 300,000 members in that region. David Cordani will comment on the significance of this transaction in his prepared remarks. You should note that our membership growth outlook of 5% to 6.5% for full year 2007 does not include the members from the Sagamore acquisition. And with that, I will turn it over to Ed. Ed Hanway, CIGNA Chief Executive Officer: Thanks, Ted. Good morning everyone. I am going to start today s call with a few brief comments on our results. Mike will then provide more details on the second quarter and our 2007 outlook. Then David is going to comment on our medical membership results and outlook. He will also discuss how we are differentiating ourselves in the market and building a leadership position in the area of consumerism and health advocacy. In my closing remarks, I will briefly discuss the debate over healthcare reform and the role CIGNA is taking in this debate. I will also briefly comment on our growth strategy and the business drivers that we believe will enable us to meet our long-term growth goals. Overall, our second quarter results were better than our expectations and reflected strong earnings contribution from all three of our health and related benefits businesses. Second quarter adjusted income from operations was $279 million, or $0.96 cents per share, and represented 25% earnings per share growth relative to second quarter of Our Health Care earnings, excluding prior year claim development were at the upper half of our expected range. The Health Care results reflected solid margins and increased penetration in our specialty businesses, as well as membership growth and execution of our guaranteed cost renewal pricing actions. Health Care membership has grown approximately 4.4% since year-end 2006, and we continue to expect full-year 2007 membership growth of 5% to 6.5%. Based on a strong first half, we are confident in our ability to execute on our 2007 highest priorities and achieve our full year Health Care earnings outlook. Our Group Disability and Life and International businesses also continue to deliver strong results. For the quarter, our Group Disability and Life business reported earnings of $68 million at an attractive growth of 10% in premiums and fees. Our after-tax margin in this business continues to be industry leading. Our International business reported earnings of $44 million on 17% growth in premiums and fees. Both our Group and International operations have strong market positions with good growth opportunities. We also continue to be active with share repurchase. To date in 2007, we have repurchased approximately 20 million shares for $990 million. To summarize, our second quarter consolidated results were strong, and we believe we are on track to achieve our full-year earnings and membership goals. Mike is now going to cover the specifics of the second quarter results and our outlook for Mike. Mike Bell, CIGNA Chief Financial Officer: Thanks, Ed, and good morning everyone. In my remarks today, I will review CIGNA s second quarter 2007 results. 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 income from continuing operations, excluding realized investment results and special items. This is also the basis on which I will provide our earnings outlook. Our consolidated second quarter earnings were higher than our May estimates and reflected strong results in each of our health and related benefits businesses. Our second quarter earnings were $279 million, or $0.96 per share, compared to $270 million, or $0.77 per share, in 2006.

6 Page 6 I will now review each of the segment results beginning with Health Care. Second quarter Health Care earnings were $168 million. Excluding $2 million of after-tax favorable prior year claim development, second quarter Health Care earnings of $166 million were in the upper half of our expected range. Health Care earnings included the impact of solid margins and increased penetration in our specialty businesses. Membership growth and strong execution of our guaranteed cost renewal pricing actions also contributed to year-over-year earnings growth. Health Care membership at second quarter was 4.4% higher than at year-end We continue to expect full year membership to grow by 5% to 6.5%. This range excludes the impact of the Sagamore acquisition. Our guaranteed cost Medical Loss Ratio (MLR) for the first half of the year, excluding $6 million of aftertax favorable prior year claim development and excluding the results from our voluntary business, was 84.5%, compared to 86.7% for the first half of We continue to expect to achieve the full year MLR estimate of approximately 84%, which we discussed in May. Experience-rated earnings in the quarter were strong and improved relative to first quarter. Medicare Part D earnings for the second quarter were $3 million after-tax. This result was improved from the first quarter loss of $9 million after-tax. Health Care premiums and fees for the second quarter were up 11% versus 2006, reflecting medical membership growth, guaranteed cost rate increases, and growth in Medicare Part D. Relative to operating expenses, second quarter results demonstrated our continued emphasis on improving productivity. Our statistical supplement breaks out the operating expense impacts of our various growth initiatives and transformation amortization. Excluding these items, our operating expenses for second quarter were modestly higher than first quarter. Expenses through June include some favorable timing impacts, which we expect to reverse later in the year. On the same basis, we continue to expect full-year operating expenses per member to be lower than the comparable 2006 amount. To recap, Health Care earnings were strong due to continued good execution. Now, I ll discuss the results in our other segments. Second quarter 2007 earnings in the Disability and Life segment were $68 million. This result reflected competitively attractive margins driven by strong disability management results and favorable mortality in the group life business. In our International segment, second quarter 2007 earnings of $44 million reflected competitively strong margins and continued growth in our life, accident and health and expatriate benefits businesses. Our Group Insurance and International businesses continue to be important contributors to our consolidated results. Results for our remaining operations, including Run-off Reinsurance, Other Operations, and Corporate were a loss of $1 million for the quarter. Before providing our earnings outlook for the full year, I will comment briefly on our current capital position and our outlook. Our parent company capital position continues to be strong, and our subsidiaries remain well-capitalized. At the end of the second quarter, cash and short-term investments at the parent were approximately $435 million. We continued our share repurchase program in the second quarter, repurchasing 6.5 million shares of our stock for approximately $350 million. To date in 2007, we have repurchased approximately 20 million shares for $990 million. Our capital management priorities remain consistent with our prior communications. We intend to continue effectively deploying capital for the benefit of our shareholders. Our first priority is to maintain appropriate liquidity at the parent company and to ensure that our subsidiaries remain adequately capitalized to support growth and to maintain their credit ratings.

7 Page 7 Our second priority for excess capital is to consider acquisition opportunities. We routinely review a range of acquisition opportunities that would enhance our strategic position and meet our return on investment goals. We do not know when or if, we would find additional opportunities that would meet our criteria, and absent these items, our priority would be to buy back our stock. I ll now review the capital outlook for the remainder of By way of overview, we continue to have a strong capital position and good financial flexibility. We ended the second quarter with $435 million in cash at the parent. We continue to expect full-year 2007 subsidiary dividends of approximately $1 billion. Our parent received approximately $500 million of subsidiary dividends in the first half of the year. We expect other sources and uses of parent company cash for the second half of the year to sum to a net use of approximately $50 million. This estimate includes July share repurchase and the Sagamore acquisition, but excludes any further repurchase and any additional M&A activity. We continue to have a long-term target for parent cash of approximately $250 million. To date, we have repurchased $990 million of our stock. Because there are a number of factors that could influence future stock repurchase, we do not forecast it. I would note that annualizing our year-to-date repurchase activity as an estimate for the full-year would not be consistent with the estimates of projected sources and uses of capital that I have just discussed. In summary, we continue to have a strong capital position and good financial flexibility. Now I will review the earnings outlook for the full year. For full year 2007, we currently expect consolidated adjusted income from operations of $1.030 billion to $1.095 billion. This range is higher than the estimates we provided in May. I will discuss the components starting with Health Care. Our estimate for full year 2007 Health Care earnings is a range of $670 to $720 million. This is slightly higher than the guidance we provided in May, reflecting favorable second quarter prior year development. Consistent with our previous discussions, this estimated range reflects our expectations that Health Care earnings in the second half of the year will be higher than in the first half. I will now review several key factors of our estimates for Health Care earnings for the balance of the year. We expect medical cost trend for our total book of business to be in the range of 6.5% to 7.5% for the full year. This is unchanged from the estimates we provided in May. We expect guaranteed cost pricing yields to exceed trend; and we continue to expect the guaranteed cost MLR, excluding prior year claim development and the voluntary business, to be approximately 84% for the full year. I would note that approximately 35% of our guaranteed cost business renews in the second half of the year, and we continue to expect renewal pricing actions to exceed trend. We expect Medicare Part D earnings to continue their pattern of quarter-to-quarter improvement in the balance of the year. For the full year, we expect Part D to be a small positive, as compared to the aftertax loss of $6 million in the first half. We also continue to estimate that our medical membership growth will be 5% to 6.5% for the full year, reflecting additional organic growth relative to our 4.4% growth in the first half. Partly offsetting these factors, we are evaluating opportunities to increase our investment in market facing capabilities to support our growth initiatives. We currently expect operating expenses to be higher in the balance of the year than they were in the first half. All in, we currently project full-year 2007 Health Care earnings, excluding any additional prior year development, to be in the range of $670 to $720 million. Turning to the balance of our segments, we expect our remaining operations to contribute approximately $360 to $375 million of earnings for the full year. This is higher than the outlook we provided in May, reflecting the strong second quarter results. We have increased our full-year expectations for earnings growth in our Group Disability and Life and International businesses. Specifically, for the full-year, we now expect high single-digit earnings growth in Group and earnings growth in the mid-teens for International. Earnings for the balance of our operations, which include run-off businesses and Corporate are expected to be lower in the balance of the year, as compared with the first half. By putting together all of the

8 Page 8 pieces, we estimate that our full year 2007 consolidated adjusted income from operations will be in the range of $1.030 to $1.095 billion. Our consolidated earnings will be affected by any share repurchase that occurs in future periods. As I have discussed before, we do not predict the amount or pace of repurchase, and our estimates for earnings and EPS do not reflect the impact of any further repurchase activity. On this basis, our estimate of full-year EPS for 2007 is a range of $3.55 to $3.75 per share. This is higher than our previous range, reflecting the benefit of share repurchase activity to date and our strong second quarter earnings. To recap, our consolidated second quarter earnings were higher than we had previously estimated and reflected strong results in each of our health and related benefits businesses. Our earnings estimates for full year 2007 reflect attractive earnings growth in our Health Care, Group and International businesses. With that, I will turn it over to David. David Cordani CIGNA HealthCare President: Thanks, Mike, and good morning everyone. I will start my comments with where we are in the second quarter, and how that relates to our full-year expectations. I will then give you an update on how we are continuing to improve the competitiveness of our products and services, and to conclude I ll talk about progress on our multi-year growth strategy. First, as Mike noted, we are one track to reach our earnings outlook for Our year-to-date medical membership growth is in line with our expectations and on target to achieve 5% to 6.5% growth for the full year with all segments and geographies contributing to these strong results. We expect good organic growth in July with the addition of around 50,000 members, with healthy contributions coming from both the national and regional segments. Our persistency rates are strong and are on track with our full year 2007 estimate. Our pipeline of new business opportunities and our close ratios are also strong. Our consumer directed health plan membership has more than doubled from full-year 2006, and we are expecting to see additional growth in this area for the remainder of the year. Our guaranteed cost MLR is on track with full-year expectations, which is reflective of our disciplined renewal pricing and strong medical cost management. We continue to see good opportunities for continued growth in all segments. Part of our success can be attributed to our health advocacy and medical management capabilities, which have proven to be very important to our customers. An example is our cancer screening program that could literally save lives, such as our colorectal cancer at-home test that screens for gastrointestinal bleeding, an early indicator of this potentially deadly disease. After completing a successful pilot program, last year in Florida, we expanded it this year. In the expanded program, almost 7% of our members who returned the test kit we provided them had positive results and required follow up tests with their doctors. We have learned time and time again that many forms of cancer are treatable if detected early enough; and members have written and called to let us know that this has changed, and potentially saved, their lives. Another big selling factor is our integrated approach to solutions across the spectrum of health and wellness services. Our goal is to ensure a healthier population tomorrow, rather than just focusing on illness today and that is resonating very positively. In short, we are determined to evolve CIGNA HealthCare into a health services company fully committed to the health and well-being of our members, rather than simply an insurance company focused on paying claims for sick care. Turning to our multi-year growth strategy, I will comment on three areas: first foundational elements, which include competitive costs, access, and service; second, differentiated capabilities to engage individuals and ultimately improve health; and third, expanding the strike zone of our business segments. With respect to improving cost and access, we will announce later today the purchase of Sagamore Health Network, the largest leased healthcare provider network in Indiana. This acquisition strengthens

9 Page 9 our competitive position in the key growth market. Sagamore provides access to an extensive preferred provider network of 9,400 primary care physicians; 27,000 specialists; 1,100 ancillary providers and over 200 hospitals. The company also offers a broad range of utilization review and case management services. This acquisition expands the CIGNA healthcare network and brings fresh competition to the region. We will work closely with Sagamore to reinforce the excellent quality and service that the clients and members already receive. Relative to differentiated capabilities, we continue to see a growing interest and need for products and services that engage, educate and enable individuals. The national segment employers were the early adopters of this approach. Today, employer interest is up significantly across all segments, and as we have previously asserted, there s a natural time lag between interest and action. Today our focus on solution capabilities is winning for us. Consumer driven health plans are getting more attention from employers, as a way to engage and educate employees and creating focus on maintaining health and vitality. This in turn, improves health, presenteeism and productivity of our customers employees and controls rising health costs by positive influencing health. Consistent with our commitment to health advocacy we provide a wide range of services to create awareness, to educate, to motive and to enable members to engage more effectively in their health and well being through health advisors, coaches, behaviorialists and nutritionists providing support and advice. We don t simply talk about health awareness and improvement, we do it, and we re having a positive impact on the life of individuals every day. We are taking pro active steps to truly engage individuals to make the change necessary to improve their health. One great example of this is our partnership with the Health Management Resource Center at the University of Michigan. As discussed with you previously, we do not simply track health data and trends, we take it further. We use the information to help people understand the risk profile, not just whether they are healthy or not, but by identifying the healthy at risk, the cause of the risk and the optimal means of intervention. The Health and Well-Being in America survey we sponsored and released in May shows that the majority of Americans believe they are in excellent or very good health but their habits don't match their believes. The first vital step to improve health is to address the gap between consumers perception of their health and the reality. Simply said, we must increase awareness. The critical step is to constructively engage, those people who are healthy now, but at risk of losing that health and vitality within a few short years. Another innovative example is our partnership with Hope Lab in an ongoing initiative to deliver interventions to improve the health and quality of life of children who are dealing with chronic illness. Our first joint initiative is to address the needs of teens and young adults with cancer. The video game Remission, which we sponsored, is a way to give them a sense of power and control over the disease, addressing this group in a way that is engaging and powerful for them. The third and final area I will comment on is the progress we are making with expanding the strike zone of our business segments. As we all know, the seniors market is the fastest growing market segment, expected to grow by about 20% per year over the next five years alone. Today, we are actively investing in the senior and retiree services segment. Our membership and retention results are good within our existing products. We are also launching an expanded product portfolio to meet the needs of employers and Medicare eligible consumers, which will complement our existing administrative, clinical, and insurance services. We have applied for and received conditional approval for additional employer and individual Medicare products. We also recently launched CIGNA Medicare Surround SM, a Medicare supplemental plan that we are offering to employers in the national account segment. These are all in addition to the good membership growth we realized in Part D this year. In 2008, we will turn our attention to growing our existing suite of products for individuals under the age of 65. We will continue to enhance our position as the leading consumer engagement company by delivering simple, affordable easy-to-use solutions for seniors.

10 Page 10 So to close, as you can tell, we are focused on our business at hand, while building for tomorrow. We believe it is imperative to lead the industry in driving improvements in the health care system, through enabling member engagement, making sure the right incentives are in place, having cost and quality transparency, expanding choice, convenience and access to care, providing full coverage and incentives for prevention, wellness and chronic care, and partnering with providers. We are also committed to delivering actionable information and expert consultation helping individuals with personal choices that matter to them, helping to connect the health of employees to the health of businesses, and ultimately to the health of the country. Proactive is the way I would characterize our approach to helping individuals improve health and customers meeting their business needs, and it is working. Our current business results are strong, and we are on target with full-year expectations. We are expanding our capabilities to meet customers needs not only today, but also tomorrow. We do not intend to merely react to trends, we intend to drive them in a positive direction. With that I will turn the call back over to Ed. Ed Hanway: Thanks, David. I want to underscore a few points. First, consolidated results for the quarter exceeded our expectations, reflecting strong earnings for each of our health and related benefits businesses. Second, given our first half results and prospects for the remainder of the year, I am confident that we can achieve our full year 2007 earnings and medical membership outlook. And third, we will continue to make significant investments in market facing capabilities in 2007 and beyond to achieve our mission to become the leading health and related benefits provider. I will now make a few remarks on the healthcare industry from a public policy perspective. As you now, the U.S. healthcare environment has been challenging in recent years, and it will likely remain so for some time. CIGNA is actively invested both in the debate around the future of our health care system, as well as pursuit of new and enhanced capabilities required to succeed going forward. At CIGNA, we believe that every American should have access to affordable quality healthcare. We also believe that a coordinated public and private partnership of all health care stakeholders is critical to creating a value driven market, which will expand coverage to the uninsured and improve the health of all Americans. Market based solutions are key to strengthening the cost effectiveness and quality of the U.S. healthcare system. Approximately 160 million Americans now benefit from the innovation, wide range of choice, and administrative cost efficiencies of the employer provided health care market. The system works, and it reaches a large portion of our population. Through enhancement and expansion, we can quickly reach others. That is why we believe individuals with access to health coverage through their employer should take advantage of that benefit. Employers should continue to receive incentives, rather than mandates, to provide meaningful health care coverage for their employees. We also believe that individuals have the primary responsibility for their health. At CIGNA, our goal is to provide innovative market solutions that empower individuals to take more responsibility to improve their health, wellness and security. We achieve this by leveraging our wellness prevention and disease management programs to help our members make better informed decisions, which is essential to reducing health care costs, while at the same time improving quality of care. It is important to note that the current health care reform proposals of both parties are based on building on the employer based health insurance system, which we view as a positive sign for our industry. At

11 Page 11 CIGNA we are preparing for the evolution of healthcare in the U.S., and we believe this evolution will create opportunities to support the long-term growth of our HealthCare business. Our primary focus for HealthCare growth will continue to be the employer-sponsored arena, where we will seek to grow membership through consistent introduction of innovative products and services. In addition, we re adding capabilities and resources to expand into segments where we see significant growth opportunities, some of which may be enabled by healthcare reform, such as the small group, individual, seniors, and voluntary segments. We expect to capitalize on opportunities to complement our core medical products with specialty, disease management, and disability and life products. In the long run, we expect these HealthCare growth opportunities to produce sustainable mid-single digit membership growth; and this member growth, coupled with rate increases, will produce high-single digit annual revenue growth. Through a combination of this revenue growth, specialty product penetration, and productivity savings, we expect to achieve double digit annual earnings growth in Health Care. In summary, our prospects are attractive to organically grow our business on a sustained basis. We expect our Group Life and Disability and International businesses to continue to contribute single-digit and double-digit earnings growth, respectively, on a long term basis. While we are focused on pursuing these growth opportunities, we will also consider supplementing our organic growth with acquisitions, should we find opportunities that meet our criteria. Collectively, we expect our health and related benefits businesses to deliver 10% annual earnings growth and, when coupled with effective capital deployment, we believe we are well-positioned to achieve our long term EPS growth target of 12% to 15%. In closing, our first half Health Care and consolidated results were strong. We are on track to achieve our 2007 outlook, which capitalizes on our competitive strengths and reflects industry leading member growth rates for our HealthCare businesses. I am confident that CIGNA has strong market positions in each of our health and related benefits business, and we will leverage these positions to continue to create value for the benefit of our customers and our shareholders. This concludes our prepared remarks, and at this point in time, we would be glad to take your questions. Carl McDonald (CIBC): I noticed in your balance sheet you ve got $3.6 billion of mortgage loans. I know most of them are commercial-related. But could you walk through what impact, if any, some of the current concerns in the market will have on that portfolio? Sure, Carl. First of all, in terms of your underlying question around the sub-prime news in the press, let me be clear that we currently have a de minimis exposure to that. On our total invested assets portfolio of approximately $18 billion, it s literally less than $5 million so it s de minimis in the scheme of things. In terms of your specific questions around commercial mortgages, I would point out that our CIGNA investment management organization has delivered very strong results this year and last, particularly in the areas of real estate and commercial mortgages. We have good underwriting disciplines in those areas, and there have been very, very minimal issues to date. In fact, if you look back at the last 18 months, we have net realized capital gains in that area. And there is no reason for me to believe that will materially change in the future.

12 Page 12 Carl McDonald: OK. Could you update us on the thinking about the first half Health Care earnings, relative to the second half Health Care earnings or potential second quarter to third quarter however you want to think about that? In terms of the second half versus first half, we expect two main items to drive the second half versus first half improvement, both of which we have talked about in the past. The first is improved guaranteed cost earnings driven primarily by pricing actions. We expect the combination of the lower medical loss ratio, as well as the continued improvement in the expense ratio for the guaranteed cost book, to drive second half earnings higher than first half. The other main driver is the improved Medicare Part D results. We expect the combination of ASO and experience rated earnings to be roughly flat, second half versus first half. Carl McDonald: Thank you very much. Christine Arnold (Morgan Stanley): Good morning. A couple of questions, it looks to me like you had some prior period negative development in the guaranteed cost business. Given the relationship between the MLR with and without positive development, could you talk about that and breakout and exactly where the development was and what it was? Christine, you are right, we had some very modest unfavorable prior year development, specifically in the guaranteed cost block this quarter, related to 2006 literally negative $1 million after-tax. I think the more relevant number I would ask you to focus on is the $6 million after-tax of favorable prior year development on a year-to-date basis. With a guaranteed cost book as small as ours, I would not focus on the quarter. I would focus more on the year-to-date, which was a net favorable $6 million after-tax related to Christine Arnold: OK. And then development in the quarter, where was that? And also, it looks like the experience-rated MLR improved. Could you talk about how to think about that and what happened there? In terms of the development in the quarter, it is very modest in the scheme of things. On the experience-rated results, the most important headline is that the outlook in terms of the fundamentals for experience-rated is unchanged materially for the full year. The outlook is modestly better, but essentially unchanged in the grand scheme of things. I would not overweight any one quarter, as we discussed last year. Specifically, the outlook continues to be strong based on very strong medical cost results, as well as very strong underwriting execution. That is what drove the sequential improvement in experience-rated and a modestly higher expectation for the full year. Jon, is there anything you would like to add?

13 Page 13 Jon Rubin, CIGNA HealthCare Financial Officer: No. I just underscore, Christine, that the development within the quarter was immaterial. Christine Arnold: OK. And immaterial for other divisions as well Medicare, experience-rated, all of the specialty? Because you can get to a small number total, but something big could move in the pieces. I understand completely. You are right there were a few offsetting pieces. Specifically, guaranteed cost prior year development was negative $1 million, stop loss prior year development was $2 million favorable, and specialty prior year development was $1 million favorable, which sums to the overall $2 million after-tax favorable prior year development for the quarter. Christine Arnold: All right, so all small. Thank you. Scott Fidel (Deutsche Bank): First question, could you talk a little bit more about how you are seeing the national account selling season for this year fleshing out at this point? And maybe talk about average case sizes you are seeing and the number of RFPs relative to this point last year. David Cordani: First, as you know, it is early in the season relative to how things are developing. For us, as we look at the national account segment, the first and foremost critical lever is retention. As you recall, we had a very good retention outcome in 2007; and as we sit here today, we expect to see that continue as we look into Relative to your question on the pipeline, as we have suggested previously, pipeline is about the same size with the average case size being a bit larger on a year-over-year basis, which for us is about the same size. And we continue to see a strong appetite in the national account segment for discussion of capabilities around health advocacy and clinical programs to drive some of the behavior change. But again, it is very early in the cycle. I will have a lot more next quarter. Scott Fidel: OK. And then a follow-up around the reserve buildup you had at Run-off Reinsurance, could you talk about how you feel about the adequacy of the reserves in the reinsurance business at this point and some of the metrics you look at to evaluate how those reserve levels look relative to per policyholder, or however you actually look at those reserve levels? Sure, Scott. First, in terms of the specific item that Ted referenced, the special item around GMIB, let me clarify this is not new news. At the end of May, we filed an 8-K indicating that experience had gotten a little bit worse in the April/May timeframe, and we had seen a similar uptick in the first quarter. At that point, we signaled that a reserve study would be completed in 2007; and we expected the charge would

14 Page 14 be less than $100 million. We completed that study in the second quarter and that charge, as Ted mentioned, was $56 million, after-tax. In terms of how we feel about the reserves, any time we strengthen reserves our estimate at that point in time reflects our estimate of all future claims based on the experience that we are analyzing. Certainly our intention is that the second quarter reflects our expectations of all future claims on the GMIB block. In terms of your veiled reference to VADBe, let me be clear that VADBe is a separate block; and the experience on VADBe has recently, in the last 12 months or so, been running modestly better than our reserve assumptions. I do not have any expectation, at this point, that we would have a problem. With Run-off Reinsurance, as we have discussed before, there is uncertainty in this block, but I am currently comfortable with the reserve analysis. Scott Fidel: OK. Thank you. John Rex (Bear Stearns): I m wondering if you have a way of helping us understand cash flow generated from the Health Care segment in the quarter. And I know you do not like to talk about operating cash flow, but help us understand; because there is obviously not much cash generated for the company in the quarter. And do you have a way of helping us understand that better yet? Sure, John. First, you are absolutely right. We continue to believe that the parent company cash is the more relevant cash flow to analyze; because that is the actionable cash that can be deployed. But you are also right in saying that the second quarter Health Care cash flow was out of pattern from what we have seen in the last several quarters. Things can bounce around in any given quarter, so I suggest that you focus more on the year-to-date cash flow rather than the quarter, but I will comment briefly on each. First, cash flow on a year-to-date basis, excluding the small impact of GAAP accounting related to mortgage loans held for sale, which was small, was $423 million; and we acknowledge that is modestly lower than our overall year-to-date earnings of $487 million. Again, there are a number of moving parts; but the main ones are taxes and a net increase in our receivables in Health Care, particularly around Part D, which is not unique to us in our sector. The other main reconciling item on a year-to-date basis, which is mostly a second quarter item, is $61 million in pay outs of experienced-rated surpluses. When we talk about the rate credit liability, the cash that we owe our customers for their positive medical cost experience for 2006, we had payouts of $61 million in the first half of the year, $52 million of which was paid in the second quarter. There is no impact on earnings, because the rate credit liability was accrued during the course of It is evidence of the good medical cost experience, which we have talked about before, and why we believe the experience-rated product is a win-win item. For completeness in the second quarter specifically; the tax payments were high compared to first quarter, we literally made two estimated payments in the second quarter. To summarize; the tax payments, the experience-rated payouts of $52 million in the quarter, and the increase in the receivable balance, particularly Part D, are the items that create the cash flow noise in the second quarter.

15 Page 15 John Rex: So if were able to see Health Care discretely, is your expectation that you would see cash flow about in line with net income over time, is that how you think about it? Yes, absolutely. I would expect to see cash flow from operations for Health Care equal to earnings over an extended period of time. As we have talked about before, in terms of parent company cash flow, I think a more reasonable rule of thumb would be to assume that, over time, roughly three-quarters of our GAAP income would show up as subsidiary dividends to the parent; because we need to retain capital in the operating subsidiaries to support growth. John Rex: OK. And then just thinking about your second half Health Care segment earnings, I think your midpoint is roughly $360 million or so. Should that split fairly evenly between the quarters in terms of how we think about that? Well first, John, I would suggest that you focus primarily on the full year; so in this case, the implied second half rather than the quarters; because the quarters can be impacted by timing items, for example what we end up doing in terms of spending between the quarters. But for Health Care, I would suggest the way you think about it is that directionally, we expect an increasing pattern of earnings in Health Care over the second half of the year. John Rex: I am looking back to last year, because you are not providing quarterly guidance anymore. I am looking back, you were roughly flat in third and fourth quarter in Health Care. And you would suggest that it s going to be a little more weighted towards fourth quarter this year than last year? That s correct. John Rex: OK. Thank you. Charles Boorady (Citi): Good morning. International is not something you probably get many questions on, but you spent a good deal of time at your Investor Day highlighting the prospects there; and it seems to have grown really nicely this quarter. I am wondering what countries are driving that growth and what you see as the three to five year potential, as it s now 16% of your company s profits. Ed Hanway: Charles, I am glad you noticed. Yes, I think we feel very good, as we said, about International. In terms of what is performing well, I would say there are two parts of that business, each of which is performing very well.