CIGNA CORPORATION FOURTH QUARTER 2007 INVESTOR TELECONFERENCE PHILADELPHIA, PA WEDNESDAY, FEBRUARY 6, 2008

Transcription

1 Page 1 CIGNA CORPORATION FOURTH QUARTER 2007 INVESTOR TELECONFERENCE PHILADELPHIA, PA WEDNESDAY, FEBRUARY 6, 2008 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, 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. Forward-looking 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 and 2008 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; 12. significant stock market declines, which could, among other things, result in increased pension expenses of CIGNA s pension plan in future periods and the recognition of additional pension obligations; 13. unfavorable claims experience related to workers compensation and personal accident exposures of the runoff reinsurance business, including losses attributable to the inability to recover claims from retrocessionaires;

3 Page 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; 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; 19. the ability of the parties to satisfy conditions to the closing of the Great-West transaction, including obtaining required regulatory approvals; 20. the ability to successfully integrate and operate the businesses being acquired from Great-West by, among other things, renewing insurance and administrative services contracts on competitive terms, retaining and growing membership, realizing revenue, expense and other synergies, successfully leveraging the information technology platform of the acquired businesses, and retaining key personnel; 21. the ability of CIGNA to execute its growth plans by successfully leveraging its capabilities and those of the business being acquired from Great-West to further enhance the combined organization s network access position, underwriting effectiveness, delivery of quality member and provider service, and increased penetration of its membership base with differentiated product offerings; and 22. any adverse effect to CIGNA's business or the business being acquired from Great-West due to uncertainty relating to the acquisition transactions. This list of important factors is not intended to be exhaustive. Other sections of CIGNA s 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, CIGNA's Forms 10-Q for the quarters ended March 31, 2007, June 30, 2007, and September 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, CIGNA VP 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 CEO; Mike Bell, CIGNA s Chief Financial Officer; David Cordani, President of CIGNA HealthCare and Jon Rubin of CIGNA HealthCare. In our remarks today, Ed Hanway will begin by discussing highlights of CIGNA s 2007 results. He will also make some comments regarding our growth prospects for Mike Bell will then review the financial details for 2007 and provide the financial outlook for David Cordani will discuss our medical membership results and outlook. He will also make comments regarding the evolving health care marketplace and the growth opportunities that it presents for CIGNA HealthCare. Ed will then conclude our prepared remarks by briefly commenting on how we expect to leverage CIGNA s strong competitive market position in each of our health services business to continue to create value for the benefit of both our customers and our shareholders. We will then open the lines for your questions. Now, as noted in our earnings release, CIGNA uses certain financial measures which are not determined in accordance with generally accepted accounting principles, 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 gains or charges as a principle 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. 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. Before turning the call over to Ed, I will cover one item pertaining to our financial reporting and disclosures for Regarding our disclosures, I note that in 2006 the Financial Accounting Standards Board issued Statement No. 157 entitled Fair Value Measurements, which clarifies the measurement of and expands disclosures regarding fair valuing of certain assets and liabilities. Statement 157 is effective January 1, 2008 and will affect results for our Guaranteed Minimum Income Benefits business, otherwise known as GMIB, which we report in our Run-off Reinsurance segment. This pronouncement will require CIGNA to fair value its GMIB assets and liabilities based on exit values, using current risk-free interest rates, volatility and other market assumptions. Historically we have used longer-term averages for our market assumptions. We believe that using an exit value approach to fair value the assets and liabilities of this business is a methodology that does not reflect the underlying economics of the GMIB business. In addition, an implementation of Statement 157 will have no impact on our subsidiary capital levels with the amount of free cash that we can dividend to the parents. Therefore, beginning with our first quarter 2008 statistical supplement, we will break out our GMIB results and exclude them from our definition of adjusted income from operations when discussing our results and outlook, which is similar to our current practice for both realized investment results and special items. If significant changes occur to what we consider to be underlying economics of the GMIB business, we will communicate this to you. We currently expect that the initial implementation of Statement 157 as of January 1, 2008 will result in an after-tax charge in the range of $125 million to $150 million. In addition, because future changes in the exit value of these assets and liabilities will be recorded net income, CIGNA s future results of the GMIB business will become more volatile. To illustrate this point, as of January 31 st, interest rates have declined and the S&P 500 is down approximately 6% relative to year end If we were to report results as of January 31 st, CIGNA would expect to record an after-tax loss of approximately $50 million for its GMIB business. Again, it is worth

5 Page 5 noting that we do not expect the GMIB loss that we will be reporting in first quarter to impact our ability to meet our 2008 subsidiary dividend estimates. Mike Bell will provide a capital management update in a few moments. To reiterate, CIGNA s earnings outlook for 2008, which Mike Bell will discuss in a few minutes, excludes the results of the GMIB business, and therefore any potential volatility related to the adoption of Statement 157. With that, I ll turn it over to Ed. Ed Hanway, CIGNA Chief Executive Officer: Thanks Ted. Good morning everyone. I m going to start today s call with a few brief comments on our full year 2007 results. I m then going to provide my perspective on our prospects for Mike will then review the 2007 results and provide the specifics of our 2008 outlook. And after that, David is going to comment on our medical membership results and review the 2008 membership outlook. He s also going to discuss how our consumer engagement capabilities, including our industry leading clinical resources and integrated offerings are helping us achieve success in the marketplace. These capabilities are positioning us well to achieve our long-term goal of becoming the leading health service company. In my closing remarks I will briefly comment on why we believe we are well-positioned to achieve our near term as well as our longer-term enterprise objectives. Full year 2007 adjusted income from operations was $1.14 billion, or $3.96 a share, and represented 26% earnings per share growth relative to In 2007 we successfully executed on several key HealthCare objectives. First, we grew our aggregate medical membership by 8%, inclusive of members acquired through the Sagamore acquisition. This includes organic membership growth of approximately 5% which was a very strong competitive result. Within this total we grew our experience-rated membership by 5% since first quarter of 2007 and we expect to continue this momentum into Second and very importantly, we maintained our pricing discipline and successfully executed our guaranteed cost pricing strategy to improve the profitability of our commercial risk book. Lastly we grew our specialty programs which are key to our value proposition. These programs create economic value in two ways: by increasing profit margins and by improving persistency. In November 2007, as you know, we signed a definitive agreement to purchase Great West s healthcare business. We re excited about this acquisition as it meets all of our acquisition criteria. This acquisition provides us with several near term benefits as well as longer-term growth opportunities by strengthening our middle market presence and by accelerating our growth in the small group segment. Our Group Disability and Life and International businesses delivered another year of strong results with competitively strong top-line growth as well as profit margins. Our Group Disability and Life business reported full year earnings of $248 million with premiums and fees growing year over year at an attractive rate of 13%. We are growing in Group based on our solid product and service capabilities, as well as our ability to provide value through integrated disability management. We have industry leading claims management and return to work outcomes in disability and this line of business generated strong premiums and fee growth of 18% in Our International business reported full year earnings of $174 million, representing earnings growth of 26% relative to This strong result was driven by 17% revenue growth and continued strong margins. Over 80% of International earnings are healthcare related and we continue to see growth in our life, accident and health businesses, particularly in Asia as the middle class in this region continues to expand and seek cost effective protection for their health and financial security.

6 Page 6 Overall both our Group and International operations have strong market positions with good growth opportunities. To reiterate, our full year 2007 consolidated results were strong and resulted in very attractive growth and earnings per share. Now, regarding our 2008 outlook, we expect medical membership to grow organically in 2008 by 2% to 5%. We are targeting a date of April 1 st to close the Great West healthcare acquisition, which will add new product capability and further grow our medical membership in key geographies. We expect HealthCare earnings to grow in a range of 9% to 15% versus 2007, excluding Great West healthcare acquisition, as we continue to leverage the strong competitive position we have built in the marketplace. We also expect continued good earnings and revenue growth in both our Group and International businesses. In total we have raised our full year 2008 earnings per share estimate to be in a range of $4.05 to $4.25, and that s based on a stronger outlook for our Group and International businesses. Overall we are pleased with our 2007 accomplishments and consolidated results, and we believe we are well positioned to leverage this success to achieve our 2008 earnings growth and membership goals. Now Mike s going to cover the specifics of the 2007 results and also review our 2008 outlook. Mike Bell, CIGNA Chief Financial Officer: Thanks, Ed. Good morning everyone. In my remarks today I ll review CIGNA s 2007 results and also discuss our outlook for full year In my review of 2007, consolidated and segment results, I ll comment on adjusted income from operations. This is income from continuing operations excluding realized investment results and special items. Our full year 2007 consolidated earnings were $1.14 billion, or $3.96 a share, compared to $1.06 billion, or $3.15 a share in This result reflected higher earnings in each of our ongoing businesses and in our other operations. Our full year EPS of $3.96 was at the upper end of our expected range in November of $3.80 to $4.00 per share. I ll now review each of the segment results beginning with HealthCare. Excluding prior year claim development, full year 2007 HealthCare earnings were $671 million, which is 9% higher than Our earnings growth primarily reflected effective execution of our guaranteed cost pricing actions and revenue increases due to aggregate membership growth and increased specialty penetration. As expected, earnings in our experience-rated book were lower than our full year 2006 results. We completed the year with a strong medical cost result. Full year medical cost trend for our total book of business was 6.9%. Relative to our expectations for the fourth quarter, HealthCare earnings were in the lower end of the range that we gave in November. This mainly reflected the fourth quarter $10 million after-tax impact of higher than expected medical costs in our experience-rated book. The quarter s result also included an after-tax charge of $4 million related to the CMS disease management pilot which we ve now exited. In addition there were other various puts and takes in the quarter, including some favorable tax items. For full year 2007, HealthCare membership was at 8% higher than at year end 2006, including 4.7% organic growth. This result included the impact of higher than expected account level disenrollment in the fourth quarter. Also in the fourth quarter, experience-rated membership grew sequentially while guaranteed cost membership declined. The latter reflects our focus on maintaining pricing discipline in an environment which continues to be very competitive. Our full year guaranteed cost Medical Loss Ratio (MLR) was 84.2% excluding favorable prior year claim development and excluding our voluntary business. This result was 160 basis points better than the comparable 2006 MLR, reflecting strong execution of our guaranteed cost renewal pricing actions. HealthCare premiums and fees for the year increased 9% versus 2006, driven by medical membership growth, rates increases, increased specialty penetration and growth in Medicare Part D.

7 Page 7 Relative to operating expenses, our results for the full year reflected productivity improvements partially offset by investments in our growth initiatives. Overall, excluding prior year claim development, our full year HealthCare earnings were 9% higher than in Now I will discuss the results in our other segments. Full year 2007 earnings in the Disability and Life segment were $248 million. These results continued to reflect our competitively strong disability margins, favorable life and accident results and effective operating expense management. In our International segment, full year 2007 earnings were $174 million, a 26% year-over-year increase. Earnings reflected competitively strong margins and growth in our life, accident and health and expatriate benefits businesses. Group and International continue to be important contributors to our consolidated results. Earnings in our remaining operations, including Run-off Reinsurance, Other Operations and Corporate were $42 million for the year. Run-off Reinsurance earned $45 million and consistent with my comments in November, this result reflected favorable items which we do not expect to recur. Before discussing our 2008 outlook, I ll comment briefly on our investment portfolio. Our investment management strategy is to maintain a high quality well-diversified portfolio. We are really proud of our investment management results. Our strong team of investment professionals is highly experienced. Our continued emphasis is in private placements and commercial mortgages where we have consistently added attractive value and diversification relative to public bond funds. As a result our investment portfolio is well diversified and our performance has been competitively very strong. Our investment assets totaled approximately $16 billion at year end 2007 and are invested primarily in bonds and commercial mortgage loans. We currently have no direct exposure to subprime loans and de minimis direct exposure to residential mortgages. As of year end 2007 our investments in commercial mortgages were approximately $3.3 billion or 20% of our overall investment portfolio. These mortgages were carefully underwritten and we ve consistently applied a very disciplined approach. Our current mortgage portfolio results are strong. All of our loans are fully performing. Said differently, none of our loans is currently 30 days delinquent. For the total commercial mortgage portfolio the loan to value ratio is approximately 62%. This means that our loans are well collateralized and that our borrowers have significant equity at stake in front of our mortgages. I will discuss our 2008 outlook. As Ted indicated, starting in first quarter 2008, we will exclude results on the Run-off Reinsurance GMIB business from adjusted income from operations, since we do not believe SFAS 157 accounting reflects the underlying economics. The estimates I provide will be on this basis and will also exclude any impacts from the Great West acquisition. For full year 2008 we currently expect full year consolidated adjusted income from operations to be in a range of $1.165 billion to $1.225 billion. This range is higher than our November estimates, mainly reflecting a more favorable outlook for our Group and International businesses. I ll discuss the components of our outlook, starting with HealthCare. We expect our medical membership to increase by approximately 2% in the first quarter and 2% to 5% for the full year We view this as a strong competitive result. This range is somewhat wider than estimates we ve provided in the past, reflecting uncertainties about the weakness in the economy and the guarantee cost competitive pricing environment. We expect virtually all of the first quarter member growth to be in ASO. We currently expect guaranteed cost membership to decline in 2008 as a result of our maintaining pricing and underwriting discipline in a competitive market. We do expect to organically grow our experience-rated book in first quarter and throughout the year.

8 Page 8 We currently expect medical cost trends for our total book of business to be in the range of 6.5% to 7.5% in We expect guaranteed cost pricing yields to exceed trend, and we estimate that the full year guaranteed cost MLR, excluding the voluntary business, will be approximately 83%. Our estimate for full year 2008 HealthCare earnings is a range of $740 million to $780 million, and this range is unchanged from our November estimates and equates to expected year over year earnings growth of 9% to 15%. Our expected earnings growth in 2008 reflects several key factors. First, we expect that revenue growth in our service business, including the impact of increased membership and higher penetration of our specialty products will deliver approximately $30 million to $60 million of additional after-tax earnings. Second, we expect guaranteed cost pricing actions in excess of medical trend to improve the MLR by approximately 120 basis points versus The impact of the improved MLR will be tempered by our projected decrease in guaranteed cost membership. We expect the net impact to be in the range of $25 million to $30 million increase in after-tax earnings. Third, we expect experience-rated earnings to increase by approximately $30 million to $35 million aftertax reflecting revenue growth and modestly higher margins relative to Fourth we expect to make significant investments in our segment expansion initiatives in the individual, small group and seniors markets. While diluted in 2008 by approximately $15 million after-tax, we expect these initiatives to be accretive to earnings starting in In total we expect 2008 HealthCare earnings to be in a range of $740 million to $780 million. Regarding earnings progression during 2008, we expect to see a significantly increasing pattern of earnings throughout the year as we execute our pricing actions and continue to grow our specialty businesses. We expect Medicare Part D results to be a loss in first quarter of 2008 followed by positive earnings later in the year. This is consistent with the pattern in Let s turn to the balance of our segments. We expect our remaining operations to contribute approximately $425 million to $445 million of earnings in We expect our Group Disability and Life and International business to continue to grow revenue while maintaining strong margins. Specifically we expect mid to single digit earnings growth in Group and double digit earnings growth in International. Earnings for the balance of our operations which include Run-off businesses and the parent company are expected to be lower year over year, mainly due to the absence of the 2007 non-recurring favorability in Run-off Reinsurance. As a reminder, our 2008 outlook excludes results on the GMIB book. Relative to our consolidated outlook, as is customary, our estimates for earnings and EPS assume no repurchase during 2008, and on this basis we estimate that our full year 2008 consolidated adjusted income from operations will be in a range of $1.165 billion to $1.225 billion, and EPS in a range of $4.05 to $4.25. Our 2008 EPS estimates represent a compound annual growth of 13% to 16% relative to In the balance of my remarks I ll provide updates on our pending acquisition of Great West s healthcare business and on our capital management outlook. With respect to Great West, we re targeting a closing date of April 1 st, and our expectations for the transaction remain in line with our discussion in late November. Of course they re subject to change as we complete integration planning and resolve the actual timing of the transaction close. In 2008 we continue to expect the transaction to be accretive relative to the full year EPS outlook of $4.05 to $4.25 which I just discussed. We continue to expect the transaction to be further accretive in 2009 and to be significantly accretive in 2010 and beyond.

9 Page 9 Overall we feel very good about this acquisition and expect to obtain business with strong strategic value on sound economic terms. I ll now comment on our capital management outlook. Our parent company capital position continues to be strong, and our subsidiaries remain well capitalized. I would note that we do not expect any change in our capital management outlook as a result of implementing the new accounting pronouncement for GMIB. There is no change to our expectations for 2008 subsidiary dividends or parent company free cash. 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 continues to be maintaining appropriate liquidity at the parent company and ensuring our subsidiaries remain adequately capitalized to support growth and maintain their credit ratings. In 2008 we will be focused on financing the Great West acquisition and restoring parent company cash to our long-term target of $250 million by the end of the year. Consistent with our previous discussions, the acquisition will require $1.5 billion in cash and $400 million of additional subsidiary surplus. We expect to finance the $1.5 billion of cash by using approximately $1 billion of cash at the parent and by issuing approximately $500 million of debt. We ended 2007 with cash and short-term investments at the parent of approximately $885 million. Before taking into account the acquisition, we expect to generate full year 2008 subsidiary dividends of approximately $900 million. This estimate reflects our expected 2008 consolidated earnings as well as the retention of needed capital in the subsidiaries to support their growth. Since we intend to retain approximately $400 million of surplus in the subsidiaries to support the Great West acquisition, we expect net subsidiary dividends for the full year 2008 to be approximately $500 million. At this point, excluding any additional M&A activity or any share repurchase, we expect other sources and uses of parent company cash to be essentially offsetting, that is, to net to zero. So consistent with these estimates, we expect to have the capacity to resume share repurchase or consider additional acquisitions during the fourth quarter of So to recap, our 2008 EPS estimate, assuming no further repurchase and excluding the impact of the Great West acquisition, is a range of $4.05 to $4.25. Our outlook for 2008 reflects attractive earnings growth in HealthCare and continued strong performance in our Group and International businesses. With that, I ll turn it over to David. David Cordani CIGNA HealthCare President: Thanks, Mike, and good morning everyone marked an important and successful year for CIGNA HealthCare. We generated both strong earnings and organic membership growth and delivered another year of industry leading clinical quality results. This was achieved with ongoing investments in our consumerism capabilities and segment expansion. In a very competitive marketplace we grew our share of the market in Additionally, our pending acquisition of Great West will provide us with an attractive set of capabilities to further our profitable growth. Today I m going to share with you our 2007 membership results, our 2008 outlook on membership growth and medical cost trends, and progress against our health care strategy, including an update on the Great West acquisition. My comments on our membership and medical cost trend outlook will exclude the impact of the Great West acquisition.

10 Page 10 Staring with membership, we had strong organic growth of 5%. The increasing competitiveness in the marketplace coupled with intense economic pressures for corporations make profitable organic growth challenging in our industry. Our response has been to keep hitting hard with our value proposition, which is built on integrated health advocacy programs that we deliver through our consultative sales teams. We have demonstrated and will remain committed to disciplined pricing execution. In January 2008, our renewals reflected strong persistency in the national and regional segments. We expect to have approximately 2% membership growth for the first quarter and 2% to 5% membership growth for the full year. In the fourth quarter we began to see the impact of the economic slowdown through higher existing case disenrollment and lower enrollment in new sales. We have widened our 2008 outlook to reflect the potential impact of ongoing economic slowdown and increased competitiveness of the guaranteed cost pricing environment. For 2008, approximately 70% of our full-year growth is expected to be ASO and the remainder, primarily in experience-rated and voluntary. We expect guaranteed cost membership to decline 2% to 4% for the full year with a loss of 5% to 7% for the first quarter. On the other hand, we did see good growth in experience-rated for the first quarter and expect to have solid growth for the full year. In 2007, our Consumer Driven Health Plan (CDHP) membership more than doubled to 580,000 members. The market sees differentiated value from CIGNA as we seek to deliver minimal cost shifting from our CDHP program. Rather, we deliver significant trend deflection by leveraging our health advocacy programs to improve health and thereby lower costs. For 2008 our CDHP membership is expected to increase to approximately 850,000 members. Turning to medical costs, as you know, competitive medical costs are a key foundational element of our strategy. Our total medical cost trend in 2007 was 7%. This is a strong competitive medical cost result, coupled with our industry-leading clinical quality, provides us with a strong foundation for products and services. These are increasingly recognized in the marketplace. In 2008, we expect medical costs to be in a range of 6.5% to 7.5%. In addition to competitive medical costs, our continued growth is driven by our consultative sales approach, our superior health advocacy programs and effective integration of our broad portfolio solutions. Our consultative sales process means deepening our knowledge of existing and prospective customers, by learning their business strategy and the health status of their employees. With that knowledge, we build our recommendations and solutions. We ve learned from customers in both the national and regional segments that we win when the customer is focused on total cost, when we offer integrated medical and specialty solutions and when we demonstrate the ability for ongoing partnership and deliver creative solutions. I ll now turn to my final topic, progress on our multi-year growth strategy. As we have discussed in the past, our strategy has three elements. The first is our Foundation, providing consistent reliable service at a competitive cost. The second is Differentiation. Our approach is to develop superior knowledge of the individuals we serve, use that knowledge to drive active participation of the individual in their health and then use that active participation to realize improvements in their health. And the third component is Market Expansion. Here, we continue to take share in the national and regional segments, while we seek to expand our strike zone into voluntary, individual, small employer and the seniors markets. Today, I will expand briefly on the second and third components, differentiation and market expansion, including the Great West acquisition. Relative to differentiation, we seek to truly engage individuals to actively participate in improving their health. This is a significant opportunity and one that should not be underestimated. Behavioral and lifestyle changes aren t easy for anyone. We have leading case

11 Page 11 management, health coaching and behavioral health solutions, with dedicated coaches and clinicians to make a difference in people s lives each and every day. From our point of view, healthy people are more productive people, and productive people have a better quality of life and a better quality of life lowers total cost of the employer and their employees. Expanding the delivery of these services is critical to ensure we can effectively reach and engage our members in the way that works best for them. This is important for those who are chronic and acute, as well as for those who are healthy and healthy at risk. This is where online coaching capability that we secured through our vielife acquisition comes into play. It expands our delivery capability to the web and provides real-time link to effective and proven health coaching. Another innovative way to deliver convenient health engagement is through online messaging. In December, we announced with RelayHealth that we are taking our four state pilot to a national level, to provide greater access to secure online messaging between our members and their doctors. This enables a concept known as virtual house calls. These are just two exciting examples of recent innovations by CIGNA HealthCare to effectively engage the individuals we serve. Now, I ll turn to market expansion, where my comments will focus on small group. Currently, we define small group as employers with under 200 employees. The total market here is approximately 55 million people; fully one-third of the entire employer sponsored segment. This segment is highly fragmented and since we are currently underrepresented in this segment, it represents a significant growth opportunity for CIGNA. Our pending acquisition of Great West Healthcare will be a tremendous accelerant to our small segment strategy, while also further strengthening our regional segment. Great West is highly complementary to our business. There are three main reasons we are excited about this purchase and see it as a meaningful part of our growth strategy. First, it strengthens our geographies for the national and regional segments. Second, it accelerates our small segment growth strategy. And third, it adds thousands of additional relationships for CIGNA to have the opportunity to cross-sell for additional programs and services. The acquisition will add approximately 1.5 million medical members in the employer segment and an additional 660,000 covered lives through TPA arrangements. As I ve said previously, we expect to create significant financial value from four key economic levers. First, by combining the capabilities of our two organizations, including our strong total medical cost position, we expect to stabilize then resume growth in Great West s membership. Second, we expect this strong total medical cost position will improve margins on the acquired book. Third, our measured approach to integration will achieve operating expense synergies, over time. And fourth, we will have the opportunity to cross-sell our specialty products and other offerings from our portfolio to Great West s current book of business. Together, this will provide more expansive choice for employers, enable superior clinical outcomes for members, provide consistent quality service and enable better management of overall medical costs. Now over the past couple months, I ve personally had the opportunity to meet with hundreds of Great West employees in a number of cities around the country. I continue to be impressed with the strength and passion of their people. They have built very strong market receptivity through their differentiated products, in large part, due to their outstanding service proposition for producers, their provider partners, employers and their members. We re looking forward to successfully completing the regulatory process and becoming one team that s committed to winning. I ll now move to wrap up my comments. Being the leading health service company means being the best and listening to, understanding and helping individuals improve their health. Simply put, success means that people are healthiest when they are supported by CIGNA. That is our objective. The definition of health must however be used in the broadest sense, which means much more than the absence of sickness. For some people, it extends to well-being and security. It can mean decreasing stress. It means increasing activity. It means the information people need most is easy to obtain and is

12 Page 12 helpful to them. We know that this focus improves productivity and quality of life and lowers cost for the employer, member and the system as a whole. Focusing on keeping people healthy is a very different ball game than merely paying claims when people are sick. It s the right thing to do in a societal sense and it s the right thing to do from a business perspective. It creates a sustainable business benefit for our customers and our shareholders; a business benefit that has the power to move healthcare from a global competitive disadvantage to a competitive advantage. As a health service company, we don t see a mature insurance market we see a promising growth market. One where we have the momentum and are leading the charge to improve the health of the individuals we serve. I am personally looking forward to continuing the momentum we ve build in 2007 into 2008 and beyond. We are positioned well to achieve membership and earnings growth that will be attractive by any standard. And with that, I ll turn it back to Ed for closing remarks. Ed Hanway, CIGNA Chief Executive Officer: Thanks, David. Before we take your questions, I want to underscore several points. First, our consolidated results for full year 2007 were strong and they reflect solid growth in HealthCare earnings, as well as significant contribution from our Disability and Life and International business. Second, our strong 2007 organic medical membership growth validates that our value proposition and capabilities related to the broad based consumer engagement are resonating well in the marketplace. Third, in 2008, we will be making significant investments in targeted market expansion, which we believe will lead to good growth opportunities and will help us to achieve our long-term mission of becoming the leading health service company. Finally, we are excited about the pending acquisition of the Great West healthcare business. Great West s products and distribution capabilities will accelerate our growth, particularly in the small group segment. As I ve spent time with many of the Great West people, I have been very impressed with their commitment to effective execution of the fundamentals of our business, and that s a commitment we at CIGNA clearly share. We are focused on completing an integration that truly leverages the strengths of both Great West and CIGNA for the benefit of our customers. I m confident this transaction will create meaningful value for our employees, our customers, our provider partners and our shareholders. Relative to 2008, we are very well-positioned to achieve our earnings and membership targets. Specifically, for our HealthCare business, we expect to leverage our strengthened competitive position to grow earnings in a range of 9% to 15% in We are confident we can continue to win, given our differentiated capabilities, including our consultative sales approach, our competitively superior clinical capabilities, and our breadth of integrated solutions. Our value proposition in both Disability and Life and the International operations will enable us to profitably grow these businesses, while at the same time maintaining their competitively superior margins. In summary, our prospects are attractive to grow our broad array of businesses on a sustained basis. Overall, we believe the investments we are making in market facing capabilities, including our segment expansions in 2008, will position us to achieve our long-term objective of growing earnings per share on a compounded annual basis of 12% to 15%. In closing, our consolidated 2007 results were strong and reflected competitively superior organic growth in each of our ongoing businesses. We expect to build on this momentum in 2008 and beyond. I m confident that CIGNA has solid market positions in each of our ongoing businesses and that we will leverage these positions to continue to create value to the benefit of our customers and shareholders.

13 Page 13 This concludes our prepared remarks, and we would now be glad to take your questions. Matthew Borsch (Goldman Sachs): I m wondering if we could start with some granularity on the pricing environment. I believe you talked about seeing some pricing pressure on the fee based business. And here, you focused a little bit more on the pressures on the guaranteed cost segment. Is there any sense you can give us for what markets or segments you re seeing that in? Is it coming generally more from the larger, public companies or the not-for-profit companies. And perhaps how has it changed relative to a year or two ago? David Cordani: Matthew, good morning, it s David. Based on your comment, you said that in a prior dialog we highlighted the fee based environment. If you look back over the last year plus, we have continued to identify the fact that the market environment, in general, has been competitive guaranteed cost, as well as the fee based environment. And we continue to see that somewhat accelerating. Regarding specific geographies, competitors, etc., I would not point toward any discrete geography or sub segment in the market place. By way of a few trends. Few trends that we continue to see are the broader coverages like experience-rated and ASO passing into smaller and smaller side segments. We believe that is putting some compression on the aggregate strike zone of the guaranteed cost environment. Two, we see more employers seeking what we look at as alternative funding solutions. We believe this plays to our strength as evidenced by our experience-rated membership in the third quarter and fourth quarters of 2007, as well as our expectations for first quarter We expect to see experience-rated membership growth throughout However, we do see the pricing environment as being competitive, and, as we articulated in our prepared remarks, very competitive. I would not highlight that it is for profit or not-for-profit competitors leading the charge. Mike? Matthew, the only piece that I would add is that the guaranteed cost environment is particularly tough in small group and lower end of the middle market. That is where we have seen increased pressure and, as a result, increased competitive pressure on our membership. David answered exactly right. The strength of the experience-rated results is one of the real bright lights, over the last three quarters, in terms of membership. We expect that to continue in 2008, which also reinforces our confidence in the Great West acquisition. Because Great West s sweet spot is bringing ASO and stop loss to those segments of the market. Therefore, we think with product differentiation we do not have to be in those segments of the market [swinging head to head / standing toe to toe] on a guaranteed cost basis. Matthew Borsch: That makes sense. You re doing well in growth in experience-rated. But, you did touch on somewhat higher than expected experience in the fourth quarter. And in that light, could you just update us on the outlook there? And also, I think you said at your investor day that 30% of your experience-rated business was in deficit? Has that figure changed? I will start with that last point first. We ended 2007 with 32% of the book in deficit. So, there is greater opportunity for deficit recovery in 2008 than there was at the end of third quarter 2007.

14 Page 14 To put some context around your question regarding the experience-rated business, the full year 2007 results for experience-rated were in line with our original earnings expectations. As we have discussed, the margins on this book are very strong. In fact, they are stronger than those for both the guaranteed cost and ASO businesses. Your point is correct the fourth quarter experience-rated underwriting margins were $10 million lower, after-tax, than our fourth quarter forecast, which essentially offset the favorability we had seen in margins for the first nine months of Fundamentally, the full year 2007 results are strong. The medical cost trends have been favorable. The premium yields were just north of 10% in So, we feel good about our underwriting and medical management. As we look forward to 2008, we expect to grow experience-rated membership approximately 5%, excluding any membership we may pick up as a result of the pending Great West acquisition. So, we expect to grow experience-rated membership 5% organically for the full year 2008, which is in line with what we saw in the last three quarters of Perhaps most importantly, we are well positioned at this point for additional earnings growth in As I said in my prepared remarks, we expect experience-rated earnings will increase $30 million to $35 million, after-tax, versus full year This increase is expected to come from a combination of low double-digit revenue growth in the experience-rated book, as well as $5 million to $10 million of after-tax margin expansion in So, again, we are feeling very good about our 2008 outlook. As we have discussed before, we view this as a win-win product for both our customers and us. And we are well positioned to grow both top line as well as bottom line results in 2008 in the experience-rated business. Matthew Borsch: Thank you. David Cordani: A quick add-on to Michael s points -- your question about 30% versus the current 32% of accounts in deficit. You may also recall from Investor Day that we said, historically when this business has run quite well, the accounts in deficit have been somewhere around 30%, which we view as a healthy book of business. Success is keeping it in that 30% range and keeping the deficits for any individual case from being too significant. Ongoing medical management and pricing execution help to deliver that result. And as Mike said, we are very excited about the 2008 growth and earnings contribution we expect from the experience-rated book. Matthew Borsch: Great. Thank you. Bill Georges (JP Morgan): Good morning. To follow-up on the experience-rated book, are there any other metrics that you can give us, so that we can try to follow this business as it develops through the year, in addition to this roughly 30% target for deficit, anything that would help us out to track the business?