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Executives

Ted Detrick - Vice President of IR

Ed Hanway - Chairman and CEO

David Cordani - President and COO

Mike Bell - EVP and CFO

Marcia Dall - Financial Officer of CIGNA Health Care

Analysts

Matthew Borsch - Goldman Sachs

Josh Raskin - Barclays Capital

Doug Simpson - Merrill Lynch

John Rex - JPMorgan

Justin Lake - UBS

Anu Gupta - Sanford Bernstein

Charles Boorady - Citigroup

Brian Wright - Banc of America Securities

Peter Costa - FTN Midwest Securities

Scott Fidel - Deutsche Bank

Greg Nersessian - Credit Suisse

CIGNA Corp. (CI) Q3 2008 Earnings Call October 30, 2008 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by for CIGNA's third quarter 2008 results review. At this time, all callers are in a listen-only mode. We will conduct a question-and-answer session later during the conference and review procedures on how to enter the queue and ask questions at that time. (Operator Instructions). As a reminder, ladies and gentlemen, this conference including the question-and-answer session is being recorded.

We will begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

Ted Detrick

Good morning, everyone, and thank you for joining today's call. I am Ted Detrick, Vice President of Investor Relations. We are speaking to you from our headquarters in Philadelphia, the home of the World Champion Philadelphia Phillies.

With me this morning are Ed Hanway, CIGNA's Chairman and CEO; David Cordani, our President and Chief Operating Officer; Mike Bell, CIGNA's Chief Financial Officer; and Marcia Dall, Financial Officer for the CIGNA Health Care business.

In our remarks today, Ed will begin by briefly commenting on CIGNA's third quarter result and the enterprise outlook for both 2008 and 2009. David Cordani will provide his perspective on the outlook for CIGNA's ongoing businesses and provide a current assessment of the health care marketplace. He will also comment on the integration status of our acquisition of Great-West Healthcare. Mike Bell will then review the financial details of the quarter and provide the financial outlook for full year 2008 and 2009. Ed will then make some concluding remarks and then, we will 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" as the principal measure of performance for CIGNA in our operating segments.

Adjusted income from operations is defined as income from continuing operations, excluding realized investment results, special items, and the results of our guaranteed minimum income benefit business and our 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 also 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 risks factors that could cause actual results to differ materially from our current expectations and those risk factors are discussed in today's earnings release.

Now, before turning the call over to Ed, I will cover a few items pertaining to our third quarter results and disclosures. In an effort to improve the quality and transparency regarding our investment asset disclosures, we have provided additional information about our bond and commercial mortgage portfolios in the third quarter's statistical supplement, which is posted in the Investor Relations section of Cigna.com.

These disclosures include the following: First, an analysis of our bond portfolio showing gross unrealized gains and loss positions, and concentrations by sector and asset type for both our corporate and government bondholdings.

We also provide a breakdown of the components of our private placement bond portfolio. We also provide a detailed analysis of our commercial mortgage loan portfolio by property type and geographic concentration, as well as detailed information about our estimated loan-to-value ratios and loan originations by year. Mike will make some comments about the quality and performance of our investment portfolio in a few minutes.

Now, regarding CIGNA's run-off businesses, the third quarter net income included after-tax losses of $61 million, or $0.22 per share related to the guaranteed minimum income benefits business otherwise known as GMIB, which is reported in the Run-off Reinsurance segment.

I remind you that CIGNA adopted Financial Accounting Standard number 157 in the first quarter of this year, which impacts the measurement of fair value for the assets and liabilities of our GMIB business. A portion of the third quarter GMIB also relate to the effects of fair value accounting under statement 157.

I would also remind you that the impact of statement 157 reporting on our GMIB results is for GAAP accounting purposes only and does not represent the actual economics or cash flows of the GMIB business.

Now, because of statement 157, CIGNA's future results for this business will become more volatile as any future change in the exit value of GMIB's assets and liabilities will be reported in net income.

Accordingly, CIGNA's 2008 and 2009 earnings outlook, which Mike will discuss in a few moments, excludes the results of the GMIB business and, therefore, any potential volatility related to the prospective application of this statement.

Mike will also provide an update on our capital management outlook, which will include the impact of economic losses in our Run-off Reinsurance business.

On a different matter, I note that management is evaluating a number of options for achieving additional operating expense reductions, which may result in a special item in the fourth quarter to reflect the potential impact of these cost reduction initiatives.

One last item. I would also remind you that CIGNA will be hosting its Annual Investor Day this year on November 21st in New York City. With that, I will turn it over to Ed.

Ed Hanway

Thanks, Ted. Good morning, everyone. Now as Ted noted, I am going to provide summary comments on the quarter as well as the '08 and '09 outlook. Then I would ask David to drill down on the pieces especially as it relates to health care.

Our third quarter consolidated adjusted income from operations was $246 million, or $0.89 a share. Our consolidated third quarter results reflect solid earnings contributions from each of our ongoing businesses; Health Care, Group Insurance, and International.

The results demonstrate the benefits of having a diversified portfolio particularly during periods of economic challenge. While our ongoing businesses had solid earnings, our Run-off Reinsurance results were adversely impacted by the capital market turmoil.

Regarding the full year 2008 outlook, we now expect 2008 earnings per share to be in the range of $3.40 to $3.50. This is lower than our previous range, primarily due to higher than expected Run-off Reinsurance losses. Mike is going to discuss in detail the Run-off Reinsurance result and outlook in a moment.

With regards to 2009, the challenging competitive and economic environment will collectively result in a much lower level of earnings growth for our ongoing businesses than we had previously expected.

We now expect 2009 earnings per share to be in the range of $4 to $4.30, excluding any provision for future VADBe losses, which cannot be reasonably estimated. We now expect full year 2009 Health Care membership to decline by approximately 2%.

We are clearly not satisfied with our outlook for 2009 for our ongoing businesses, but we view it as realistic given the current competitive and economic environment, including rising levels of unemployment which we anticipate will impact Health Care membership.

Our 2009 earnings per share growth is not consistent with our long-term goals and also not fully reflective of our capabilities. While our Great-West acquisition is providing good earnings growth, our core Health Care earnings are lower than previously expected due to expected membership declines that disproportionately impact our higher margin businesses.

Given this membership decline, our current expense levels are too high and exert further pressure on earnings for 2009. We are conducting a comprehensive review of all earnings levers to improve our health care results, with a particular emphasis on reducing operating expenses.

By establishing and executing on a plan to improve our Health Care earnings, we are committed to creating greater value to the benefits of our customers and shareholders.

With that, I am going to turn it over to David, who is going to cover in detail the outlook for our ongoing business. David?

David Cordani

Thanks, Ed, and good morning, everyone. The environment continues to be challenging for our customers, our competitors and for CIGNA. Despite the economic and competitive landscape, CIGNA's ongoing businesses remain well-positioned and we are addressing our short-term challenges while continuing to strategically build for sustainable, profitable growth.

Today I am going to share some perspective on our third quarter results for Health Care, Group and International businesses, including a view of the current environments that we are operating in. I will also provide an overview of our 2009 outlook for each business and provide a brief update on the integration of Great-West Healthcare.

We will share a more detailed view of our long-term growth strategy at our Investor Day meeting on November 21st. Now there is no doubt that the marketplace has changed considerably in the last few months. Additionally, the employer benefits marketplace remains competitive especially for guarantee costs and experienced-rated products. Through these challenging times, we remain focused on four key components of our strategy.

First, we will continue to deliver service excellence. Second, we will maintain and in some lines expand our margins through our pricing discipline. Third, we will continue our approach to health, as we believe keeping people healthy is the only sustainable way to deal with escalating costs. Fourth, we will invest in our people and our technology, which are both required, to build success in the future.

Specific to technology, these capabilities will lead to greater efficiencies and additional market-facing capabilities that will continue to differentiate CIGNA. Before I turn to each of our operating businesses, it is important to recognize the strength of our diversified earnings streams, which provide us with opportunities to grow profitably despite these challenging economic conditions.

Let me begin with a view of Health Care. On a year-to-date basis, Health Care earnings were $506 million. Third-quarter Health Care earnings improved as we maintained our focus on managing operating expenses, while investing in key strategic initiatives. We generated strong contributions from our specialty businesses, which were tempered by pressure on the guarantee cost medical loss ratio.

Excluding Great-West, medical membership through the end of the third quarter was essentially flat with year end 2007, reflecting the impact of lower new sales as well as higher dis-enrollments. We currently expect our membership excluding Great-West to end the year approximately 1% below year end 2007.

Looking forward, our earnings projection for the full year 2008 is $690 million to $710 million. This is below our previous estimate and reflects our current assessment of membership levels; the current outlook for our guaranteed cost medical loss ratio and higher litigation expenses. As we look to 2009, we expect our medical memberships including the Great-West book of business to decline approximately 2% from year end 2008.

Let me give you some additional color on the drivers. International segment, defined as commercial employer groups with greater than 5000 employees, we are projecting slightly higher new sales through January 2009 than we saw in January of 2008. Our new sales growth in International segment indicates that our value proposition remains attractive in this very competitive market space.

Our retention rates on existing business are at the low end of our historical range driven in part by the loss of a large, low margin auto-related retiree group. Additionally in group attrition is somewhat higher reflecting declines in employment levels. In our Regional segment, the upper ends of the market that is more oriented to ASO products continues to grow reinforcing the continued success of our products and programs.

However, we are anticipating a decline in the lower end of the segment that is more concentrated in guarantee costs and experienced-rated products reflecting the impacts of maintaining our pricing disciplines. The result changes the mix of our portfolio which reduces our 2009 earnings growth potential due to our increased concentration in lower risk and therefore lower margin service business.

As we look beyond January, we expect to expand our membership in the individual and small group segment through phase launches in markets. We began our first launch in third quarter of this year and we will continue with phase launches into 2009. We do expect Health Care earnings growth in aggregate in 2009 driven by Great-West, which offsets the decline in the balance of our book.

Our Health Care earnings outlook for 2009 is $710 million to $790 million. This is lower than prior expectations due to five major factors. First, the lower overall membership outlook; within that, second, a disproportionately larger decline in higher margin guarantee costs and experience-rated membership in 2008 along with projected further declines in 2009. This is largely due to the lower new sales outlook tied to the very competitive market conditions.

Third relatively flat earnings from our specialty business, as a result of lower sales to new and existing customers due to economic pressures. Fourth, we are expecting flat operating expenses on a dollar basis excluding Great-West coupled with a 2% decline in membership, which is causing our operating expenses per member to be higher. This reflects continued investments in our technology.

Our investment is in the form of expanding the breadth and depth of our people as well as specific capabilities to drive operating efficiencies and to strengthen our infrastructure. Fifth, we anticipate the competitive landscape and outlook for unemployment will remain challenging in 2009.

Now, we are projecting our guaranteed cost medical loss ratio to improve modestly in 2008 reflecting renewal pricing increases above medical cost trends. We are projecting that medical cost trends will increase approximately 50 basis points in 2009 to a range of 7% to 8%.

Lastly, we do expect improvements in our experience-rated margins in 2009, but this improvement will be offset by expected membership declines and will result in roughly flat experience-rated earnings. Specifically to Great-West, we expect approximately $100 million of additional earnings in 2009. The Great-West earnings growth remains attractive. This is at the lower end of the previously communicated range due to membership being somewhat lower and higher than expected IT transitional and integration costs.

We are on track to successfully integrate Great-West Healthcare book of business. We are focused on preserving and ultimately growing the book on integrating provider networks and clinical programs as well as key aspects of the infrastructure, and as we have noted in the past, we expect to retain and build on the strength of the Great-West organization.

We recognize that the 2009 outlook is disappointing. As such, we remain committed to improving our earnings. As Ed noted, we are reviewing all of our profit levers with an emphasis on reducing operating expenses.

Now I would like to shift gears and spend a few minutes on our Group Insurance and International businesses. Both businesses will deliver top line and bottom line growth again in 2008. Each business has a strong leadership team and benefits from a very good competitive position, whether that is in disability, life and accident or expatriate benefits in individual health and life products.

Our Group Insurance business remained strong despite the challenging economies. In the first nine months of 2008, our Group business reported earnings of $211 million, reflecting the 10% year-over-year increase.

Premiums and fees grew year-over-year at an attractive rate with competitively strong margins. We expect to maintain our strong market position while driving earnings growth in the low-single digit range in 2009 as we balance top line growth with our need to continue to invest in technology.

Our International business remained strong with sustained top line and bottom line growth. Our International business has reported year-to-date earnings of $144 million, an increase of 12% compared to the first nine months of 2007.

Excluding the impact of foreign exchange, we achieved double-digit earnings in the first nine months of 2008 compared to the prior year, reflecting strong growth in supplemental health, life, accident, and our expatriate businesses.

In the past, the impact of foreign exchange has had a nominal impact on our reported earnings. However, due to the very unfavorable foreign currency movements in South Korea, CIGNA's largest non-U.S. based market will spike out the impact of foreign exchange movement on our reported earnings.

The underlying fundamental performance of our International business remains strong. As such, we remain committed to further expanding our footprint. This includes continuing to build on our success in China and exploring additional growth possibilities in India and the Middle East.

For 2009, we expect earnings growth in our International business in the mid-teens excluding the impact of foreign exchange. We expect to see good top line growth in our expatriate business and our life, accident, and health businesses despite increasing competitive pressures.

Although, the economic environment and competitive marketplace has changed dramatically overall in the last quarter, our ongoing operations remain well-positioned with strong service delivery, stable margins and sustainable long-term growth prospects.

As I noted, we will be taking additional actions to improve the probability of our health care book of business in 2009. First, we will intensify our focus on growing our guaranteed costs and experienced-rated books of business, while balancing our pricing and underwriting disciplines; second, we will reduce our operating expenses by identifying additional efficiencies in operations, infrastructure such as real estate, and fast and non-customer facing roles; third, we will further invest in total medical cost improvements; and fourth, we will intensify our efforts to increase intra-year specialty product penetration with particular emphasis on our ASO products.

With that, I will turn it over to Mike, who will go into more detail of our third quarter results and our 2008 and 2009 outlook. Mike?

Mike Bell

Thanks, David. Good morning, everyone. In my remarks today, I will review CIGNA's third quarter 2008 results and I will also discuss our outlook for the balance of this year and for full year 2009.

In my review of consolidated and segment results, I will comment on adjusted income from operations versus income from continuing operations, excluding realized investment results, GMIB results and special items. This is also on the basis on which I will provide our earnings outlook.

Our third quarter earnings were $246 million, or $0.89 a share, compared to $321 million, or $1.13 a share in 2007. Third quarter results for our ongoing businesses were strong, while results for our Run-off Reinsurance business emerged unfavorably. Based on market results in October, we expect that this trend for the run-off business will likely continue into the fourth quarter.

I will review each of the segment results beginning with Health Care. Third quarter Health Care earnings were $187 million. The third quarter results included strong contributions from our specialty businesses and sequential improvement in both the guaranteed cost MLR and experience-rated earnings. Third quarter results also reflect the continued focus on managing operating expenses while increasing investments in key initiatives.

Now to discuss our Health Care results by major components. Guaranteed cost earnings improved sequentially mainly reflecting an improved MLR due to higher renewal rate increases. Our guaranteed cost MLR for the third quarter improved to 83.8% excluding our voluntary business.

Although, the improvement was less than we expected, the third quarter MLR reflected good progress on our renewal rate actions, partially offset by a higher level of benefit buy-downs. Medical cost trend for the first nine months of the year on a guaranteed cost book was approximately 7.5%, modestly higher than we had expected.

Our experience-rated results also improved sequentially, driven by strong underwriting execution. The MLR for the experienced-rated books improved by 440 basis points versus second quarter, which contributed approximately $15 million after-tax in sequential earnings growth.

Third quarter ASO earnings were lower sequentially due to higher operating expenses. Operating expenses in the third quarter included the absence of favorable items in second quarter and increased spending in targeted investment areas including technology.

Great-West contributed $13 million of after-tax earnings in the quarter, excluding financing costs, which were reported in the corporate segment. The third quarter result includes a $12 million after-tax impact of transition and integration expenses. Now, as a reminder, beginning in 2009, we will no longer report Great-West results separately as we will view this as an integrated operation embedded within our Health Care results.

Our medical membership including Great-West was 11.9 million members as of September 30th. Excluding Great-West, membership was essentially flat with year end 2007. During the third quarter, our guarantee cost membership declined by 5% and our experience-rated membership declined by 2%.

Our membership result reflects our continued focus on maintaining pricing discipline as well as the impact of higher dis-enrollment. Health Care Premiums and Fees increased 13% relative to the third quarter of 2007 primarily due to the acquisition of Great-West Healthcare.

Now, I will discuss the results of our other segments. Third quarter 2008 earnings in our Group Disability and Life segment were $70 million. This result includes a $5 million favorable impact from reserve studies. Earnings in the quarter primarily reflected revenue growth and competitively strong margins.

In our International segment, third quarter 2008 earnings of $44 million represented revenue growth and strong margins in both the life accident and supplemental health and expatriate benefits businesses. The results also include a $3 million unfavorable after-tax impact from foreign currency movements in South Korea, CIGNA's largest non- U.S. market. So, our Group and International businesses continue to be important contributors to our consolidated results.

Earnings for our remaining operations including Run-off Reinsurance, Other Operations, and Corporate will incur loss of $55 million for the quarter. This includes an after-tax charge of $72 million related to our variable annuity death benefit or VADBe product. The VADBe charge is primarily market related driven by a variety of factors including the unfavorable market returns and increased volatility in the third quarter.

I would remind you that our VADBe results have been close to breakeven for the last five years. I would also point out that there has been continued market turbulence since September 30th. We estimate that if fourth quarter had ended on October 28th, we would expect to incur additional losses in the fourth quarter of approximately $125 million after-tax related to VADBe.

We have assumed that the third quarter and October results reflect an unusual level of negative market returns and higher volatility, which we do not expect to continue. We have included the estimated $125 million after-tax loss in our fourth quarter estimates. Actual fourth quarter results could differ materially from these expectations.

I will now comment on our investment portfolio and results. As we have discussed previously, our investment strategy is to maintain a high quality, well-diversified portfolio. We have a dedicated, experienced investment management team that has historically produced competitively strong returns in both stable and challenging market conditions.

In 2008, our investment portfolio continues to perform well. Year-to-date, our net realized investment losses have totaled $18 million after-tax. Now in the quarter, our realized investment losses of $55 million after-tax were mostly offset by realized gains of $40 million on the sale of a commercial real estate partnership.

Now as Ted noted, we have expanded our disclosures regarding our investment portfolio. I will now add a few key highlights. First, we continue to have no direct exposure to sub prime ALT-A loans, credit default swaps or auction rate securities and we have no material exposure to residential mortgages.

Our current commercial mortgage portfolio of $3.6 billion is strong reflecting our consistent disciplined approach to underwriting. All of our loans in this commercial mortgage portfolio are fully performing consistent with prior quarters.

Then we estimate that our average current loan-to-value ratio for our commercial mortgages, as of September 30th was 64% and therefore our borrowers have a strong economic incentive to make good on their loans.

Now as shown in the additional exhibits, the substantial majority of the mortgages were originated before 2007. So overall, we continue to be pleased with our investment management results relative to the current market conditions.

Now I will review the earnings outlook for full year 2008. For full year 2008, we currently expect consolidated adjusted income from operations of $950 million to $980 million. While we expect continued solid earnings from our ongoing businesses in the fourth quarter, this updated full year range is lower than the estimates, we provided in August primarily due to the third quarter charge and fourth quarter outlook for run-off VADBe book.

Now, I will discuss the components starting with Health Care. We currently expect full year 2008 Health Care earnings in a range of $690 million to $710 million. This range is approximately $15 million lower than our estimated second quarter, primarily reflecting a lower membership outlook, higher litigation-related expenses, and a higher guarantee cost MLR, which I will discuss in a minute.

In addition, the full year range includes a contribution of approximately $50 million from Great-West and the latter is consistent with our estimate in second quarter and excludes the financing costs in Corporate. We currently expect our medical membership excluding Great-West to end the year down approximately 1% versus year end 2007 and this membership outlook is below our previous estimates.

In addition, we currently expect Great-West membership to decline by approximately 80,000 over the balance of this year with the majority of the decline coming from our lower margins TPA business.

We continue to 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 2008. We now estimate that the full year guaranteed cost MLR excluding the voluntary business will be approximately 84%.

Lastly, I would note that we are evaluating a number of options for driving additional operating expense reductions, which may result in a special item in the fourth quarter to reflect the potential impact of these cost reduction initiatives.

At this point, our preliminary estimate is that this type of special item charge would not exceed $15 million after-tax. This potential charge is not included in our current 2008 earnings estimates.

Now, I will discuss the balance of our segments. We expect our remaining operations to contribute approximately $260 million and $270 million of earnings for the full year 2008. Specifically, we expect our Group Disability and Life and International businesses to continue to grow revenue while maintaining strong margins.

We expect mid-single digit earnings growth in Group and double-digit earnings growth in International for the full year 2008. Our current expectations for International's fourth-quarter earnings include an unfavorable impact of the South Korean Won exchange rate.

Now, earnings for the balance of our operations are expected to be significantly lower than previously estimated as a result of the VADBe third quarter reserve charge and our current best estimate of the fourth quarter charge of approximately $125 million based on market conditions at the close of business on October 28th.

So, we currently estimate that our full year 2008 consolidated adjusted income from operations will now be in a range of $950 million to $980 million and that EPS will now be in a range of $3.40 to $3.50 a share. Our EPS expectations assume no additional share repurchase.

Now, I will review the earnings outlook for full year 2009. Given the challenging competitive and the economic environments, we currently expect that 2009 and earnings for our ongoing businesses will be lower than our prior expectations.

For full year 2009, we expect consolidated earnings to be in a range of $1.09 billion to $1.18 billion and EPS in a range of $4 to $4.30 a share excluding any provision for future VADBe losses.

We believe the VADBe assumption to the appropriate based on the underlying assumption supporting our reserve levels for this business, along with an expected return to more normal market conditions. Actual 2009 VADBe results could differ materially from these expectations.

Now, I will discuss the components of the 2009 outlook, starting with Health Care. Health Care earnings including Great-West are expected to be in a range of $710 million to $790 million, representing growth of 3% to 11% versus 2008.

Now, I will highlight the drivers of the expected Health Care results. We currently expect medical membership to decline by approximately 2% for the full year 2009 including Great-West. Specifically, we currently expect an 8% decline in both guaranteed cost and experience-rated membership.

Further, while we expect Great-West membership to decline in 2009, we also expect service membership excluding Great-West to be approximately flat with year end 2008. Relative to our guaranteed cost book, we currently expect flat year-over-year earnings in 2009.

Specifically, we expect to achieve price increases to drive approximately 50 basis points of improvement in the loss ratio, which would result in a full year 2009 MLR of approximately 83% to 84%.

This improvement is expected to be offset by lower guaranteed cost membership. These MLR estimates exclude the impact of the individual and small group segment expansion, which I will discuss shortly.

Turning to medical cost trend; we expect trend on our total book of business to be in the range of 7% to 8% in 2009, or up approximately 50 basis points versus full year 2008.

Now with respect to the segment expansions, we now expect the individual, small group and senior segments to be approximately breakeven in 2009 relative to an estimated $20 million after-tax loss in 2008.

Regarding our experience-rated book, while we expect margin improvement in 2009 relative to 2008, we now expect it to be less than had previously targeted, reflecting tougher competitive and economic conditions.

Overall, we expect that improved experience-rated margins coupled with lower experience-rated membership will result in relatively flat experience-rated earnings in 2009 versus 2008. Great-West earnings accretion is expected to be significant in 2009, but at the lower end of our previously communicated range.

We now expect 2009 earnings of a $140 million to $160 million after-tax excluding financing costs and this represents an increase of $90 million to a $110 million over 2008. This estimated range includes an expected significant improvement in margins, partially offset by a decline in membership.

We expect that specialty earnings from ASO members will be approximately flat with 2008. While we will continue to focus on managing operating expenses, we will continue to increase investments in key initiatives.

Overall, we anticipate a level of spend in 2009 that will also put pressure on ASO earnings. So, all in, we expect ASO earnings excluding Great-West to be down approximately $40 million to $60 million after-tax year-over-year.

Now in addition, we expect lower Medicare Part D results and other various items to reduce earnings by approximately $20 million after-tax in 2009.

Turning now to our other segments; we expect to grow Group Disability and Life earnings by low-single digits in 2009, driven by revenue growth with some expected pressure on margins. International earnings are expected to grow by high-single digits in 2009 driven by strong revenue growth and margins partially offset by an expected negative impact in the exchange rate in South Korea.

Specifically, we have bundled an exchange rate of approximately 1200 Won per dollar. Since the rate continues to fluctuate, we expect to provide additional updates in the future. So all in, we expect 2009 EPS to be in the range of $4 to $4.70 a share.

Now the underlying earnings drivers for our ongoing businesses reflected in our current 2008 and 2009 EPS outlook are not consistent with the assumptions supporting our 12% to 15% long term EPS growth goal. Given the current and anticipated environment, we do not expect to achieve this level of EPS growth from our ongoing businesses in the near term.

I would now like to discuss the impact of the current financial market conditions and I will first discuss our capital position and then our parent company liquidity. Overall, while there are near term challenges in the financial markets and our earnings outlook is now lower for 2008, 2009, we believe that we have a range of options to deal with the current pressure.

In view of current conditions, we do not anticipate any share repurchase in the near term and I will expand on the range of options in a minute. First, let me provide some context regarding our approach to capital management. We manage our operating subsidiaries to target capitalization levels well in excess of minimum regulatory requirements.

We have benchmark capital targets that we review with the rating agencies that address our specific business mix and Run-Off Reinsurance exposures. Based on recent market developments and the revised 2000 outlook for reinsurance and health care, we expect to end 2008 below our long term targets, but still well in excess of regulatory minimums.

During 2009, we expect to limit our subsidiary dividends to increase our capitalization level back towards our long term targets. Specifically, while there are a number of variables that could impact year end capital, I currently expect that our capital position may entail retaining approximately $400 billion to $500 billion more in earnings in the operating companies in 2009 relative to what we have historically targeted.

As a result, based on our revised 2009 outlook and providing for the potential for additional investment managements credit impairments in 2009, we currently expect 2009 dividend payments to the parent from our operating subsidiaries to be approximately $350 million.

While this is our current estimate based upon recent market conditions, it is obviously subject to change in the future and the key is that we expect that this lower level of dividends would enable us to increase our subsidiary capitalization levels by the end of 2009. So overall, despite the recent market turmoil, our current operating company capitalization remained strong and well in excess of minimum regulatory requirements.

Now, I will turn to the second topic, parent company liquidity. We ended third quarter 2008 with cash and short term investments at the parent of approximately $130 million and commercial paper borrowing of approximately $315 million. I would also note that we have continued to have access to the commercial paper markets in October.

So, starting with our parent company cash balance of $130 million at September 30th, we expect other net uses of $90 million during the fourth quarter including $30 million of share repurchase, which was completed in October reducing our parent company cash position to approximately $40 million at year end.

Now, we would normally target a higher level of parent company cash and we have several potential options for increasing our parent cash balance by year end 2008. First, as we have discussed previously, if market conditions permit, we may issue long term debt to meet part or of this target.

Second, we may increase our commercial paper outstanding. Otherwise, potential actions could include utilizing our bank credit facility or temporarily borrowing from subsidiary operating companies to meet the parent company needs.

Now turning to 2009 parent company cash, our next long-term debt maturity is scheduled in 2011. So, we do not have any long term debt obligations maturing during 2009. External obligations including net interest expense and shareholder dividends are expected to be approximately $200 million in 2009.

As noted earlier, we expect subsidiary dividend payments to the parent of approximately $350 million next year. So, all other sources and uses of cash at the parent company other than pension plan funding requirements, which I will discuss shortly, are currently expected to be approximately zero. So, before considering pension plan funding requirements, our net parent company cash sources in 2009 are expected to be approximately $150 million.

Now relative to the funding of our pension plan, based on the current Pension Protection Act guidelines, we may make contributions to the plan in 2009. Based on the current equity market and the assumption that we restore our pension plan to the currently targeted funding levels, the funding need would be significant given the impact of the decline in equity markets on our pension assets.

Based upon the current equity market and assuming that we restored our plan to the currently targeted funding levels, we would expect that the net parent company cash outflow to the pension plan of approximately $600 million after-tax in 2009.

This estimated impact is still subject to revision based on a wide range of factors including equity markets and interest rate changes between now and year end 2008, as well as our decisions around targeted funding levels, which could be impacted by any regulatory changes.

Now to address pension funding in 2009, our options include the following: First, we could increase our parent company debt. Absent that, we could utilize our credit facility or consider temporarily borrowing from the subsidiaries.

In addition, we could defer some or all of the planned increase in subsidiary capitalization into 2010 or we could elect to fund our pension plan at a lower level in 2009. We also recognize that our overall financial leverage will depend upon the mix of actions that we elect to take in order to meet our parent company funding needs.

At this point, under most scenarios, we anticipate debt-to-capital leverage to be in a range of 30% to 35% based on the debt-to-capital calculations as defined in our bank credit facility covenants. This is above our targeted range of 20% to 30%, but lower than the maximum leverage of 40%, which is allowed by the credit facility.

In 2009, while again subject to the mix of options that we choose to implement, we plan to reduce financial leverage back below 30%. So, overall, while there are near term challenges to our capital and liquidity position, we believe that we have the financial flexibility to deal with the current conditions.

So to recap, our third quarter results for our ongoing businesses were strong. Consolidated results were lower sequentially due to the unfavorable results at Run-Off Reinsurance. We currently have financial flexibility to deal with the current conditions and our investment management results continue to be competitively attractive.

With that, I will turn it back to Ed.

Ed Hanway

Thanks, Mike. Before we take your questions, I want to conclude on three key points. First, our three ongoing businesses: Health Care, Group Insurance and International are well-positioned to provide value to customers and investors in these very challenging times. Our products, customer service levels and consumer engagement and information capabilities are all recognized as competitively strong.

Second, our Health Care earnings growth in 2009 is lower than we had expected. Competitive and economic pressures we face are significant. However, given our capabilities, we are committed to improving performance. We continue to review all earnings leverage to improve our Health Care results with a particular emphasis on reducing operating expenses.

Third, our capital position is currently solid. We expect to have the financial flexibility to deal with these difficult capital markets. In addition, our investment portfolio is of high quality and very well-managed. Assuming more stable capital markets going forward, we also have programs in place to substantially manage our Run-Off Reinsurance exposure.

Now in summary, while we are not satisfied with our 2009 outlook, we feel it is prudent one given our environment and we are committed to improving upon it and creating greater value for our shareholders.

With that, Ted, I think we will go to the phones and take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Matthew Borsch of Goldman Sachs.

Matthew Borsch - Goldman Sachs

Please give us a little bit more of your thinking on the pension funding for next year. In particular, what are the factors around which you would have flexibility to fund the pension plan at a lower level? You mentioned that as a potential option. I'm just not clear on what would go into either your ability to do that, vis-à-vis the regulations or your decision to do that if you can.

Mike Bell

First, overall, we have a range of options that we'll be looking at here for 2009. Specific to your question, we believe that the true current minimum requirements would entail on a net basis over the full year 2009, apparent to on a net after-tax basis to contribute approximately a $100 million after-tax to the pension plan. That obviously assumes the current financial market levels.

Now, that's obviously significantly less. That $100 million, which we believe to be the true current minimum requirement, is much less than the $600 million net after-tax item that I mentioned in my prepared remarks.

The $600 million after-tax would, in fact, follow your nose what we've done historically. Again, we're in the process really of evaluating our options. We'll evaluate any regulatory changes that come out of Washington, where markets end up at year end. Based on a consideration of options, we'll likely provide you an update in the future.

Matthew Borsch - Goldman Sachs

Sorry, but if I could just ask a follow-up, and this is on a different topic. Maybe I got this wrong, but it sounds to me like your language around the health care competitive environment would indicate that maybe relative to how you saw things last quarter, you're seeing the competitive intensity is a little bit greater going into next year than you did last quarter or do I have that wrong?

Mike Bell

I think that's fair, Matt. David, do you want to add?

David Cordani

We've continued, to flag the marketplace as being competitive and very competitive. As we've highlighted, where it's most pronounced is in the guaranteed cost, which is in the lower end of the buying segment and then it shows up in the experience-rated book of business, which is high end to small segment, low end to middle market. I would say we see it continuing. We don't see a pronounced firming up in the marketplace and we think it's premature to call that.

Operator We will go next to Josh Raskin of Barclays Capital.

Josh Raskin - Barclays Capital

First question I guess, how do we think about sort of the decline in Health Care earnings excluding Great-West, you mentioned that that's due to economic and competitive pressures. How much of this is sort of economically related? Is that just an assumption of a continued worsening of the unemployment or how are you thinking about that?

Mike Bell

I think it's fair to say that both the competitive conditions as well as the economic conditions are worse than what we had anticipated three months ago and are contributing to the lower outlook here for Health Care for 2009 actually from both Great-West as well as the legacy operations.

Specifically that entails obviously a lower membership expectation for full year 2009. We are now estimating a 2% decline over the full year, which is obviously worse than what we had anticipated three months ago. But as David described a disproportionate impact on our highest margin product, so that combination is reflected in our current estimate for 2009. David, do you want to add?

David Cordani

Good morning Josh. Just to reinforce, as we commented in the prepared remarks. So point one with the membership being down although our total operating expense is ex-Great-West are flat in an environment like that, we are seeing negative earnings pressure from that relationship of the flat operating expenses per membership.

Secondly, it's the guaranteed cost, the compound, in fact that the guaranteed cost and experience-rated downtick in volume in 2008 and 2009. I would contrast that with the comments I made in my prepared remarks. Looking at the ASO business for national accounts, our 1/1/2009 ASO sales were actually higher in 2009 than they were in 2008 in the higher end of the middle market buying segment. So, that 2000 to 5000 (inaudible) who typically buys ASO. Generally speaking our book is performing reasonably well even in those conditions.

Ed Hanway

Josh, the only other thing I would add to that is within the guarantee cost and the experience-rated book, as Mike commented, we are actually seeing some modest margin improvement there. Now as a practical matter, the earnings in aggregate are not growing because we are expecting to see some continued pressure in medical membership there.

But that's a conscious decision and I think it's reflective of the discipline we've had around the pricing and underwriting actions that we've taken and that we continue to believe is the right strategy.

Josh Raskin - Barclays Capital

Got it. And then just a follow-up on that membership, 2% decline, is that including all in Great-West? And if not, what's the Great-West expectation?

David Cordani

Good. Josh, its David. It is all in. So for 2009, our numbers are on all-in basis. The way to think about the 2% just at a macro level, you can think about the ASO portfolio for CIGNA it's being about flat. It's up a tad. As we noted the experience-rated and guarantee costs are down and then ASO memberships, specific to Great-West is down as we anticipated kicking into 2009. But the 2% is in on an all-in basis, that's correct.

Josh Raskin - Barclays Capital

Okay. Last question, this is maybe for Mike. What is the incremental pension expense that you guys are incorporating into the '09 guidance versus what you've experienced in '08?

Mike Bell

Sure, Josh. At this point, we do not expect higher GAAP expenses for the pension plan in 2009 than what we experienced here in 2008. The reason for that is a few fold. First, interest rates currently are higher than our current discount rate for GAAP purposes. Now, obviously, that's subject to change between now and year end, but currently interest rates are higher.

At the same time, for investment returns, we elect to spread the difference between the actual investment returns and our investment return assumptions over a period of something like five years. Those two things coupled with the fact that we are currently assuming in our earnings plan for 2009 that, in fact, we fund the pension plan to the historical levels, which would entail the $600 million after-tax item that I mentioned in my prepared remarks. That combination of all those things would suggest that from a GAAP expense standpoint, pension plan expenses would not be higher in full year '09 versus full year '08.

Josh Raskin - Barclays Capital

I guess, Mike, the only part I would question is just even if you amortize the difference between actual versus realized, that last portion of the pension costs, it still seems even over a five-year period if we assume two-thirds of your pension plan is in equities that it calculates, I still get numbers in that. Even not just component I think switches by $50 million, but, maybe we can take it offline or maybe I'm doing the math wrong.

Mike Bell

We could certainly take it offline. I think the piece that you maybe underestimating is the significant impact of the higher interest rates. But we'd be more than happy to take that offline.

Josh Raskin - Barclays Capital

Meaning you'll increase your discount rate?

Mike Bell

No, meaning that if the year ended today, the actual interest rates that would be used to project the 2009 expense…

Josh Raskin - Barclays Capital

Expected return, okay, got you. Thank you.

Operator

Thank you, Mr. Raskin. Our next question comes from Doug Simpson of Merrill Lynch.

Doug Simpson - Merrill Lynch

Could you just give us a little more color on the reserve strengthening for the VADBe business? I apologize if I missed it, but did that relate to the hedges or was it surrender rates, partial surrender rates?

I guess just as a follow-up, on the GMIB book, have you seen any change in the annuity income election rates?

Mike Bell

Sure. Doug, its Mike. In answer to your first question, the VADBe charge is primarily market-related, both market conditions in third quarter as well as what we've seen thus far in October. The short answer to your second question is we've not seen a material change in the GMIB annuitization election rates.

Just to give you a little more color on both of those items. First of all, in terms of the hedge program for VADBe, as you know, the hedge program is really designed to give us additional protection in downside scenarios. It's not intended obviously to guarantee that we'll have zero earnings in that book.

But over the last five years, the hedge program has produced a VADBe result that's been pretty close to breakeven. There are really two items in third quarter that we also saw continue into October and roughly these two items are weighted equally. So they account for approximately 50% of the third quarter charge and approximately 50% of what we've seen thus far in October.

The first for VADBe is the unhedged portion. So, we don't hedge for the provision for future partial surrenders…

Doug Simpson - Merrill Lynch

Right.

Mike Bell

…and between the equity market declining and bond funds, which we also don't hedge for, about half of the third quarter charge and about half of the estimated losses in October, relates to these unhedged items.

Then roughly the other half relates to volatility related impacts. So, we've noted in our critical accounting estimates that volatility is an important assumption. We've seen much higher volatility in the last 60 days than what we've seen historically.

Coupled with what we refer to as basis mismatch, which is the difference between the futures that we use as part of the hedging program as compared to the underlying mutual fund performance. The combination of all of those volatility-related impacts equates to approximately half of the third-quarter charge and also the October estimate at this point.

Then in terms of GMIB, like I said, at this point no material change in annuitization is this correct word? rates. But the impact there has been the combination of the unhedged impact of the equity markets decline, but also the fact that U.S. treasuries which is a key assumption there have also declined. So that combination has led to those charges.

Doug Simpson - Merrill Lynch

So there has been no change in your expectation or your forecast going forward for either partial surrender rates or annuitization rates?

Mike Bell

Correct, Doug. No material change.

Doug Simpson - Merrill Lynch

Okay, thanks.

Operator

Thank you, Mr. Simpson. We'll go next to John Rex of JPMorgan.

John Rex - JPMorgan

Thanks. I just wanted to come back to the capital discussion. In particular the decision to keep the capital down, the statutory subs, can you just go through where those subs are now? When I look at authorized control level down there, adjusted capital, it looks that they are pretty adequately capitalized. I just want to get a little better understanding of what's driving that decision.

Mike Bell

Thanks, John. It's Mike. You're absolutely right. We capitalize our subs well above the regulatory statutory minimums. Specifically at this point, again, obviously there are a lot of factors. At year end 2008, we estimate that the year end RBC would be approximately 270% of the company action level, which to your question would be approximately 540% of the authorized control level.

So well above our regulatory minimums, again, obviously lower than what we've targeted on historically, which is why we see a path at this point back closer to our long-term target for full year 2009. While I don't have a specific calculation for our third quarter, it would be in that ballpark for third quarter as well.

John Rex - JPMorgan

And where do you target? Where do you want those to be?

Mike Bell

Well, our specific benchmark targets, John, are more sophisticated than just the plain vanilla RBC calculations and when we review the benchmark capital levels with the rating agencies, again, subject to some moving parts, ballpark would be about 300% of the company action level. So 600% of the authorized control level. I can't emphasize enough. Our benchmarks are more specific than RBC, but that would kind of put you in the ballpark.

John Rex - JPMorgan

Strategically on that, what's driving that now I guess? In terms of obviously, it's not at a level where the regulators would be pushing you to do it. Kind of what drives it in terms of your comfort level and in terms of wanting to boost the capital down there?

Mike Bell

Sure, John. The most important consideration that we have is really our ratings. It's really very important to us in the context of strategically where we're trying to take the business and meeting our 2009 business plans. The most important thing is to have that strong A rating from our insurance company operating subsidiaries specifically CG Life.

While I believe we will maintain these A ratings, it's certainly important to the rating agencies and important to us that we increase the capital in those insurance company operating subsidiaries back closer to the longer term targets, certainly before we would do any additional share repurchase.

John Rex - JPMorgan

Okay. Back on the pension contribution, quickly again. So what level of contribution do you assume right now as you're looking at? I know you had to kind of from $100 million to $600 million, but did you make an assumption? Would the level of that funding impact the pension expense that would be recognized?

Mike Bell

John, the short answer is yes. We have assumed at this point that we will make a $600 million net after-tax contribution in 2009 from the parent into the pension plan. That's assumed in our 2009 plans. That would be what we've done historically. That would follow the pattern that we've done historically with pension plan funding.

John Rex - JPMorgan

Then if you had gone at 100 instead, would there be an expense impact, then, that you'd have to recognize if you had gone lower?

Mike Bell

John, I think that's fair. And again, we're looking at a wide variety of options. Going back to Matt's earlier question, we believe that would be based on current market conditions. That would be the true current minimum requirement would be that $100 million after-tax on a net basis for full year '09.

John Rex - JPMorgan

Okay. But at the lower level, there would actually be an expense impact also, just a GAAP expense non-cash GAAP expense.

Mike Bell

That's correct, John.

John Rex - JPMorgan

Okay. On the med cost commentary for '09, just give a little color more on what you are seeing in terms of driving the medical costs higher over '08 versus the components and maybe utilization versus unit pricing?

David Cordani

John, sure, I'll start now ask Marcia if she wants to add. First, at this point, we've assumed in the 2009 plan a 50 basis point uptick in medical cost trend for the total book of business and that's consistent with what we had talked about three months ago.

I would not try to be real specific in terms of attributing that 50 basis points back, but overall, we think it's prudent to assume that kind of modest level of acceleration. Marcia, anything you want to add?

Marcia Dall

Yes. As we look at the 50 basis point uptick projection for 2009, we believe that would primarily be driven by facility costs both inpatient and outpatient.

John Rex - JPMorgan

Can you tell us what you're seeing in utilization right now?

Mike Bell

A modest uptick, John, but nothing at this point that I would characterize as a sea change in the total book of business.

John Rex - JPMorgan

So if I want to break it down to like I'm thinking about bed days per thousand members, you're seeing a modest uptick in bed days?

David Cordani

Good morning, it's David. I would think of on a facility base. Think about the inpatient side of it, primarily costs. Think about the outpatient side is where the utilization piece of it would come into play, of course, during the cost piece. But I would break the two apart.

We're putting facility together, inpatient and outpatient. Costs more pronounced on the inpatient side within that 50 basis point smallest movement. On the outpatient side, more of that would be utilization.

John Rex - JPMorgan

One last thing. What are your assumptions for your disability book as you look into '09? I know you've typically talked about in a recession you can see several hundred basis points of margin deterioration in that book and maybe what you're seeing right now and your expectation for '09, if it's embedded.

Mike Bell

Sure. John, its Mike. First, our disability results have been very strong on a year-to-date basis. In fact, the loss ratios improved relative to what we experienced in 2008. We've not tried to model a growth specific disability deterioration at this point in '09, other than to say that basically what we're modeling is wherever overall margins for the Group Insurance book.

I think it's fair to say that, historically, there has been upward pressure on disability insurance. We expect that could certainly continue into 2009. The good news is on a year-to-date basis for 2008, we've done a particularly strong job in our disability claim operations of closing those claims. I would expect that we'd have good success in 2009 as well. David, did you want to add?

David Cordani

Just quickly, so a little uptick in presentation levels, but as Mike said, the closure rates are quite attractive. So why is that? That's where our return to work programs are at their best. We've added some people both at the clinical and vocational rehabilitation level. That's kept the pattern both at the end of this year in good check as well as, as we project next year.

So it gives a little bit of that margin pressure that Mike made reference to, but the overall outcome is quite good. And again, it pivots off that return to work program.

John Rex - JPMorgan

So just to be clear, so I can get an order of magnitude. So your '09 outlook incorporates flat disability margins or maybe if you can get order of magnitude, 200 basis point deterioration, 400 basis points of deterioration, just an order of magnitude.

Mike Bell

John, I'd rather not be that specific on the disability loss ratio, but I think it's fair to say that we're guiding towards current estimates for full year earnings in 2009 of low-single digits versus ballpark mid-single digits in terms of top line growth. You could conclude that all in, we would expect margins to be down approximately $5 million after-tax. So again, not a sea change for all the reasons David described.

John Rex - JPMorgan

Great, thank you.

Operator

Thank you, Mr. Rex. Our next question comes from Justin Lake of UBS.

Justin Lake - UBS

A question first on the guaranteed cost MLR. Mike, I think if remember correctly, you had kind of spiked that out, expected to be 80%, 82%. In the back half of this year, obviously, running higher than that. Can you just give us some color around whether it's pricing, whether it's medical cost trend? What's driving that much higher MLR?

Mike Bell

Sure, Justin, it's Mike. First, you've got the numbers in the ballpark. The MLR improved in third quarter, again, not as much as we had expected. As a result, we're now expecting a full year MLR of approximately 84%, which is higher than what we had previously anticipated.

And specific to your question on the components, we did see strong rate actions here on July 1 and overall for third quarter. So, we did expand prices higher than expected medical cost trend for the third quarter renewals in that 100 to 200 basis point range that we had targeted.

Specifically, we saw a couple other things in third quarter. Benefit buy downs were approximately 200 basis points higher in third quarter than we had projected. At the same time, medical costs have gone modestly higher for the guaranteed cost book now for nine months versus what we had anticipated and actually approximately 50 basis points higher than what we're seeing on the total book of business.

Again, the underlying drivers there are primarily utilization driven. I do not see anything there that would drive me to believe that we're seeing, again, a sea change in the medical cost outlook. But that's the overall factor here for year-to-date. David, do you want to add?

David Cordani

Good morning, Justin. Just a couple of points to remind you. As Mike had previously described, in the first half of the year we had higher catastrophic claims that were projected not to reoccur in the second half of the year. So that speaks to a portion of the pattern. Secondly, was the renewal pricing execution. Thirdly, you can remember that the aggregate size of the book is relatively small, less than 1 million lives in total. So it's bouncing around a bit and tied to that as we expected a bit higher sales in guaranteed costs than we're seeing in the latter part of the year.

That would typically have been smaller case sizes. Those smaller case sizes would've been written at lower loss ratios just because the smaller case sizes are written at lower loss ratios could be expense contribution. That also is contributing a little bit to the change in pattern that we are dealing with here.

Justin Lake - UBS

Okay, that's all very helpful. The second question I have was on the membership side. Just thinking about your 2% membership decline, if we kind of think about versus year end, it's probably 200,000, 250,000 members. And yet if I remember correctly, you had talked about GW being down 10% alone, which would eat up most of that 2% decline for the company.

I'm just thinking with that plus the guaranteed costs down, what gives you confidence that 2% number kind of encompasses, where you need to be?

Mike Bell

Sure. Justin, let me try to put that picture together. So as we are stepping into the first quarter, we expect the first quarter and the full year to be about a 2% decrement. So we're not anticipating a larger stepdown in the first quarter and then acceleration in overall performance.

To put it back in the categories as you just described, for the Legacy CIGNA Health Care ASO business, we're expecting to see a slight uptick, 0% to 1%. For guaranteed costs and experience-rated in 2009, we're expecting to see a decrease between 5% and 10% of their respected total books. And for Great-West, as you recall, slightly greater than 10%, that's ASO business.

When you meld it all together, it's a 2% decrease. For a national segment about 85% of that portfolio occurs in the first quarter of the year. So as I referenced before, we understand what the sales pattern is there and we understand what the retention pattern is there.

Our full year outlook for the experience-rated and guaranteed costs at least in our current projection does not expect a material improvement in the latter quarters of the year. If we're able to do that, we will obviously flag that in further calls, but we are looking at the best available projections in the first quarter, which is a minus 2 and expect to see that pattern as being around in line with our overall projection for the full year.

Justin Lake - UBS

What are you using for in-group attrition? What is that running now? And where do you see that going next year as far as maybe on a monthly basis?

David Cordani

Justin, its David. Let me try to just put that in perspective. So the in-group attrition shows up for us in two ways. In prior calls, we flagged it that our net yield on new sales was a bit lower than we had initially expected because the ultimate employment levels that we're seeing on new business was a little lower as we are putting on new cases.

I think your question goes specifically to month-in, month-out in-group disenrollment patterns. On order of magnitude for our total book of business, that runs anywhere between 2% and 4% in any given year on an all-in basis and it ebbs and flows depending on the underlying subsegment small, middle, national, et cetera.

We're expecting in 2009 that that level of performance will be about what we saw in the second half of 2008. Said otherwise, we are not projecting a significant uptick in unemployment levels in 2009, rather continued challenging employment levels coming through our disenrollment levels.

Justin Lake - UBS

Okay. What was that level into second half?

David Cordani

My second half was running more in that 2% to 4% disenrollment level. Higher end of the range as opposed to historically, we would have been at the lower end of the range on a more stable basis. So if you want to conclude its 1% to 2% higher of overall membership erosion that's coming through with that elevated pattern and disenrollment.

Justin Lake - UBS

Okay.. Could I just slip in one more on '09 just a couple of quick numbers questions? I'm trying to figure out why the '09 Health Care income guidance range is twice as large as it was in '08. On the operating cost reductions, you are talking about taking a $50 million impact in the fourth quarter. What would be the accretion? Would that be accretive to '09 guidance of book? Could you spike out what that accretion would be if you were to undertake those cost changes?

Mike Bell

Sure, Justin. It's Mike. First of all, in terms of our range of earnings estimates for 2009, I would acknowledge that it is a larger range than what we've done historically. We think that's prudent given just how much uncertainty there is in the environment, uncertainty around the competitive conditions, uncertainty around the economy.

So really what we were trying to flag there is the greater level of uncertainty versus what we've seen in prior years.

Justin Lake - UBS

Right.

Mike Bell

On operating expenses, it's really too early for us to give you specific projections there. As Ed noted, further reducing operating expenses to right size our organization commensurate with the expected decline now in membership is a high priority.

At this point, I would not try to size the specific fourth quarter potential special item or the potential accretion in 2009. All I wanted to do in the prepared remarks was flag that it's something that we are looking at. And obviously, we'll give additional updates in the future. Ed, do you want to add?

Ed Hanway

Yes, the only thing I would add, Mike, is just to reiterate that given the competitive environment we see, given the outlook for membership that we see, and given the mix of that membership particularly, we are very, very committed to working hard on the expense piece to drive the expense and the infrastructure down, to have a more appropriate per member expense level.

As David noted, we've got flat spending built in here while we continue to invest. However, that gives us with the membership decline an increase in per member expenses. That's clearly unacceptable. And to Mike's point, we have work underway to identify exactly where and how we take those costs out.

I just think it's a little early for us to be more definitive relative to how much of that benefit is in '09. It's clearly our intention to have a difference in the '09 expense picture vis-à-vis what we have built into our forecast.

Operator

Thank you, Mr. Lake. Our next question comes from [Anu Gupta] of Sanford Bernstein.

Anu Gupta - Sanford Bernstein

So my question is around how we should be thinking about growth in your Health Care business in this economy. The story as I have been hearing it is you are increasing your prices. You are experiencing membership declines, which is natural probably exacerbated by the deteriorating economy.

When I back out some of the premium yields, I see 8% to 9% yields on a per month per member basis in your guaranteed cost book. I was wondering in addition to just thinking about improving MLR's with premium yields, are you looking at what your uptick is for products in your voluntary book with the Star HRG, CD, HPs? Are you looking at new product offerings? So that might in some way give you an opportunity to grow your book and cater to some of the cost management pressures that employers are facing today.

David Cordani

Let me give you two different pieces of the pie. First, as it relates to growth, important to look at our retention rates first. So, the retention rates we are seeing as we look into 2009 are actually overall consistent with what we've seen in the past. So for the overall enterprise, it's in the high 80s, with national in the low 90s, the regional segment in the mid to upper 80s. So, point one, the retention rates for our book of business continue to perform well and even in our important experience-rated book, we are seeing an uptick in the retention rates from the 2008 levels.

Secondly, for the ASO portfolio, as referenced previously, we continue to see both relative to the market conditions good sales and good retention performance. Where it's most pronounced is in the guaranteed cost and experience-rated.

So to your question, where are the stimulants to drive growth? I'll give you a couple of pieces to consider. One, our phased entry into the individual and small, meaning under 50 employer marketplace is rather important for us. It's a phased entry, two to three markets per quarter, began in the latter part of this year and it's critical that we show sustained progress launching into those buyer segments where we've been underrepresented, where they are predominantly, they are guaranteed cost sales and the package sales.

Point two is, as we finalize our Great-West integration activities, we are rather excited about the ability to bring their ASO and stop loss, now our ASO and stop loss portfolio to the 51 to 250 like employer, where to-date their choice has solely been guaranteed cost alternatives. It is a nice alternative for an employer who wants higher transparency, who has a packaged purchase and wants to protect the top side of their losses through the stop loss.

Finally, we've seen good CDHP growth to the point that you raised. We have seen good CDHP growth in the higher end of the middle market as well as in the national accounts segment and as we push into the under 250 employer segment, we'll be able to bring those CDHP capabilities there. So, we see that as an opportunity looking forward.

Mike Bell

The only piece I would add just back to your earnings summary that you started with before asking about the membership growth, I would just reinforce the fact that the Great-West is obviously a source of significant earnings growth for us in 2009 as we had anticipated.

With a substantial margin improvement coming primarily from giving their members, their historical members now our members access to stronger medical costs as well as some operating expense reductions. So remember, that's an important part of the earnings growth equation for 2009 and we expect, it's early, but we expect further improvement in that area in 2010 and obviously more updates on 2010 in the future.

Anu Gupta - Sanford Bernstein

I just had a follow-up on that. So on the individual book, what should we be thinking about in terms of membership growth as you are rolling out these products state-by-state for '09?

David Cordani

So important to put in context, the individual book you should think about it starting at a base of close to zero because we have historically now played in that space. In 2009, our expectations would be to grow that book on a net basis in the 30 to 55,000 member range for overall net growth. So there's not a large skyhook there, but when you're counting them one at a time, that's a significant amount of growth. It's a phased entry; first two markets were entered into the third quarter of 2008, additional markets in the fourth quarter of 2008 and then additional markets playing through in quarters going into 2009.

Operator

Thank you, Ms. Gupta. And as a reminder, please limit yourself to one question and one follow-up. We'll go next to Charles Boorady of Citi.

Charles Boorady - Citigroup

First question just on the Health Care business; I noticed significantly lower tax rate. I wonder if that's going to stick going forward. In health and other, the investment income was a lot higher than I expected and as a percent the cash and investments, seems to have gone up, which is out of sync with the rest of your peer group where because of lower interest rates, investment income has been significantly lower as a percent of cash investments. So, I just wonder how to project that also going forward and if there was anything unusual that benefited that item in the quarter?

Mike Bell

Charles, this is Mike. First, in terms of the tax rate, I would suggest that it'd be more appropriate to model something closer to our historical tax rate going forward. The third quarter Health Care tax rate in particular benefited from some amended state tax filings, one in particular that hit all in the quarter. So I would suggest that you model what we've had historically there in Health Care in the 35% to 35.5% range going forward.

On net investment income, again, that bounces around quarter-to-quarter. Again, I would suggest that you use something more like a rolling average on a year-to-date basis. I'd project that going forward. The major driver of our investment income in 2009 will be much were driven by asset levels than swings in interest rate since in fact our investor portfolio is reasonably long in duration in aggregate.

Charles Boorady - Citigroup

To what extent is price hardening for gen-one renewals in the national and regional businesses?

Mike Bell

I will start and I will ask David if he wants to add. First of all on the regional side in particular for guaranteed cost in experience-rated, it's still pretty early to be real definitive about 1/1. Specifically, we have approximately a third of our guaranteed cost. 1/1/09 renewals at this point had been resolved.

So, there's still two-thirds of the precincts have not reported, if you will. But based on what we've seen thus far, I would not characterize 2009 as a hardening pricing environment versus what we've seen in 2008 and obviously that's reflected in our updated forecast for full year 2009 earnings as well as full year membership. David, do you want to add?

David Cordani

No, Charles, I'd just reinforce Mike's point. Consistently we've seen it as a competitive market. There might be individual states where there's a little bit of activity, but too soon to declare an environment of hardening.

Charles Boorady - Citigroup

Okay. Finally for a point of clarification, in response to one of Rex's questions on the ACL versus CAL and why you might need to put more capital in even though according to the RBC calc, things look okay. Just so I understand that, is this because RBC relies on the rating of the investments you hold to establish the value, whereas the market value may be significantly below the value that RBC would determine?

Mike Bell

Charles, it's Mike. No, that is not a material driver in the capital issue. The primary driver of the capital adequacy here for 2008 and 2009 is driven by our benchmark capital targets that we've reviewed with the rating agency. So, it really is based upon long-term how we expect to capitalize our business in these operating subsidiaries and is not primarily investment management driven. Ed?

Ed Hanway

The only thing I would add, Charles, is remember our mix of business relative to the extent to our ASO business here and so our profile is somewhat less risk intensive.

Operator

Thank you, Mr. Boorady. We'll go next to Brian Wright of Banc of America Securities.

Brian Wright - Banc of America Securities

Thanks, good morning. Could you give us the actual authorized control level at CIGNA Life and the current statutory level of that subsidiary?

Mike Bell

Brian, it's Mike. Let's see, you are specifically referring to CG Life?

Brian Wright - Banc of America Securities

Yes.

Mike Bell

See, for CG Life at September 30th, we estimate that the overall statutory capital on a rating agency basis for calculations was approximately $2.4 billion. We don't specifically calculate the authorized control level on a quarterly basis. But we would expect that at year end 2008, that our overall on a consolidated basis, statutory capital would be approximately 540% of the authorized control level or approximately 270% of the company action level.

Brian Wright - Banc of America Securities

Okay. But you won't give us that number for CG Life?

Mike Bell

Well, in terms of year end 2008?

Brian Wright - Banc of America Securities

Yes.

Mike Bell

At year end 2008, I wouldn't expect it to be materially different. It will likely be down a little bit because of the fourth quarter anticipated items, but if you assume for CG Life at year end, that it was in $2.25 billion to $2.3 billion range, you'd be pretty close.

Brian Wright - Banc of America Securities

And your RBC level for CG Life wouldn't be that different from the 540? It'd be lower than that, but would it be in the fours?

Mike Bell

Oh, God, no. It would be modestly below the 540, but it would be pretty close to that.

Brian Wright - Banc of America Securities

The primary reason you have to have it at a higher level is because that's where you're running your Life business. And what's kind of the level you need to have that at for your Life business?

Mike Bell

Well, just to be clear…

Brian Wright - Banc of America Securities

Just to keep the A rating that you're targeting?

Mike Bell

So, a couple things. First, it's not primarily the Life business that we're concerned about. What we're really concerned about is having a capital over time overall in our operating subsidiaries that support a strong A rating for these insurance company operating subsidiaries. And while the rating agencies would not give you a bright line that you need X amount or an A rating and if you drop down to a Y level, you'd be at BBB or BAA for Moody's.

The point is that over time we would expect to be much closer to that 300% of company action level or 600% of the authorized control level. Again, I would not try to speak for the rating agencies. I think it's something like the 270% level as long as they understood, which I believe they do, understand that we're committed to returning to those targeted capital levels over a reasonable period of time. I don't anticipate that being a rating agency trigger.

Now again, as I mentioned earlier, it obviously has an impact on 2009 projecting current company cash flows and it means that we do not have repurchase capacity or don't expect to have repurchase capacity in 2009.

Operator

Thank you, Mr. Wright. We'll go next to Peter Costa of FTN Midwest Securities.

Peter Costa - FTN Midwest Securities

A question on pricing. You are raising price above cost trend and your margins are going up. So the market didn't really get worse, did it? People just didn't follow your lead to raise prices. Is that correct?

Mike Bell

I think that's fair. I mean I think it certainly is tougher in some places than others. Where we have seen increasingly challenging conditions here in 2008 as we have gone through the year and we anticipate that staying the same in terms of 1/1/09 is at the lower end of the market, which primarily impacts our higher margin products, guaranteed costs in the ER. Ed, do you want to add?

Ed Hanway

I was going to add Peter, I think that's a good representation. David made this point earlier, our retention rates have actually been pretty good. So we've been very focused on maintaining the book of business effectively and getting that book of business to an appropriate margin level. Mike's point is right. We've seen less success in the lower end size of the market. We've also seen less success with new business.

So I think as a reflection of kind of the competitive state of the market, people who have us, like us, we can get good margins there. We're very comfortable with that book of business. It's simply we haven't seen the level of new business across that book that we would ultimately like. And I think that's reflective of the competitive nature of the market.

Peter Costa - FTN Midwest Securities

Okay. And then on the pension funding, another one of your competitors shows oppositely rather than to sort of refill the coffers of the pension funds to take the charges on an ongoing basis going forward in terms of pension expense. I think mathematically it's probably better to use the $1 billion of cash that goes away anyway when you fund the pension permanently to repurchase shares as opposed to refunding the pension. Why did you choose what you chose to do the refunding?

Mike Bell

First of all, we are evaluating options. So we'll provide updates in the future. Again, what I characterized for you in my prepared remarks is what's built into our current 2009 plan. I'm not going to try to give you a lead pipe block here that that's all locked in here for 2009. We are going to continue to evaluate options and we'll give you updates on any of those options in the future.

Second, I would point out that contributions to our pension plan is not throwing that $1 billion away, to use your words, but in fact, would be invested in investment management assets including equities, which several of us believe and maybe even Warren Buffett would say, that it's a good buying opportunity. So I would not characterize it as throwing away.

And certainly at this point, we would prioritize higher targeting our pension plan at historically funded levels. We'd target that as a higher priority than share repurchase at this point.

Operator

Thank you, Mr. Costa. We'll go next to Scott Fidel of Deutsche Bank.

Scott Fidel - Deutsche Bank

Thanks. First question just to nail down an actual number for your pricing yield expectations for 2009 in the GC, should we assume that is that 7.5% to 8.5% just 50 bps above the 7% to 8% cost trend guidance?

Mike Bell

Scott, it's Mike. Yes, that's a fair assumption for full year '09.

Scott Fidel - Deutsche Bank

Okay. Then just relative to the experience-rated business, if you can update us on the percentage of accounts in deficit in the third quarter, how that tracked relative to 2Q? And then also in terms of on renewals for 2009, what percentage of the accounts in deficits are looking to renew for 2009?

Mike Bell

Sure, Scott, it's Mike. First, in terms of the deficit balances here at third quarter 2008, not materially different than where we ended second quarter of 2008, which net-net is a good thing and in fact, better than we had anticipated. At this point, we ended the third quarter 2008 with approximately 34% of the active cases in deficit. So, same as the second quarter of 2008.

The cumulative book of business deficits for the active cases stands at $150 million in third quarter versus $151 million at second quarter. So the good news there is that we saw a relative improvement in the pattern of deficits in third quarter versus second quarter, which is obviously the biggest contributor to the improved loss ratio for the experience-rated book.

Well, there is certainly some favorable medical costs relative to what we've seen historically, but it was also driven by strong rate execution in underwriting in the third quarter. We achieved in the 9% to 10% range for the third quarter renewals. That's the kind of level that we're targeting here for first quarter on the renewal book and hence we do expect full year 2009 to show margin expansion in the experience-rated book versus what we saw here in full year '08. Now, that will come at some cost in terms of membership, but overall, we expect to continue down that track. David, do you want to add?

David Cordani

Specific to your retention question, as Mike said, from 1/1 all the precincts aren't reported in yet, but as we look forward to '09, we expect to see based on what's renewed to date a meaningful improvement in our retention rates overall for the experience-rated book from 2008 to 2009.

Therefore, you should expect to see both an improvement in cases in surplus as well as those that are in deficit. Said otherwise, for us to improve the margins in the latter part of 2008 and then into 2009, we need to renew those deficit cases and recover a bit of those deficits which in line with our expectations.

Scott Fidel - Deutsche Bank

One last follow-up question just around the international business and if you could hone in a bit on your top line growth expectations for international for '09? And then maybe just talk a bit in terms of the global economic slowdown, what type of assumptions you are assuming for revenue growth around the expat business relative to the international health and life products?

David Cordani

Scott, David. So, the portfolio is broken up into two components, the expatriate component and the LA&H component. For the expat portfolio, we expect in 2009 to see continued strong retention rates, so growth starts to [retain] in the business, continued strong retention rates as well as new sales to generate some attractive top line growth there, so a healthy outlook for the top line performance of that book of business.

For the LA&H portfolio, we expect to see another step-up in what we call annualized new premiums or new sales as we look into 2009, not driven by, important to note, not driven by any one country, although as we said in our prepared remarks, Korea represents our largest individual country. We are seeing a good uptake in the health, supplemental life, and other products more broadly.

Finally for the LA&H portfolio, the 2009 outlook has an expectation of retention rates for those individual policyholders about at the level that we saw in 2008. So increasing the top line with new sales, retaining business at a consistent rate for the LA&H portfolio as well as for the CIEB portfolio, consistent retention levels and good new business sales. Ed?

Ed Hanway

The only thing I would add to David's is it's interesting. Remember, the products in individual life, accident and health are fairly low cost, simple products, which interestingly we have seen historically when economies may be more challenged actually have some benefit because they are lower cost and people often times will view them as alternatives to what they might have done otherwise.

So while I wouldn't say they are recession proof or depression proof, they are certainly products that seem to have reasonably good demand through ups and downs of economic cycles. When you combine that back with the fact that we are expanding in terms of the markets and the sponsors that we are working with, it gives us the opportunity to continue to expect some pretty reasonable growth.

Operator

Thank you, Mr. Fidel. Our final question is from Greg Nersessian of Credit Suisse.

Greg Nersessian - Credit Suisse

Most of my questions have been answered. I just wanted to just understand the pension contribution again. I guess the $600 million, did you say that gets you to your fully funded status or I guess if not, how close to your fully funded status would that get you?

And then what is built into your '09 guidance in terms of a potential capital raise I guess in terms of interest expense? Are you assuming you are raising that capital externally, and what kind of rates are you [assuming]?

Mike Bell

Let me answer your second question first and I'll come back to your first one. The 2009 earnings estimates assume that we raise an additional $500 million in longer-term debt. Now that's an assumption and obviously we will update that as we go through the year, but we assume that we will raise $500 million of external long-term debt and that that will replace the current commercial paper outstanding. That's what built into the earnings.

In terms of the interest rate that's assumed there, if you thought something in the high single digits, you would not be far off. And again, that's what is booked in the earnings numbers.

In terms of the pension plan in particular, what I described in my prepared remarks, which would be a $600 million net after-tax contribution from the parent company into the pension plan would not fully fund the plan, but it would increase the funding levels of the plan back to what we've done historically. So specifically, it would assume that as we've done historically that we would fund up to the 80% and then grade from the 80% funded level to the 100% over a period of years. And that's what we've done historically.

Greg Nersessian - Credit Suisse

Okay, that's very helpful. A last quick question. The fair value of the assets that you provided in this schedule, which is very helpful, declined less than I expected it to have particularly maybe the corporate bonds in the financial services segment. So, just wondering, I guess what percentage of these assets that you've listed here are tier-1 that are based on market prices versus based on your estimates?

Mike Bell

First, the majority of our fixed investment portfolio are in fact calculated based on tiers two and three pricing calculations and not literally tier-1. Having said that, we believe that our tier-2 pricing for example for the private placements continues to be appropriate and I would not try to use tier-1 versus tier-2 as a determination of your confidence level in those underlying prices.

Operator

Thank you, Mr. Nersessian. Ladies and gentlemen, this concludes CIGNA's third quarter 2008 results review. CIGNA Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing 888-203-1112 or 719-457-0820. The passcode for the replay is 6083437. Thank you for participating.

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Source: CIGNA Corp. Q3 2008 Earnings Call Transcript
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