CIGNA Corporation, HealthSpring Inc. - M&A Call

 |  About: Cigna Corp. (CI)
by: SA Transcripts


Ladies and gentlemen, thank you for standing by for the CIGNA Corporation and HealthSpring Inc. joint conference call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference including the Q&A session is being recorded. I will begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

Edwin J. Detrick

Good morning, everyone, and thank you for joining us on a short notice. I am Ted Detrick, Vice President of Investor Relations and with me this morning are: David Cordani, our President and Chief Executive Officer; Herb Fritch, HealthSpring's Chairman and CEO; and Ralph Nicoletti, Cigna's Chief Financial Officer. This morning, we are very pleased to announce that CIGNA's signed the definitive agreement to acquire HealthSpring, one of the largest and fastest-growing Medicare Advantage care coordinator plans in the country. We are here this morning to discuss the business and financial aspects of this combination.

In our remarks today, David Cordani will begin by discussing the strategic significance of combining our 2 companies, including the opportunities for enhanced value creation for both customers and shareholders. Herb Fritch will provide his perspective on why this combination creates a theme value for HealthSpring's stakeholders. Ralph Nicoletti will then discuss the financial aspects of the combination including commentary on earnings accretion and long-term business growth opportunities.

He will also make some high-level comments regarding our third quarter results and update our financial outlook for 2011.

Following our remarks, we will respond to your questions.

I remind you that CIGNA uses certain non-GAAP measures when describing it's financial results. A reconciliation of these measures to the most directly comparable GAAP measure is contained in our second quarter 2011 earnings release which is posted in the Investor Relations section of

Now on our remarks today we will be making some forward-looking comments. We would remind you that there are risk factors that could cause actual results to differ materially from our current expectations and those risk factors are discussed in our second quarter Form 10-Q and 2010 Form 10-K, both of which are accessible in the Investor Relations Section of our website at

Now before turning the call over to David, I will cover one item relating to an accounting change that CIGNA will adopt in 2012. Effective January 1 of 2012, CIGNA will adopt new guidance regarding the accounting for the deferral of certain costs related to the acquisition of new or renewal insurance contracts. It primarily impacts the policies we write for our Health, Life and Accident business in our International segment. This accounting change restricts the amount of costs that can be capitalized and accelerates the recognition of certain acquisition costs that previously would have been deferred. It has no impact on the fundamentals of the business. That is there is no effect on revenues, future cash flows or the lifetime profitability of the policies.

Also, there is no change in our statutory capital position. We will retain the same level of dividend capacity from international subsidiaries to the parent company for capital deployment purposes. CIGNA will adopt this accounting change on a retrospective basis in the first quarter of 2012 recasting prior periods and recording a one-time non-cash charge of approximately $250 million to $300 million directly to shareholders' equity to write down the unamortized portion of deferred policy acquisition costs that would not have been capitalized in previous periods under this new rule.

Subsequent to the adoption of the accounting change, there will also be a reduction in the amount of policy acquisition cost that we can defer. We estimate that the impact on full year 2011 of adopting this new guidance would be to reduce reported international income tax earnings in the range of $60 million to $70 million. Because we're adopting this new guidance retrospectively, as if the new rules have been in effect in all prior periods, the earnings growth, growth trajectory for the International business will remain unchanged. Again, this accounting change will not take effect until January 1 of 2012. Therefore, the impact of this change is not reflected in the revised full-year 2011 outlook that Ralph will discuss in a few moments.

Now one last item before we get started, this morning we filed with the SEC a Form 8-K which provides our updated earnings outlook for full-year 2011 as well as commentary on certain aspects of our third quarter results and the accounting change that I just discussed. And with that, I'll turn it over to David.

David M. Cordani

Thank you, Ted, and good morning, everyone. As reported earlier today, we're excited to announce that we have signed a definitive agreement to acquire HealthSpring. As many of you know HealthSpring is one of the largest and fastest-growing Medicare Advantage coordinated care plans in the United States. They currently have approximately 340,000 Medicare Advantage customers, and they operate in 12 states as well as the District of Columbia. HealthSpring also has a stand-alone Medicare prescription drug business, it serves more than 800,000 customers. From a strategic standpoint, this combination is significant because it positions CIGNA with proven capabilities and immediate scale in the high-growth seniors and Medicare segment. It also provides us with expanded retail capabilities, as the U.S. market continues to evolve in this direction. Together, we would be able to provide attractive long-term value to customers and shareholders as we continue to build differentiated partnerships with health care professionals.

I'll elaborate on these themes in a moment, but first, I want to emphasize that this acquisition strengthens our ability to deliver on our mission, which is to improve the health, well-being and sense of security of the individuals we serve. It also accelerates our growth strategy particularly around the Go Deep and Go Individual elements. Go Deep process is all about focus on expanding our leadership in existing geographies, product lines and customer segments to drive sustainable growth. This combination expands our geographic depth by adding the Seniors and Medicare segment into our product portfolio in a meaningful way. The Go Individual aspect that the combination connects to our strategy of the need to market highly-personalized tailored health solutions and services that spans all life and health stages. HealthSpring adds more than 1 million individual customer relationships in the Senior segment with excellent prospects for future growth.

We are announcing this exciting combination at a time when CIGNA has been very successful in growing our business both top line and bottom line. And as you know, we've identified seniors and retail market capabilities as attractive long-term opportunities for CIGNA. As we have consistently indicated in the past, our objective is to take a disciplined approach to M&A in pursuing this strategy. And now together, CIGNA HealthSpring have significantly greater opportunities to expand in this growing market. Specifically, we see 5 main advantages the combination creates including accelerating growth for HealthSpring by providing the physical into their Medicare Advantage solutions for 65-year-old retirees from senior's employers' launch of plans, by expanding and deepening in key geographies for HealthSpring's proven model and by leveraging our combined customer footprint and capabilities.

By maximizing HealthSpring's highly effective physician-engagement modeling capabilities to accelerate our retail programs as we look toward a post-2014 exchange environment. By leveraging CIGNA's specialty in clinical capabilities for the benefit of health insurance customer base. And by delivering an operating expense synergies as a combined company.

Turning to HealthSpring specifically, their assets include an experienced work force of more than 3,000 employees and are highly complementary to our U.S. Healthcare Service business. HealthSpring will further diversify our predominantly commercial business mix. The company also expands a high portfolio while giving us a differentiated platform in the Medicare Advantage base. HealthSpring, like CIGNA has consistently delivered strong organic growth to differentiated value as well as attractive returns for shareholders. Specifically, HealthSpring's Medicare Advantage in part to your business have organically grown their customer base over the last 5 years. We have achieved this by focusing on the customer and very importantly, through partnerships with physicians to coordinate care and service delivery. The result, strong organic growth, customers retention that's strong and very attractive returns.

At this time, I'd like to turn the call over to Herb for him to share his perspective. Herb?

Herbert A. Fritch

Thank you, David. I want to take a few moments to talk about why this is the right combination at the right time for HealthSpring. Why I'm excited about this combination with CIGNA. First off this combination delivers outstanding value to HealthSpring shareholders. CIGNA's proposal reflects their recognition that HealthSpring is truly a unique company, approaching the delivery of health care methods and services in a differentiated way. CIGNA's all-cash proposal delivers certain and immediate value to shareholders at an attractive premium and as a testament to HealthSpring's achievement to date and our future prospects. The strategic benefits of this transaction also represent tremendous opportunities for HealthSpring's employees, physician partners and plan members. Expansion has always been a key aspect of HealthSpring's proven strategy and scale has never been more important in our industry. As a result of this transaction, HealthSpring will now be part of an organization with the resources to support growth both organically and inquisitively, and we will be even more strongly-positioned for industry leadership going forward.

The combination with CIGNA is a great strategic fit and they are the right partners for us culturally. They share our commitment to delivering the highest quality care and greatest value to our members and they know our success is the result of our outstanding employees and our dedication to building and maintaining excellent partnerships with our physicians. We will also be working closely with David and his team to integrate our physician engagement strategy across CIGNA's other business units. Given our shared commitment to service excellence, I am confident in our ability to continue our strong service delivery with no disruptions. This is aided by the fact that CIGNA will be leveraging our platform, an exceptionally talented team of professionals to deliver for today's customers while we grow tomorrow's.

Finally, on a personal note, I've had the good fortune of building businesses my entire career and after spending meaningful time with David and his team, I'm excited for the opportunities that lie ahead as a part of the CIGNA family.

With that, I'd like to turn the call back over to David.

David M. Cordani

Thanks, Herb. Let me reinforce that our companies share a common vision and philosophical approach to health care. And that is to offer greater choice to our customers and improve their health outcomes, to create greater value for health care partners by aligning incentives around quality performance, to give each of our employees rewarding work that makes a real difference to our customers.

As we noted in our press release, we will build off Magnolia's track record of success, starting with our highly accounted leadership team and their extensive knowledge as the seniors in Medicare segment, as well as their experience in designing and managing effective physician engagement models that generate improved health outcomes. And I've personally spent significant time with Herb and members of his leadership team and I'm delighted to have his team and employees join CIGNA. And as I believe, our combined strengths will continue to move us forward as the leading global health service company. Now before I turn it over to Ralph, I need to provide more color on the structure and the financial aspects of the acquisition. I want to reinforce our view on the long-term value creation. Both CIGNA and HealthSpring have consistently delivered attractive organic revenue and earnings growth over the last several years, with disciplined, effective execution of our respective business strategies. In short, by going deep. In addition, both organizations are operating from a position of strength and continue to have attractive growth prospects going forward on a standalone basis. However, together, CIGNA and HealthSpring have significantly greater opportunities for value creation.

So in closing, I'm very excited about the acquisition and its strategic significance. We now have strengthened capabilities, greater scale and an expanded talent pool to serve the fast-growing Senior segment. And this combination expands our portfolio to cover a broader range of life and health stages, and positions us to thrive in a rapidly evolving retail market place.

With that, I'll turn the call over to Ralph.

Ralph J. Nicoletti

Thanks, David and good morning, everyone. As David indicated, we are very excited about the strategic significance of this combination and the value creation for our customers and shareholders. Our acquisition of HealthSpring is very much aligned with our growth strategy and our capital deployment priorities. Our capital deployment objectives give high priority to using capital to acquire capabilities and scale in high-growth markets. HealthSpring clearly fits this criteria. In my remarks today, I will discuss the terms of the transaction, the financing structure, the economics of the business we're acquiring and identify some of the longer-term growth opportunities and synergies.

At the end, I will also make some high-level comments regarding our third quarter and update our outlook for 2011. We now expect to release our third quarter earnings on Friday, October 28.

First, the terms of the deal. Today, we signed the definitive agreement to acquire all the outstanding shares of HealthSpring at a price of $55 per share in cash, totaling $3.8 billion. The definitive agreement has been approved by the Board of Directors of both companies, the transaction is subject to the required regulatory approvals and customary conditions to closing. We currently expect the transaction to close during the first half of 2012. We view the purchase price as a fair price for a highly regarded company with attractive long-term growth prospects and profitability.

Based on our current estimates, we expect the transaction to be accretive to earnings in the first full year of operation, including the impact of a one-time transaction and integration cost. Regarding financing, we have entered into a bridge financing facility of up to $2.5 billion to complete the transaction. However, prior to closing, we expect to access the capital markets for permanent financing, which will include both debt and equity components. We expect the permanent financing to improve approximately 20% of the purchase price in a form of newly issued equity and approximately 80% in debt and available cash. We believe that this financing structure allows us to maintain a strong balance sheet and liquidity. We would expect to maintain our current credit ratings.

While at completion of these financing arrangements, our debt to total capitalization ratio will be higher than our historical levels. We expect to return to our targeted ratio of 25% to 30% in a reasonable period of time.

I will now discuss the economics of the business we are acquiring and how we expect to realize value from the acquisition. As David mentioned, HealthSpring has approximately 340,000 Medicare Advantage customers and they operate in 11 states and the District of Columbia. In addition, HealthSpring has a standalone Medicare Part D business that serves over 800,000 customers today. HealthSpring has an excellent track record of achieving solid revenue and earnings growth, both organically and through acquisition while also delivering attractive profitability with after-tax margins in the mid-single digit range.

In addition to the strong current performance of the business, as we looked at 2012 and beyond, we believe this deal gives us a number of opportunities to create long-term value for our customers and shareholders. More specifically, HealthSpring's current management team will lead our expansion into a growing Seniors and Medicare business. We expect strong organic growth in HealthSpring's existing service areas and we expect to accelerate expansion into new service areas delivering strong earnings growth over the next 3 to 5 years. We also expect contribution from leveraging both of our organization's part D capabilities.

We expect operating expense synergies of $30 million to $40 million in annual pretax savings over time to be largely offset by integration cost in the first year. We currently expect to incur one-time transaction cost of approximately $50 million to $60 million after tax.

In summary, we are acquiring a company that has a solid track record in growing both top and bottom line results and we expect will enhance CIGNA's revenue and earnings growth profile for many years to come.

Now before I take your questions, I wanted to make some remarks about our current outlook. As I noted earlier, we are still in the process of finalizing our results and now expect to report on the specifics of our third quarter results this Friday, October 28. That said, we have enough capability into those results to make some high-level comments. Based on the strength of our third quarter results, we now expect full-year 2011 consolidated adjusted income from operations of $1.385 billion to $1.445 billion. This range is an increase of $30 million to $50 million for our ongoing businesses, reflecting the strong performance of each of these operations. We expect full-year earnings per share to be in the range of $5.05 to $5.30 per share, which is an improvement of $0.05 to $0.10 per share over our previous expectations.

Our improved full-year earnings and EPS outlook also include the effect of recording a charge of $45 million after-tax or approximately $0.16 per share in the third quarter in our runoff operations, are strengthening reserve in our VADBe book of business. We are projecting breakeven results for our VADBe book in the fourth quarter of 2011 relative to our full-year outlook.

Regarding our other one-off business, the GMIB book, while those results are excluded from our outlook, we do expect to report an after-tax loss of $134 million or $0.48 per share in shareholders' net income for the third quarter. The VADBe and GMIB results reflect the impact of unfavorable equity market and the low interest rate environment.

To recap, our combination with HealthSpring will create significant strategic opportunities and provide near-term and long-term value for our shareholders. Our capital structure is well-positioned with manageable levels of leverage and we continue to execute well on the base business. Finally, we have increased our earnings and EPS outlook for the full year 2011, reflecting the continued strong earnings contribution from each of our ongoing businesses.

With that, we will take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question will come from Scott Fidel with Deutsche Bank.

Scott J. Fidel - Deutsche Bank AG, Research Division

Question just on the regulatory review of the deal and just if there's any markets or product areas where you do expect there will be any regulatory issues? I would assume it's probably not going to be that significant of an issue given CIGNA's very limited exposure outside of, frankly, Arizona in the Medicare Advantage business.

David M. Cordani

Scott, it's David. From a macro standpoint we view this is a segment expansion and to your point, other than Arizona, we essentially don't have Medicare Advantage business and that's not a target market for the existing HealthSpring business. So we think this is just a highly complementary from the geographic standpoint and we have a strong expectation to go through the regulatory process and as Ralph noted in his prepared remarks, we'd anticipate the ability to close the transaction the first half of 2012.


And we will go next to John Rex with JP Morgan.

John F. Rex - JP Morgan Chase & Co, Research Division

I'm wondering if you could just comment to what's kind of on the process here. Can we assume that it was fully -- that it's been fully shopped here? Or should we be looking for others that would potentially raise their hand here.

David M. Cordani

It's David. As you might imagine, for such a valuable and successful organization, there's a dynamic marketplace and a dynamic environment and we're pleased with the outcome. And as we noted in our prepared remarks, we think there's a big strategic opportunity and it created a unique opportunity to put 2 companies together.


We go next to Charles Boorady with Credit Suisse.

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Congratulations on the deal and if I can throw in to Herb, HealthSpring is in the sweet spot of where the Managed Care sector has -- might be the best near-term and long-term growth prospects, you made a lot of investments in the platform for the dual Special Need Plans to really be where the growth is now and I'd like to hear how you chose CIGNA as a -- as the best partner for you and your company, and how the deal came together and was there real formal process or was it just a process of the 2 of you coming together and seeing a nice fit.

Herbert A. Fritch

I think we felt there was a great cultural fit, that we really complemented each other and that this is a great platform that would allow us to -- we believe pretty strongly in the model we built and the physician-engagement piece and I think I'll -- we really felt this was a great platform to take that model to another level. We did go through a pretty rigorous process and I think we're all pleased with the results of that and feel pretty good about that we've touched all the bases in that regard.


We go next to the Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

Just wanted to make sure I understand the discussion around the synergies, and then accretion. It sounds like the expectation this will be accretive in the first full year, you talked about pretax synergies of only $30 million to $40 million, and it sounds like that's going to be offset by integration costs, but then there were one-time acquisition costs that were actually higher of $50 million to $60 million. So I just want to make sure, maybe Ralph, if you could sort of run through those numbers again and maybe specifically comment where you're going to get some of those synergies, if you're going to keep the management team it's going to be sort of a segment extension. I'm just curious where they could come from and then lastly, any comments on the PBM that HealthSpring uses.

David M. Cordani

It's David. I'll start in our last route to expand that to your point. And if you're referring -- if you're talking about the synergies, Ralph will expand on that and bridge it across to the accretion. First, a way you could consider thinking about the synergy framework here is it's not at a macro level dissimilar to the way you might have thought of big Great-West acquisition. What we mean by that is we have the ability to secure a leading platform, and what does that mean? Of course it's the leadership those with 3,000 talented and passionate associates, has a proven physician partnership model, has a proven product innovation capability, so that's what we mean by a platform. And having said that, we see synergies around sustaining growth and accelerating growth further through both agents as well as geographic expansion, synergies through specialty leverage capabilities that we have, as well as some expense synergies over time. So our way to think about is taking a very successful franchise in infrastructure and our ability to collectively build on that and leverage the successful franchises there. I'll ask Ralph to expand a little bit on the synergies and bridge out across to the accretion.

Ralph J. Nicoletti

Thanks, David. A couple of puts on the cost synergies, I think the easiest way to look at that, is we have a good line of sight on this area and they would be the types of synergies you would expect when 2 public companies come together. Whether there's some natural redundancies in most of the areas of focus, as both David and Herb mentioned. We're excited about the model and the way the business operates and we want to make sure we continue to leverage that over time. So the areas across synergies are largely in the, I'll call it the, sort of the public company corporate areas of redundancy that we look at over time. As it relates to accretion, a lot of ways to look at this, and first, when you count all costs whether that's integration cost, transition cost and ongoing amortization, we expect the transaction would be accretive in the first full year. When we say first full year, because we just don't know when exactly it's going to close at this point but on a full-year basis, year 1 we certainly expect it to be accretive. Now if you look at it on a first full year excluding one-time integration and transaction costs, it's highly accretive and if you exclude the amortization, which is a non-cash impact, even more significant than that. So we feel very good that it's highly strategic and financially accretive.


We will go next to Justin Lake with UBS.

Justin Lake - UBS Investment Bank, Research Division

Just a few quick numbers questions. First, Herb's contract to stay running CIGNA's Medicare Advantage business, just curious there on the length of time and the terms. Second, is there a breakup fee and if so, what is it? And then what is the debt-to-cap expected to be? And lastly, And I think Josh asked the question on the PBM, we'd be definitely curious on what you're going to do with HealthSpring's PBM, I think I missed that answer.

David M. Cordani

Justin, it's David, I'll start. I'm not going to walk through on the call, it will be in the public disclosures, the components of the arrangement with Herb, breakup fee of the transaction, et cetera. Let me give you some macro point though, and then we'll cut across through the PBM piece of the equation. As we referenced in prepared remarks question today, the leadership team, starting with Herb are a real important part of this, as I noted in my prepared remarks it is a good opportunity to get to know Herb and his key leadership team and that's an important part of it. So as you might expect, we've taken steps to make sure that jointly, we want to be together and we want to build on the great successful momentum that's there and you'll see that in disclosures over time. Additionally, again, I don't think it's helpful to go through on the call. The intricacies of the deal but -- more standard prevailing provisions are in there protecting both parties' interests including the likes of a breakup fee. As it relates to the PBM, as you know, it hasn't been of much interest here to cap, with PBM it's been successful. As you inferred from your question, with both organizations having a PDP program, it helps when you're using another PBM. There may or may not be synergies there. What's most important for us, we will always put the customer service proposition in front and center, with good service and clinical quality and over time, we'll identify whether there's synergies on looking at it in a broader sense of the equation. But it always been the customer first and looking at their service and clinical quality. I hope that helps you, Justin.

Ralph J. Nicoletti

First, and then I'll come back to the couple of the other questions you had within there. First on the breakup fee, $115 million. To think about it, that's in just north of 3% in context. And then, on debt-to-capitalization, expect that at about 20% equity and the rest financed through debt in our existing cash. We would expect our debt-to-capitalization to move up to about the 37% range. And our expectation would be over a reasonable period of time we'll bring that back down to our target range in the 25% to 30% level. And we're going to structure the debt in a way that allows us to do that with bouncing short-term and kind of as low as longer-term.


We will go next to the Christine Arnold with Cowen & Company.

Christine Arnold - Cowen and Company, LLC, Research Division

A couple of clarifying questions. It sounds like in response to the last question, you'll initially have a lot more debt-to-cap, but it sounds like you'd be accessing the markets to bring yourself down to the 25% to 30% target level over the course of the next 6 months to one year? Is that sort of what you're saying?

David M. Cordani

Well, to be clear, we'll be taking one more debt. We'll structure the debt in a way where the maturities allow us to bring down our debt-to-capitalization to the 25% to 30% target range in a reasonable period of time.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay, but you're not defining that? Okay. And then...

David M. Cordani

Just for clarity though, we run now at the 27% level and maybe you could think of us operating in that back down to that kind of range over time.


We will go next to Carl McDonald with Citi.

Carl R. McDonald - Citigroup Inc, Research Division

I want to come back again to the question around Herb and running the Medicare business at CIGNA. I think given HealthSpring's specialized model's probably a little bit more important in this situation than it is in others. So if there is anything that you can add and, Herb, certainly feel free to chime in, in terms of, sort of, length of time and your incentives for sticking it with a much larger organization?

David M. Cordani

Hi, it's David. Let me start and then I'll ask Herb to expand as he sees fit. So as noted in our prepared remarks, think about we tried to lay out as we will seek to run the combined Seniors and Medicare business, essentially off of the very successful HealthSpring leadership team and franchise, right? There is the lead part of this equation, as you noted in your question, a very successful organization, a very innovative model, et cetera, and we'll look to get that, then leverage points in the collaboration across that. And as such, the leadership buying and support is very important there. Herb, I'll let you expand on the -- your company if you desire.

Herbert A. Fritch

Well first, it certainly was a -- we think a good deal for our shareholders, but personally, I really believe in what we're doing, with positions and changing the dynamics between physicians and payers, and we're really looking for a platform where we felt like we'd have the ability to expand that and grow that and I think we found that and we feel pretty comfortable with that.


We will go next to David Windley with Jefferies & Company.

David H. Windley - Jefferies & Company, Inc., Research Division

David, you mentioned in your remarks opportunity in the Group Retirement business, and that obviously strongly eludes to an existing or impacts -- would seem to impact an existing deal you have with Humana. I wondered if you could expand it to any degree on how that will play out? How soon and how in logistic?

David M. Cordani

As you rightfully recall, we have a relationship with Humana, we view that as an alliance relationship to accommodate the needs of our employer-sponsored and a customers both existing in perspective. Additionally, as you now, and as we noted in our prepared remarks, and I know this platform, while very successful is not a national platform. So as I said to you over the near-term you should expect that both will exist and we'll continue to work with Humana to ensure that the existing program or any evolutions to the program is mutually beneficial to both parties.


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

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I just want to go back to Herb for a second. And get a little bit more color about the rationale. We're selling at $55 when you guys were trading close to $49 I guess, a few months ago. And then I guess in particular, you mentioned it a few times, just the benefits from combining with CIGNA to getting that platform. I just really want to get a little bit more detail about exactly what it is that you couldn't have done on your own that you're going to be getting here from CIGNA?

Herbert A. Fritch

Well, I think there's certainly more scale, there's more access to Employee or Retiree business. And we also feel like the physician-engagement model can be expanded to other lines of business, to Commercial ultimately and maybe the Individual business through exchanges. And CIGNA provides a great platform to do that, that we would take much longer to do on our own.


We will go next to Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Actually, sort of another question for Herb here I know we're still on the earlier side of the annual enrollment period but I guess could you give us a sense for what HealthSpring or HealthSpring sort of viewed the core Medicare Advantage business and the growth in that business going into 2012 and whether that's factored into the discussions with CIGNA and the overall $55 purchase price?

Herbert A. Fritch

We certainly believe so, but we feel pretty good about our growth prospects for '12 and are hopeful that we'll come out of open enrollment pretty comparable to with the successful season we have in '11.


We will go next to Peter Costa with Wells Fargo.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Yes, 2 parts to this question. First, in terms of getting comfortable with the transaction. How did you account for all the scalability of the physician-engagement tools of HealthSpring? And then why didn't you use shares in the purchase price rather than the structure that you have where you're using the equity offering?

David M. Cordani

Peter, it's David. I think that I'll start on scalability now all throughout to address the second piece on the components of the financing. Broadly speaking, if I understand your question on scalability, number one, we don't believe today nor do we believe in the future. It's going to be a one-size-fits-all model. Both organizations share a notion of focus, we call it Go Deep. Herb and his team has perfected that in terms of driving depth, building a value proposition and ensuring that they're targeting those customers that really benefit from that value proposition. So very importantly, you should not think that we believe that there's a single clinical and physician-engagement model that would be useful for all customer relationships across all lines of business. However, we do believe philosophically that at the core, aligning the physician's incentives and engaging with them in a more partnered model, using information to help to drive the improvements in clinical qualities is the sustainable way to drive forward, regardless of whether it's the most innovative and combined model for a lot of such model. And I would submit to you that in the Commercial space segments we've seen good progress around that over the last 3 to 4 years. Herb and his team have seen it for much longer and have a much deeper relationship, so we're excited about having that in our combined portfolio and building on it going forward. Ralph, could we ask you to address the second question?

Ralph J. Nicoletti

Sure. Peter, for the prepared remarks, we are financing the transaction with approximately 20% equity and then 80% debt and cash. And importantly, we expect the main effect of liquidity and flexibility with that type of financing structure. And clearly, every deal has different dynamics. In this case, we determined that this was the best path for this transaction.


We will go next to Harlan Sonderling with Columbia Management.

Harlan Sonderling - Columbia Management

My question is on the pharmacy benefit manager that you have, David, and your relationship, Herb, with FXC [ph]. Could you simply reiterate the terms of that agreement, Herb, please? And then David, your consideration for the future of that plan?

Herbert A. Fritch

I believe we have 3 years remaining on our contract with them. And as well as, as of January 1, we'll be transitioning the bravo PDP business over there.

David M. Cordani

Harlan, good morning, it's David. From my point of view, we've been very pleased with the performance of our PBM. It's a critical part of the innovative clinical proposition, and we're going to continue to be nimble and flexible as we innovate that, and we're more -- from Herb and his team in terms of how we're getting the synergies and leverage out of their current relationship.


And that was our last question for today. I'd like to turn the call back to David Cordani for any additional or closing comments.

David M. Cordani

Thank you, everyone, again, for your participation in today's call. As we noted, we're very excited about the great opportunities that the combination of CIGNA and HealthSpring offer to build greater enduring value for our collective customer base.

I'll close by just reinforcing the few key points about the opportunities our combined companies create. And that is to accelerate growth for HealthSpring's improving model, leveraging of feeder pool of Medicare Advantage solutions from our 65-year-old-plus retiree population. We're seeking to expand further the geographies for HealthSpring's proven model by leveraging their combined costumer footprint and capabilities, by maximizing HealthSpring's highly effective physician-engagement modeling capabilities, to accelerate our retail programs by leveraging our specialty and clinical capabilities for the benefit of HealthSpring's customer base, and of course our operating expense synergies over time. Our company now has strength and capabilities, greater scale and an expanded talent pool to serve the fast-growing Seniors market, and we expect to thrive in this rapidly evolving retail marketplace as we offer a broader portfolio of solutions to our customers across a broad level of life and health stages. We thank you again, for joining the call, and have a great day.


Ladies and gentlemen, this concludes the CIGNA Corporation and HealthSpring Inc. joint Conference Call. 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 (719) 457-0820 or toll free (888) 203-1112, the pass code for the replay is 3305644. Thank you for participating, we will now disconnect.

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