CIGNA Q3 2007 Earnings Call Transcript

CIGNA Corporation (CI)

Q3 2007 Earnings Call

November 2, 2007 8:30 am ET

Executives

Ted Detrick - Vice President, Investor Relations

H. Edward Hanway - Chief Executive Officer

Michael Bell - Executive Vice President, Chief Financial Officer

David Cordani - President, CIGNA Healthcare

Jon Rubin - Chief Financial Officer, CIGNA Healthcare

Analysts

Scott Fidel - Deutsche Bank

Matthew Borsch - Goldman Sachs

John Rex - Bear Stearns

Charles Boorady - Citigroup

Gregory Nersessian - Credit Suisse

Joshua Raskin - Lehman Brothers

Christine Arnold - Morgan Stanley

Justin Lake - UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by for CIGNA's third quarter 2007 results review. (Operator Instructions) We’ll 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 and with me this morning are Ed Hanway, CIGNA's Chairman and CEO; Mike Bell, CIGNA's Chief Financial Officer; David Cordani, President of CIGNA Healthcare; and Jon Rubin, CIGNA Healthcare’s Chief Financial Officer.

In our remarks today, Ed will begin by discussing highlights of CIGNA's third quarter and year-to-date results. We will also make some comments regarding our growth prospects for 2008. Mike will then review the financial details of the quarter and provide the financial outlook for the full year 2007 and for 2008. David will discuss our medical membership results and outlook. We will also make some comments regarding our consumer engagement capabilities, which is improving the health and wellbeing of our members. Ed will then conclude our remarks by briefly commenting on healthcare reform, as well as the opportunities in which we are focused to deliver profitable growth for our healthcare business. We will then open the lines for your questions.

As noted in our earnings release, CIGNA uses certain financial measures which are not determined in accordance with generally accepted accounting principles, or GAAP, when describing its financial results. Specifically, we use the term labeled adjusted income from operations, which is income from continuing operations before realized investment results and special items, with special items being unusual charges or gains, as the principal measure of performance for CIGNA and our operating segments. A reconciliation of adjusted income from operations to income from continuing operations, which is the most directly comparable GAAP measure, is contained in today’s earnings release which was filed this morning on Form 8-K with the Securities and Exchange Commission and is 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 risk factors that could cause actual results to differ materially from our current expectations. Those risk factors are discussed in today’s earnings release.

Before turning the call over to Ed, I will cover a few items pertaining to our third quarter results and disclosures. In CIGNA's earnings release, we have included a $23 million after tax benefit related to the completion of an IRS examination. This benefit is reported as a special item and therefore is excluded from adjusted incomes from operations in today’s discussion of both our third quarter results and our full year 2007 outlook. In addition, CIGNA's third quarter results include after tax income from discontinued operations of $2 million related to the completion of that IRS examination.

Regarding our disclosures, I would note that in 2006, the financial accounting standards board issued statement number 157 entitled fair value measurements, which clarifies the measurement of and expands disclosures regarding the fair valuing of certain assets and liabilities. Companies are required to implement statement number 157 effective with the first quarter of 2008.

Based on our current evaluation, we believe that statement 157 changes the assumptions we use to fair value the assets and liabilities of our guaranteed minimum income benefits business within our run-off reinsurance segments.

The initial implementation of statement 157 is expected to have an adverse impact on CIGNA's results and this impact may be material to consolidated results of operation but we do not expect it to materially impact CIGNA's financial condition.

Also, because changes in the fair value of these assets and liabilities will be recorded in net income, CIGNA's future results for the run-off reinsurance segment may become more volatile subsequent to the adoption of this statement.

Lastly, I would also note that in the earnings outlook for 2008, which Mike Bell will discuss in a few minutes, our outlook excludes any potential volatility related to the adoption of this statement.

With that, I’ll turn it over to Ed.

H. Edward Hanway

Thanks, Ted. Good morning, everyone. I am going to start today’s call with a few brief comments on our third quarter results and I will then discuss the highlights of our 2008 outlook. Mike will provide more details on the third quarter results and our 2007 and 2008 outlook. After that, David will comment on our medical membership results and review the 2007 and 2008 membership outlook. He will also discuss out the strength of our consumer engagement capabilities, which are improving the health and wellbeing of our members, have helped us achieve very good membership growth in 2007 and why we believe we are well-positioned to successfully achieve our 2008 growth goals.

In my closing remarks, I will comment on the healthcare reform debate and also briefly identify the opportunities we are pursuing to profitably grow our business for the long-term.

Overall, our consolidated third quarter results were strong and above our expectations. The results reflect growth in healthcare earnings and strong contributions from our other health and related benefits businesses.

Third quarter adjusted income from operations was $323 million, or $1.14 per share, and represented 37% earnings per share growth relative to the third quarter of 2006. Year-to-date adjusted income from operations was $866 million, or $2.98 per share and represented 30% earnings per share growth relative to 2006.

On a year-to-date basis, healthcare earnings excluding prior year development have increased by 11%, or $50 million, compared to the same period last year. The healthcare results reflect aggregate medical membership growth, disciplined execution of our guaranteed cost renewal pricing action, and strong contribution from our specialty businesses.

Year-to-date, healthcare membership, excluding members gained from the Sagamore acquisition, has grown approximately 5.1%. Our year-to-date 2007 healthcare results demonstrate disciplined pricing, which we plan to maintain in 2008.

Our group disability and life and international businesses continued to deliver strong results. Year-to-date, our group disability and life business reported earnings of $191 million, with premium and fees growing year over year at an attractive rate of 13%. Our after tax margin in this business continues to be very strong.

Our international business has reported year-to-date earnings of $129 million on 17% growth in premiums and fees. Both our group and international operations have strong market positions with good opportunities.

We also continued to be active with share repurchase. To date in 2007, we have repurchased approximately 24 million shares for $1.16 billion.

But to reiterate, our third quarter consolidated results were strong and we have increased our full year 2007 consolidated earnings outlook.

Regarding our 2008 outlook, we expect full year membership to grow organically by 3% to 5%. We expect approximately 2% to 3% growth will be achieved in the first quarter. As Mike will discuss in detail, we expect healthcare earnings, excluding prior year development, to grow in the low double digits in 2008, similar to the earnings growth we are achieving year-to-date in 2007.

This earnings growth, coupled with a second consecutive year of meaningful membership growth, validates that our capabilities related to the consumer engagement area are resonating well in the marketplace.

We expect continued good earnings in revenue growth in our group and international businesses in 2008. Overall, we are pleased with our prospects for membership and earnings growth across ongoing businesses in 2008.

Mike will now cover the specifics of the third quarter as well as our outlook for 2007 and 2008. Mike.

Michael Bell

Thanks, Ed. Good morning, everyone. In my remarks today, I will review CIGNA's third quarter results. I’ll also discuss our outlook for full year 2007 and for 2008. In my review of consolidated and segment results, I will comment on adjusted income from operations, and this is income from continuing operations excluding realized investment results and special items. This is also the basis on which I’ll provide our earnings outlook.

Our third quarter earnings were $323 million, or $1.14 a share, compared to $268 million, or $0.83 a share in 2006.

I’ll now review each of the segment results, beginning with healthcare. Third quarter healthcare earnings were $173 million. This result included after tax favorable prior year claim development of $5 million. Excluding prior year development, year-to-date healthcare earnings are $50 million higher than the same period in 2006.

Aggregate membership growth and lower per member operating expenses contributed to our earnings growth, as did execution of our guaranteed cost pricing actions over the last 12 months.

The year-to-date results also include earnings growth from our specialty businesses. These factors were partly offset by lower mail order pharmacy volume and a $6 million after tax charge related to the CMS disease management pilot.

Healthcare membership through nine months was 5.1% higher than at year end 2006, excluding the 357,000 members relate to the Sagamore acquisition.

In the third quarter, experience rated membership grew sequentially, while guaranteed cost membership declined. The latter reflected our focus on maintaining pricing discipline in an environment which continued to be quite competitive.

We currently expect full year membership to be 5% to 5.5%, excluding Sagamore. The upper end of this range is modestly lower than our previous expectation, reflecting the guaranteed cost competitive environment.

Our year-to-date guaranteed cost MCR was 84.3% excluding favorable prior year development and excluding the results from our voluntary business. This result is 210 basis points better than the comparable 2006 MCR, reflecting strong execution of our renewal pricing actions.

The guaranteed cost MCR improved in the third quarter relative to the first half of the year, and we expect to achieve a full year guaranteed cost MCR, excluding prior year claim development and voluntary of 84% to 84.25%.

Healthcare premiums and fees through nine months were up 11% versus 2006, reflecting medical membership growth, rate increases, and growth to Medicare Part D.

Relative to operating expenses, our results for nine months continued to reflect productivity improvements, partially offset by investments that we are making in our growth initiatives. Overall, excluding prior year claim development, our year-to-date healthcare earnings are $50 million, or 11% higher than in 2006.

I’ll now discuss the results in our other segments.

Third quarter 2007 earnings in the disability and life segment were $63 million. This result reflected favorable mortality in group life and accident, effective operating expense management, and competitively attractive margins and disability. The segment’s third quarter earnings included a $3 million favorable after tax impact of reserve studies.

In our international segment, third quarter 2007 earnings of $47 million reflected competitively strong margins and continued growth in our life accident and health and expatriate benefits businesses. Group and international continue to be important contributors to our consolidated results.

Earnings in our remaining operations, including run-off reinsurance, other operations and corporate, were $40 million for the quarter. Run-off reinsurance earned $39 million, and this result reflected favorable items which we do not expect to recur, including settlement activity and favorable claim experience on run-off personal accident business.

Before discussing our earnings outlook for the full year, I’ll comment briefly on our current capital position and our 2007 outlook.

Our parent company capital position continues to be strong and our subsidiaries remain well-capitalized. At the end of the third quarter, cash and short-term investments at the parent were approximately $450 million.

We continued our share repurchase program in third quarter, repurchasing 4.6 million shares of our stock for approximately $235 million. To date in 2007, we have repurchased approximately 24 million shares for $1.16 billion.

With respect to the outlook, we continue to expect full year 2007 subsidiary dividends to be approximately $1 billion. Our parent has received approximately $750 million of subsidiary dividends through September.

We expect other sources and uses of parent company cash for the fourth quarter [to sum between] net source of approximately $100 million, and this estimate excludes any further share repurchase and any additional M&A activity.

We continue to have a long-term target for parent cash of approximately $250 million.

Our capital management priorities remain consistent with our prior communications. Our first priority is to maintain appropriate liquidity at the parent and to ensure that our subsidiaries remain adequately capitalized to support growth and maintain their credit ratings.

Our second priority for excess capital is to consider acquisition opportunities. We routinely review a range of acquisition opportunities that would enhance our strategic position and meet our return on investment goals.

We do not know when or if we would find additional opportunities that would meet our criteria and absent these items, our priority would be to buy back our stock.

In summary, we continue to have a strong capital position and good financial flexibility.

I’ll now review our earnings outlook. For full year 2007, we currently expect consolidated adjusted income from operations of $1.1 billion to $1.16 billion. This range is higher than the estimates we provided in August, primarily reflecting the strength of our third quarter results.

I’ll discuss the components, starting with healthcare. Our estimate for full year 2007 healthcare earnings is a range of $670 million to $710 million. The upper end of this range is modestly lower than the estimate we provided in August, and this reflects the facts that I noted in discussing our third quarter results. Specifically, the lower mail order pharmacy volume, the charge related to the CMS disease management pilot and lower guaranteed cost membership are expected to be partly offset by a higher outlook for specialty earnings, including [stop loss].

With respect to other key factors in the healthcare outlook, we expect medical cost trend for our total book of business to be in the range of 6.5% to 7.5% for the full year, and this is unchanged from the estimates we provided in August.

We expect guaranteed cost pricing yields to exceed trend and we expect the guaranteed cost MCR, excluding prior year claim development in the voluntary business, to be in the range of 84% to 84.25% for the full year 2007.

All in, we currently project full year 2007 healthcare earnings to be in a range of $670 million to $710 million.

Turning to the balance of our segments, we expect our remaining operations to contribute approximately $430 million to $450 million of earnings for the full year 2007. This is higher than the outlook we provided in August, reflecting the strong third quarter results. For the full year, we continue to expect high single digit earnings growth in group.

Our full year earnings growth expectation in international is now approximately 20%, which is higher than our previous estimates.

So putting together all the pieces, we estimate that our full year 2007 consolidated adjusted income from operations will be in the range of $1.1 billion to $1.16 billion. As I discussed before, we do not predict the amount or pace of repurchase and our estimates for earnings and EPS do not reflect the impact of any further repurchase activity.

On this basis, our estimate of full year EPS for 2007 is a range of $3.80 to $4 a share.

Turning now to the full year 2008 outlook, we currently expected consolidated adjusted income from operations in a range of $1.155 billion to $1.215 billion.

I’ll discuss the components, starting with healthcare. As Ed noted, we currently expect that our medical membership will increase by 2% to 3% in the first quarter and 3% to 5% for the full year 2008. We expect over 90% of the first quarter membership growth to be in ASO.

We currently expect medical cost trend for our total book of business to be in the range of 6.5% to 7.5% in 2008. We expect guaranteed cost pricing yields to modestly exceed trend and we estimate that the full year guaranteed cost MCR, excluding prior year claim development in our voluntary business, will be approximately 83%.

Our estimate for full year 2008 healthcare earnings is a range of $740 million to $780 million, and this range is $80 million, or 12% higher than our projected earnings range for 2007, excluding prior year development.

Our expected earnings growth in 2008 reflects several key factors. First, we expect that revenue growth, including the impact of increased membership and higher penetration of our specialty products, will deliver approximately $50 million to $70 million of additional after tax earnings.

Second, we expect guaranteed cost pricing action in excess of medical trend to improve the MCR by 100 to 125 basis points and we expect this improvement to contribute approximately $25 million to $35 million of after tax earnings growth.

Third, we expect to invest approximately $10 million net on an after tax basis in our segment expansion initiatives in the small group, individual, and seniors markets. Now while dilutive in 2008, we expect these initiatives to be accretive to earnings starting in 2009.

Finally, we expect 2008 experience rated margins to be approximately in line with full year 2007.

So in total, we expect 2008 healthcare earnings to be in the range of $740 million to $780 million.

Turning to the balance of our segments, we expect our remaining operations to contribute approximately $415 million to $435 million of earnings in 2008. We expect our group disability and life and international businesses to continue to grow revenue while maintaining strong margins. Specifically, we expect low to mid single digit earnings growth in group and low double-digit earnings growth in international.

Earnings for the balance of our operations, which include run-off businesses and the parent, are expected to be lower year over year, mainly due to the absence of the 2007 non-recurring favorability in run-off reinsurance.

I would reinforce Ted’s comment that our 2008 outlook does not include potential additional volatility resulting from the implementation of the new fair value accounting standard as it relates to run-off reinsurance.

Putting together all the pieces, we estimate that our full year 2008 consolidated adjusted income from operations will be in the range of $1.155 billion to $1.215 billion. As I mentioned before, we do not predict the amount or pace of repurchase and our estimates for earnings and EPS do not reflect the impact of any further repurchase activity. On this basis, our estimate of full year EPS for 2008 is a range of $4 to $4.20 a share.

In thinking about our expected EPS growth, it is useful to consider the impact of the favorability in the run-off reinsurance business, which is included in our 2007 outlook and which we do not expect to recur in 2008.

In addition, our 2008 EPS estimates represent a compound annual growth rate of approximately 14% relative to 2006.

Relative to capital management, we expect to maintain strong dividend paying ability in our subsidiaries in 2008. As we’ve previously stated, we expect to have extracted most of the excess liquidity from our subsidiaries by the end of 2007, and in 2008 we would expect subsidiary dividends to be at a more normal level of approximately 75% of consolidated earnings.

We’ll provide more specifics relative to our 2008 capital management expectations in February.

So to recap, assuming no further repurchase, our current outlook is for full year 2007 EPS to be in the range of $3.80 to $4, and our EPS estimate for 2008 is a range of $4 to $4.20. Our outlook for 2008 reflects attractive earnings growth in healthcare and continued strong performance in our group and international businesses.

And with that, I’ll turn it over to David.

David Cordani

Thanks, Mike. Good morning, everyone. As you’ve already heard this morning, we continue to expect CIGNA Healthcare to achieve strong earnings growth for 2007. In addition, we anticipate continued membership and earnings growth in 2008 while also making investments in important growth areas.

Later this month at our investor day, we will discuss our long-term growth strategy in some detail. Today, my remarks will be focused in three areas: first, membership growth for 2007 and 2008; second, what’s driving our success; and third, our strategy, which focuses on health advocacy and consumer engagement.

Our medical membership grew in the third quarter by approximately 67,000 members. Year-to-date, that’s 5.1% growth, excluding the acquisition of Sagamore. We saw growth in both the regional and national segments in the third quarter.

Our expected membership growth for full year 2007 is currently at 5% to 5.5%, which reflects national segment growth of over 3% and regional segment growth of over 6%.

Turning to 2008, during the first quarter we expect total membership growth of 2% to 3%. For full year 2008, we expect 3% to 5% increase in membership.

In the national segment, we are able to win because of the strength of our value proposition, which includes our ability to consult with and provide appropriate cost-effective solutions for employers and engage our members to improve their health and wellbeing.

Turning to the regional segment, we expect membership growth in the range of 2% to 3% for the first quarter of 2008. We are winning in this segment primarily based on cost and access, the value of our consultative employer sales, and client management capabilities, and our health advocacy programs.

Combining both segments, we expect most of our first quarter’s growth to be in ASO funding arrangements.

Relative to pricing, the market continues to be very competitive, particularly for guaranteed cost programs. Additionally, across all funding arrangement, the buying decisions are occurring later this year versus prior years.

Now let’s move to another key factor in our business, medical cost trend. Year-to-date 2007 net medical cost trend [per booked] is in line with expectations. For full year 2007, our trend will be in the 6.5% to 7.5% range. We expect the overall 2008 trend to be in the range of 6.5% to 7.5%, consistent with our ’07 outlook.

Now I will turn to my final topic for today, our strategy, which focuses on health advocacy and consumer engagement. This is a topic I am particularly passionate about. It encompasses what’s beginning to work today and the trend for the future of our industry. It’s why we talk about moving from traditional insurance view, which pays for sick care, to becoming the leading health services company who will engage members to improve their health.

While some have questioned the value of consumer directed plans, our experience is that appropriately designed consumer directed programs with health advocacy and consumer engagement programs do generate real and positive impact. We believe our approach is different and our results are demonstrable.

In fact, our combined programs have delivered a meaningful reduction in medical costs over two years.

Last month, we announced the results of our two-year study of actual health claim experience of more than 430,000 CIGNA consumer directed and traditional HMO and PPO members.

The medical cost trend for the first year of consumer directed members was more than 12% lower than traditional plans. The comparable second year trend was 5% lower than traditional plans.

More importantly, the use of preventive care increased and medication compliance improved. Prevention and compliance went up, yet costs decreased. This is clear evidence that smart consumption of healthcare can reduce costs while improving health. The key is effective plan designs that result in total cost reduction without reducing care or shifting costs to members.

To support these plan designs, there’s growing interest and need for products and services that engage, educate, and enable individuals to improve their health and well-being. The national segment employers have been early adopters. Having said that, interest is now increasing across all segments.

Today we are committed to investing in product, service, and technology capabilities to support this growing need. The effectiveness of our approach to consumer engagement is a reflection of the depth and quality of our clinical programs, where we have received national recognition.

In September, the National Committee for Quality Assurance for the sixth consecutive year show CIGNA Healthcare scores to be higher than both quality compass national average and our main competitor’s averages in the majority of preventive and chronic care measures used by NCQA in accrediting health plans.

All of our 23 NCQA accredited HMO and point-of-service health plans have excellent accreditation status. In addition, our health advocacy programs include targeted outreach to members who haven’t received preventative care where established clinical guidelines exist.

Examples include outreach to over 500,000 women for PAP tests or mammographies, outreach to nearly 300,000 families for important childhood and adolescent immunizations and our colorectal cancer screening initiative, that we’ve expanded to include over 320,000 members in 13 markets.

Finally, not only do we use health risk assessments and biometric screenings but our exclusive use of the University of Michigan’s trend management algorithms allows us to identify, engage, and coach the healthy at-risk segment of the population. This is significant. It means we can now begin to intervene before members get sick and help them reduce key risks and ultimately avoid illness.

These are some of the ways we are distinguishing ourselves, through effective plan designs delivered by our consultative sales professionals, deep knowledge of employers and the individuals we serve, and health advocacy capabilities that truly improve health and well-being. With these capabilities, we are seeking to expand our segments and thereby increase the number of people we serve.

Last quarter we discussed the importance of our expansion into the senior and retiree segment. I want to provide a bit more detail on some of our expansion initiatives.

As you know, the baby boomers represent a massive demographic and it’s a population that is very different than previous retirees -- their desires are different, thus their needs are different than previous generations. The communication and rules of engagement are different and our value proposition lines up well to fulfill those needs.

We are launching a Medicare private fee-for-service plan for 2008 on a national basis for employer groups and in 13 states for individuals. These programs will complement our continued growth of our Medicare Part D program with national individual and employer coverage.

Additionally, we will expand our offering of Medicare advantage plans in Arizona to include both private fee-for-service and Medicare HMO plans for January 2008.

So to wrap up, we are pleased with our 2007 results. We maintained good pricing and underwriting focus and strong medical cost management that has supported over 5% net organic membership growth. Our value proposition is strong and the results delivered by our health advocacy and consumer engagement capabilities, evidenced by increased prevention, increased clinical compliance, and declining medical cost trends, are very real.

Before I hand the session back over to Ed, let me just say that I look forward to talking with you in person at our investor day later this month, and with that I’ll turn the call back to Ed.

H. Edward Hanway

Thanks, David. I want to underscore several points. First, our consolidated results for the third quarter were strong and reflect growth in healthcare earnings as well as strong contributions from our disability and life and international businesses.

Second, the earnings and membership growth we are achieving in our healthcare business in 2007 validates the strength of our value proposition in the marketplace.

Third, we will make significant investments in segment expansions in 2008, which will drive future profitable growth and enable us to achieve our mission to become the leading health and related benefits company.

Lastly, I believe we have a strong market position that we can leverage to achieve our membership and earnings growth goals for 2008.

I’ll now make a few remarks on the healthcare industry from a public policy perspective. As you know, the U.S. healthcare environment has been challenging in recent years and will likely remain so for some time. CIGNA is actively invested both in the debate around the future of our healthcare system as well as pursuit of new and enhanced capabilities required to succeed going forward.

At CIGNA, we believe that every American should have access to affordable, quality healthcare. We also believe that a coordinated public and private partnership of all healthcare stakeholders is critical to creating a value-driven market which will expand coverage to the uninsured and improve the health of all Americans.

It is important to note that current healthcare reform proposals of both parties are based on maintaining the employer-based health insurance system, which we view as positive. At CIGNA, we are preparing for the evolution of healthcare in the U.S. and we believe this evolution will create opportunities to support long-term growth for our healthcare business.

Our focus for healthcare growth will continue to be the employer-sponsored arena, where we will seek to grow membership through ongoing introduction of innovative products and services and effective consumer engagement.

In addition, we are adding capabilities and resources to expand the segments where we see significant growth opportunities, some of which may be enabled by healthcare reform, such as the small group, individuals, seniors and voluntary segments.

We expect to capitalize on opportunities that complement our core medical products with specialty disease management and disability and life products.

In summary, our prospects are attractive to organically grow our business on a sustained basis. So while we are focused on pursuing these growth opportunities, we will also consider supplementing our organic growth with acquisitions should we find opportunities that meet our criteria.

Overall, we expect our ongoing businesses to grow earnings in 2008 by approximately 10%, excluding prior year development and that’s consistent with our long-term strategic goals.

We will provide details related to our expectations for 2008 and our long-term growth goals at our annual investor day in New York City on November 16th.

In closing, our consolidated results are strong and we expect this momentum to continue into 2008 and beyond. I am confident that CIGNA has strong market positions in each of our health and related benefits businesses and that we will leverage these positions to continue to create value for the benefit of our customers and shareholders.

This concludes our prepared remarks. We will be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Scott Fidel at Deutsche Bank.

Scott Fidel - Deutsche Bank

First question, just on the 2008 guidance, and maybe if you could help us think a bit about the glide path on reserve development expectations for next year, and then Mike, you did touch a bit on share buy-backs, but how do you think the activity might trend out? Because obviously those are two pieces that have come in higher than the guidance in the last couple of years.

Michael Bell

In terms of the 2008 guidance, I walked through in the prepared remarks the main drivers of the healthcare earnings growth year over year and it’s really a combination of revenue growth and further improvement in the guaranteed cost MCR.

In terms of your particular question around prior period or prior year development, I would point out that prior year development has been relatively immaterial in 2007 for all reasons that we talked about. We haven’t been surprised that it’s been lower than prior years because the drivers of the prior year development, the higher prior year development in the prior years no longer really applied to this year, particularly the fact that medical costs trends had stabilized as opposed to declining. Our membership has generally stabilized. Shrinkage in membership tends to drive favorable prior year development. Given that our membership is now much more stable, that’s a contributor to the lower level, and also our operational improvements have also stabilized. So for all of those reasons, we’re not surprised that it’s lower in 2007.

There’s nothing explicit in our expectations for 2008 around prior year development but if I had to speculate, I would suspect that prior year development will also probably be immaterial in 2008.

In terms of your question on buy back, I think you know that we don’t comment on share buy back repurchase activity just as a matter of policy.

Scott Fidel - Deutsche Bank

Okay, and then just as a follow-up, maybe if you could talk about just on the sources and uses of cash expectations for 2008 -- any particular items you would spike out there? And then just a bit more topical, actually this morning UnitedHealth announced that they are going to acquire Fiserv’s health business and just your thoughts around how that deal might impact the ASO environment and basically how much you compete with Fiserv at this point.

Michael Bell

I’ll deal with the parent company cash question. First, in terms of 2008, I would like to wait until a combination of the investor day and the year-end analyst call to be real specific in terms of 2008. But what I would suggest at this point is that our 2008 expectations for subsidiary dividends are at this point in line with our longer term expectation that approximately 75% of our consolidated earnings should translate into subsidiary dividends from the operating companies to the parent, which means that the remaining one quarter of the earnings would essentially entail retained earnings in the operating subs to support their growth. In 2008, we expect to be pretty close to that.

There are some other moving parts. We expect to extract some additional capital from the operating subsidiaries that group insurance operates in, but again there’s some other moving parts that I’ll give you some more detail on on a future call.

David Cordani

On the Fiserv question, I’ll start and see if Ed wants to add to that. I’ll not speculate specifically on why they purchased Fiserv but more broadly, don’t generally see them in the mainstream business model today. Two, there’s continued demand for lower cost or more efficient ASO type offerings and leaner ASO type offerings, so you will see some activities from certain competitors around that, whether they are [pure admin], buying small TPAs and trying to leverage those capabilities.

And the third comment is as Ed and myself have previously indicated, we expect to see further pressure on the second tier players as they compete to make sure their value propositions are competitive, and I think you see some of that playing out here. Ed.

H. Edward Hanway

I think that’s right. I don’t know that we see any material impact to our business. I think as you suggested, some of the direction we’ve seen, some of the areas we’ve taken advantage of, I think other people have recognized as well and that’s likely the motivation, but I think we feel very well positioned to continue to meet the needs of that particular part of the market.

Scott Fidel - Deutsche Bank

And on the fee competition in the ASO side, has that been coming would you say more from the majors or have the second tier players been competitive on fees essentially to try to retain some of their membership?

David Cordani

I would just say the, both in my prepared remarks and in general, the competitive pricing environment is pretty meaningful right now. The fee only competition is pretty meaningful and back to our strategy, it’s why we are so passionate about having a very diversified specialty portfolio, because if you are solely competing on an ASO only service proposition, that’s a very difficult standalone service proposition to compete against and we believe you’ll continue to see pressure there.

So for us, continuing to expand our specialty capabilities is an integral part of our business model.

Scott Fidel - Deutsche Bank

Thank you.

Operator

Next we’ll go to Matthew Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs

Good morning. Sorry if you covered this in your remarks, but on the decline in commercial risk enrolment, was that a -- can you just comment on what was driving that?

Michael Bell

Generally what’s driving that is the competitive pricing environment and the fact that we are committed to maintaining our pricing discipline. Now obviously overall our aggregate membership increased sequentially and as we’ve talked about, we expect our aggregate membership to continue to increase in 2008.

Matthew Borsch - Goldman Sachs

Got it, okay. So it was not -- you wouldn’t characterize it as a couple of large accounts, or was it more sort of erosion across the board in markets where you are maintaining pricing discipline?

Michael Bell

The latter, Matt, as opposed to any particular sizable accounts.

Matthew Borsch - Goldman Sachs

Okay, got it. And just coming back to the topic of Fiserv, the acquisition there, and I’m going to comment a little bit just on a competitor here and in a couple of respects. You know, the question comes up with these acquisitions, well, why did they do it and why didn’t you do it? That’s sort of my first question.

And the second is on capital deployment, one of your competitors has talked about going to a substantially higher debt-to-capital level to fund a greater level of share repurchase activity. Just wondering where you might be in terms of contemplating perhaps a similar move now or in the future.

And if you could just remind us where your target debt-to-cap is relative to where you are now. Thanks.

Michael Bell

Let me deal with your second question first. In terms of debt leverage, which we measure as debt to total cap, at the end of third quarter we were at 28% and there has been no change in our targeted range of 20% to 30% during normal times. In fact, absent significant acquisitions, we expect to be reasonably close to that 25% level. Now, in the event of an acquisition, we could conceivably go higher than the 30% on an interim basis, but we are quite serious about our long-term plan to be close to that midpoint of that 20% to 30%.

Matthew Borsch - Goldman Sachs

And why is that?

Michael Bell

The main reason is to protect our ratings. It’s very important to us that we continue to have operating subsidiary ratings, particularly CG Life, in that strong A level, and we believe that’s important because it’s important to our national accounts customers. And based on our discussions with the rating agencies, we think the combination of the strong results and the strong capital in our operating subsidiaries, coupled with that kind of parent company leverage and parent company cash, with a long-term target of $250 million, that that combination of elements puts us where we need to be in terms of the ratings.

Matthew Borsch - Goldman Sachs

Got it.

H. Edward Hanway

In terms of M&A and what and what not, as Mike said, we do constantly review a broad range of opportunities. The criteria we use to evaluate their attractiveness to us really hasn’t changed. We’ve been very consistent and said we’ll consider things that are strategic, that add real value for us. Sagamore, for example, is a good example of that. We’ve said that they have to be economically attractive to shareholders and then we also want to be able to integrate those acquisitions without distracting us from the good organic growth that we’ve been generating in the operation.

So as a practical matter, when an acquisition meets those criteria, we’re much more interested than not.

Matthew Borsch - Goldman Sachs

Okay, got it. Thank you.

Operator

We’ll take a question from John Rex at Bear Stearns.

John Rex - Bear Stearns

Just a first question on your fourth quarter guidance for the healthcare segment. It’s a rather wide earnings range, a $40 million on a midpoint $180 million business. It just implies you have really limited visibility on your 4Q and I’m curious what’s driving your hesitancy on your guidance for that segment for the fourth quarter ’07.

Michael Bell

I would ask you not to read in too much to that particular range. I think it is fair to say that it’s probably wider than what we’ve done in the past but that was not an intent to signal something in particular.

I would say that we are in the process of evaluating a number of issues related to operating expenses and in particular, getting ready for the growth that we expect in 2008, so there’s a little more volatility in that area than normal, but I would ask you not to overreact to that.

John Rex - Bear Stearns

Was that just -- we really shouldn’t think about a $40 million range then?

Michael Bell

Well, I’ll stick with the range that we’ve put out there but my point is that wasn’t a conscious attempt to signal a significant amount of uncertainty.

John Rex - Bear Stearns

And then on the experience rated business, I think in your comments you said that you didn’t expect it to improve in -- now, I know it’s been clearly ’07 performance has been well below ’06, because that was kind of a record year of experience rated, but even -- we’re still kind of lagging the results that you used to get out of experience rated business and does that kind of signal, that kind of reset the way we should think about earnings contribution for the segment? Is that reset from what maybe you use to get over the prior to -- over the last number of years?

Michael Bell

Just to be clear, the 2007 and 2008 margins in this business are in fact in line with what we’ve earned over a long period of time. Now, it is fair that 2005 and 2006 earnings in this business was particularly strong and essentially represented a recovery from the challenged results we had in those areas in 2003 and 2004.

But just to be clear, we feel real good about the earnings that we are generating in experience rated. We feel good about the fact that we are on a path for top line growth in 2008, a combination of the expected continued membership growth, as well as premium growth on the existing accounts.

And so our expectation is to have top line growth in the high single digits next year for experience rated, and the fact -- you couple that with all-in margins consistent with what we expect to generate here for full year 2007 and that means good earnings growth in this book of business. So we feel good about the results.

John Rex - Bear Stearns

Okay, so the margins in ’07 and ’06 are -- it kind of always looked to me like ’06 margins were considerably higher than in ’07 on experience rated, but that’s a mistake?

Michael Bell

No, John. Let me just say it again. You are absolutely right. The 2006 margins and earnings, for that matter, were stronger in experience rated than what we expect to achieve in 2007, but the point is that 2007 and 2008, we expect the all-in margins to be approximately equivalent between the two periods, which means good earnings growth, since we expect top line growth in that business.

John Rex - Bear Stearns

Okay, and then just one last thing, the implied share count in your guidance, it would look like you are using your full year ’07 weighted average shares, which would be up from where you were as you reported the 3Q. Is that just conservatism on the guidance or is there some reason we should actually expect the share count should trend up from where you were at 3Q07?

Michael Bell

John, a couple of things. First of all, remember that in the implied share counts in our guidance, there is no repurchase activity in any future period. In addition, just because of the common stock equivalents, depending upon what happens to our stock price, we do have some expansion in common stock equivalents modeled over the period. Obviously you are free to use your own estimates in that area.

John Rex - Bear Stearns

Thank you.

Operator

Next we’ll go to Charles Boorady at Citigroup.

Charles Boorady - Citigroup

Thanks. Good morning. First, just a housekeeping question on how you calculate your adjusted EPS. In the second quarter, you excluded a $0.19 charge for reinsurance and in this quarter, you are including a favorable reserve development in that same segment. Is that inconsistent or can you explain that?

Michael Bell

In terms of special items, we have been consistent that any single special item greater than $20 million, either plus or minus that we expect to be non-recurring and want to talk about as a separate item and urge you not to think about it in terms of the ongoing earnings of the business. We’ve been very consistent with that.

In this particular quarter, there were a number of non-recurring items in reinsurance that led to the positive result in the quarter, and it’s a good economic result. It’s just not expected to be recurring.

The point is that none of those individually summed up to more than $20 million after tax and that’s why we didn’t break it out. Once again, you are free to do whatever you want in terms of your own models, obviously.

Charles Boorady - Citigroup

Okay, that helps. And on international, at this growth rate, if it continued, it would eclipse life and disability next year and it would eclipse healthcare in three-and-a-half years. I know you are not expecting this growth rate to continue but maybe you could talk a little bit more about the opportunities to grow in terms of how big you see it in the next, say, three to five years. And are you able to invest enough capital to keep it growing? Or are you constraining its growth by not allocating enough capital to that subsidiary?

And then, also related to capital allocation for growth, you talked about pretty significant potential expansion in Medicare advantage, and I know you are not giving us a target on enrolment, per se, but how much capital do you foresee needing to support the growth in the next year? I assume you’ll be growing in some new markets.

H. Edward Hanway

Let me start on international. We are very pleased with the growth we are seeing there. I would remind you that this is a reasonably capital efficient business, meaning it tends to be a high return, low capital intensity business. So we very much like not only the earnings growth but the actual return on the capital we do have invested there.

In terms of the outlook, we talked about again double-digit growth next year. I think that we feel that in the markets that we are particularly focused on, and that includes Asia, what you are seeing there is increased penetration and a growing middle class that our products really appeal to. So I think we feel we have ample opportunity to continue to grow this business. We have a very tight focus on the kinds of business that we are writing and as you also know, we have continued to pare back in markets where we see less growth opportunity so we can maintain that focus.

So for example, in much of Latin America, we pulled back there because the growth opportunities are just nowhere near as significant as they are in Asia.

I think we feel very, very good about results to date but maybe more importantly, continue to believe that we could see good growth in that block of business and that that growth will be very capital efficient.

Charles Boorady - Citigroup

What’s your market share roughly, Ed? Just so we get a sense for how much the untapped opportunity is for you still.

H. Edward Hanway

That’s really hard to measure for a couple of reasons. One, remember the lines of business that we are in are truly kind of specialty oriented. I’m not sure I could give you a good sense for market share.

I think what I can say to you is in terms of penetrating that middle class that is growing in places like Korea and Taiwan and China and Indonesia and Thailand, there is lots of opportunity to continue to grow these businesses.

These are products that that population really looks at as income replacement, essentially. In places where there isn’t much of a social safety net, so if you look at hospital cash products or critical illness products, personal accident products, as the middle class grows they are looking for some security. These products are a fairly low cost way to provide some of that.

And so there’s continued good growth traction.

Charles Boorady - Citigroup

Do you think you are setting your targets too low? Or do you have internal targets that are higher than what you are telling us for that segment next year?

H. Edward Hanway

I think you can assume that given the kinds of returns we are generating on this business, we continue to push pretty hard. And I would also point to things like remember we made an acquisition in Thailand I guess last year. That was to position us more effectively in a market where we think there is going to be ongoing growth. In China, for example, as recently as probably 18 months ago, we were only licensed to do business in two regions. Today we are at six with probably two more to come in the next year.

We have pretty aggressive goals to continue to grow this business.

Charles Boorady - Citigroup

That’s great, and then just on capital for MA expansion, is that going to be a significant use of capital in ’08?

David Cordani

I would say that it is not a significant use of capital in ’08 and specifically, the Medicare expansion in ’08 is a continuation of our build, so we will grow PDP but we will launch the private-fee-for-service, focused on accommodating the needs of our employer sponsors.

I think looking beyond that, we hope that that’s a good problem to have with the growth we expect over the long term and we’ll dimension a little bit of that at our investor day, but for 2008, do not look at it as a material consumption of capital.

Charles Boorady - Citigroup

Thank you.

Operator

Next we’ll go to Gregory Nersessian at Credit Suisse.

Gregory Nersessian - Credit Suisse

Good morning. Just a quick question on the membership expectations for next year. Thank you for the breakout in terms of your 1-1 expectations, but then beyond that, I’m just wondering if you could give us a sense for directionally how you expect the guaranteed costs to track next year? And then also, any initial expectations on the MA enrolment, given your commentary on your activity there?

David Cordani

Relative to growth, again, we’ll start the year, knock on wood, with a good number, 2% to 3% growth, balanced very nicely again between our national and our regional segment. We expect that the makeup of it, as we indicated in the opening remarks, is primarily ASO, so de minimis flat or slightly down on the guaranteed cost side of the house, mostly ASO. And as Mike mentioned, we are seeing some good emerging traction on the experience rated.

As we look to the full year, we would expect consistent with prior full years, the regional segment will take over and carry the remainder of the growth pattern. So national segment will stay approximately in pattern to the 1-1 number, and we’ll see better growth through the latter part of the year in the regional segment.

And as a result, we expect to see some guaranteed costs, sales growth in the latter part of the year and continuation on the experience rated results.

Relative to the Med advantage, as I mentioned before, it’s really a build year for us, so we expect modest overall contribution to the private fee-per-service members, not a material driver of our overall membership, and maybe you could think about it in the 10,000 to 20,000 life range for us during the full year as we build out the capabilities. It’s possible to exceed that with some large off 1-1 wins, but we’re not banking on that at this point in time.

Gregory Nersessian - Credit Suisse

Okay, great, very helpful. And then my second question was, could you just go through the components of trend? A couple of the other companies in the sector had mentioned that they had seen their in patient trends tracking lower. I’m wondering if you’re seeing that as well, and then just generally if you could go through the rest of the components also.

Jon Rubin

Relative to the components of the 6.5% to 7.5% that’s built into our expectation for 2008, first I’ll provide a high level component range at this point. In-patient and out-patient, so facility overall, we’d expect to trend at high single digits, and that’s relatively consistent with what we’ve seen this year, probably a little bit better. Professional, low to mid single digits and pharmacy, mid to high single digits.

Now, by our year end call, we should have better visibility on the book of business changes that impact net medical cost trend, so we’ll be prepared to provide more specificity on trend components at that time.

Gregory Nersessian - Credit Suisse

Okay, great. Now, If I could sneak in one more, the guaranteed cost -- I’m sorry, the commercial HMO yields looked lower this quarter sequentially and the growth rate was lower. Is that a function of mix shift or the timing of enrolment that either came on or lapsed in the quarter? Could you touch on that as well?

Michael Bell

It’s all of the above that you described, particularly the mix shift piece. I would really urge you to, as you think about our guaranteed cost block, to think about the commercial HMO and the open access products essentially in a single bucket, since what we’ve seen over the last several years is the market increasingly more interested in open access products as opposed to the traditional HMO, and so I would suggest that you look at those in aggregate.

Gregory Nersessian - Credit Suisse

Thank you.

Operator

We’ll move next to Joshua Raskin at Lehman Brothers.

Joshua Raskin - Lehman Brothers

A couple quick ones; I just want to make sure I heard you right, Mike, when you said that the aggregate run-off reinsurance development was less than $20 million -- I’m sorry, was that in aggregate it was less than 20 or there were no individual items over 20?

Michael Bell

The latter, Josh. There were no individual items less than 20. In aggregate, run-off reinsurance reported earnings of $39 million for the quarter and that was a combination of a couple of different settlements and then some favorable run out in personal accident.

Joshua Raskin - Lehman Brothers

Is there a good run-rate for what you would think run-off reinsurance should be at?

Michael Bell

At this point, Josh, what we’re modeling is approximately break-even in 2008. Now, there’s a fair amount of uncertainty in this business and that, coupled with the FAS-157 fair value, however that ends up playing out, will add volatility. But at this point, I would suggest to you that break-even is a reasonable expectation.

Joshua Raskin - Lehman Brothers

And then just secondly, the Medicare health support pilots, it sounds like you guys took the $6 million charge. What’s the status of that pilot? Are you guys -- was that just sort of not meeting the end points, so not recognizing the revenue or is this more a termination of the project?

Jon Rubin

Relative to the MHS pilot and the charge, the charge really reflects the recent quarter’s performance as currently evaluated by CMS, which is below our expectations and inconsistent with previous quarters. This has led to our revising our forecast related to the performance guarantee liability for the three year program, and as a result, we’ve taken the charges, you’ll note, as approximately $6 million in the third quarter.

Now, we have been notified by CMS that during the process of evaluating the performance methodology, as recommended by a consultant, RTI in their July report to Congress, but given the uncertainty, we took this appropriate charge in the quarter. But I would note this is independent of any future decisions that we may make regarding continuation of the program.

Joshua Raskin - Lehman Brothers

Okay, so it still sounds like you guys are relatively on track, just had a blip in the third quarter and took down some of the revenues there.

Jon Rubin

That’s correct.

Joshua Raskin - Lehman Brothers

Okay, and then last question, if I could sneak one in, the PDP membership based on the bidding and the benchmarks that have come out, where do you think your PDP ends up next year?

Michael Bell

I would suggest at this point that a range of 325,000 to 350,000 members is reasonable.

Operator

Next we’ll go to Christine Arnold at Morgan Stanley.

Christine Arnold - Morgan Stanley

Good morning. A couple of questions, first on your operating expenses; how much improvement in operating expenses have you built in, recognizing you did say that you’d be making some investments in capabilities?

Michael Bell

First, in terms of productivity, what we are modeling for 2008 right now is operating expenses on a PMPM basis, excluding the segment expansion, so excluding what we are investing in individual, small group and seniors. We are expecting PMPMs on that basis to be up modestly, very modestly, 0% to 1% in 2008 versus full year 2007. So the implicit assumption underneath that is that the productivity gains that we expect to achieve as part of our multi-year plan will essentially be offset by increasing expenses to support market-facing capability, so including the higher technology expenses.

And really, Christine, what this reflects is the fact that we’re cognizant of the need to balance earnings growth with additional investments to support our long-term market position, and at this point we think the current 2008 plan strikes that balance. But this is certainly something that we are going to continue to evaluate throughout the year and we’ll also provide some additional detail to you at the investor day.

Christine Arnold - Morgan Stanley

Am I thinking about this wrongly? Because I’m kind of thinking that you guys have targeted down 2% to 3%, even with some of your market facing investments the last couple of years, and you have 99-point-something-or-other percent of membership on state platforms, so I was hoping to see more operating expense leverage in ’08. Am I thinking about the historical targets wrong?

Michael Bell

I think you are thinking about it right. I think what will be useful will be having some more discussion here in two weeks at our investor day on some of those investments that we are making in market facing capabilities, as well as the net productivity gains that we continue to expect to get in 2009 and 2010, and we will update those -- we continue to believe there is favorability to be capture there on a net basis in ’09 and ’10 and we will update those estimates for you in two weeks.

Christine Arnold - Morgan Stanley

So this is a timing issue? We’re going to see more of the benefit of the transformation in ’09, ’10, and then more spending in ’08? Is that fair?

Michael Bell

I think it’s fair to say that there are timing issues. Again, I would rather not go into more detail until we can give it greater context.

Christine Arnold - Morgan Stanley

And is it fair to say that you expect guaranteed cost enrolment to be down full year ’08? Or do you expect that to dip entering the year and then rise after that?

Michael Bell

At this point, we certainly expect some modest downward pressure in first quarter of ’08. In terms of the remainder of the year, it’s hard to gauge, since it will depend in large part to the competitive pricing environment. We do expect to maintain our pricing discipline over the remainder of the year.

We have built in some modest increases 2Q through 4Q at this point into the model, but again that is one that is very much in a stat of flux, given the pricing environment.

Christine Arnold - Morgan Stanley

So you are more dedicated to the MLR target than to the enrolment?

Michael Bell

I think that’s a fair comment.

Christine Arnold - Morgan Stanley

Thank you.

Operator

Our last question will come from Justin Lake at UBS.

Justin Lake - UBS

Thanks. I just wanted to flesh out a little bit more around this competitive price unit you are discussing. Can you give us any detail in regard to are there specific segments of your book that are getting competed against? Is it in specific geographies? Is it not-for-profits or for-profits that are taking business? Is there anything you could tell us that might give us some help in understanding what’s going on?

David Cordani

A few color comments; first, we see it very pronounced in the guarantee cost segment and candidly, as I look at my competitors’ results, most competitors are demonstrating de minimis guarantee costs growth. So we see it in guarantee cost, first off.

Secondly, by way of a region of the country, if we were to point to a region of the country, just to give you a little bit more flavor, the Southeast and the southern most Southeast, so Georgia and on through Florida, tends to be an extraordinarily competitive market right now that we see around the country.

I think the third part of your question, do we see it more for-profit versus not-for-profits, that pattern has been there for quite some time, so at any given point in time in any state, you might see a not-for-profit getting a bit more aggressive and dealing with a little bit of capital being returned. I see that as more of a continuation, little flare-ups in some locations. But more broadly, we see a very competitive landscape and to Mike’s prior point, we are committed to maintaining that pricing and underwriting discipline that’s required in this market.

My final comment would be we also feel very good in that we have such a diversified funding mechanism portfolio, so we are not guarantee costs only. We are seeing some traction emerging on the experience rated, and we are seeing the ability to carry a highly penetrated ASO alternative further down market, so we are not a one-trick pony, for lack of a better description, in the marketplace right now.

Justin Lake - UBS

Maybe you can just spend a moment then talking about the components of that commercial HMO book, as far as maybe what’s specifically sitting in there? Is it large employers or mid-market? Is it a lot of government business? Just to get a little flavor for what we should be thinking there as far as maybe the competitive segment.

David Cordani

I’ll start there. So for our -- you said commercial, so I’m going to expand that to risk, because as Mike said, you need to look at our risk open access and risk HMO. That’s how we look at the block.

Historically, our book has been predominantly middle market with some actual national account business in there, and as you might expect, if it is national account business, it is going to be slices.

First and foremost, we’ve tried to take a very targeted approach in the slice national account space and to the extent we didn’t believe it was a good, long-term proposition for us or the employer exit some of that business.

So point one is we are predominantly middle market in our book of business today. Again, we define middle market as commercial employers, a few hundred to 5,000.

Historically, there’s been some national account business there and we’ve whittled that down a bit over the last couple of year time horizon.

Secondly, as we’ve talked about our expansion initiatives, looking forward, we see some very attractive opportunity for us to expand further under 200 and then ultimately under 50, with the guarantee cost pricing.

But as you stand today, we have primarily middle market business in that segment that makes up an approximately million members, or 10% of our total membership portfolio today.

Justin Lake - UBS

That’s helpful. When you talk about larger commercial employers, is it conversions to ASO that you are seeing? Is it a reduction in the slice where they pushing people more to a single plan offering, or -- is it someone just coming in and saying you know what, we’re willing to do that at a much lower price point?

David Cordani

I would say two things; one, first broadly in the marketplace, we continue to see the ASO funding mechanism and alternative funding mechanisms continue to work their way down in side segments as a general theme. Secondly, specific to large employers, historically you would have a large employer that might take a guaranteed cost alternative in one or two or three of their geographies as an alternative, or run a guaranteed cost HMO side by side with a ASO PPO in a market.

Over a long term, that side-by-side alternative isn’t necessarily a winner. You are exposed to a bit more adverse selection, so the two themes we see in the national account, or even the high and the middle market, absolutely seeing more and more ASO penetration moving down market, and secondly, just a recognition that potentially a side-by-side with a slice proposition of guaranteed costs with ASO is not necessarily a long-term winner for us.

Justin Lake - UBS

If I could just sneak in one more, last year around this time, you gave us some really good detailed numbers around your pipeline growth year over year, case sizes, close ratios. Can you run those by us again? I apologize if I missed them earlier on.

David Cordani

I’ll provide you a little color there and we will embellish on this at our investor day, but two predominant segments here, national and regional. As we came into 2008 with the national segment, we expect to see a good pipeline about the same size as the prior year and remind you that the prior year pipeline was up significantly. We said the average case size that we are looking at a few quarters ago looked to be a bit larger and that’s what unfolded.

And for national accounts, for our best look at our 1-1 business, our close ratio is pretty strong for ourselves. Including on that we expect the retention rates to be in our historical average for the national segment, which is in the low to mid 90s.

For the regional block of business, again which we define a bit more broadly than our competition, so we go 200 to 5,000 commercial employers, and then single site large employers. As we sit here today, that pipeline is up somewhat, absent some large cases and it’s up order of magnitude 10%, which we are happy with because last year it was up meaningfully and it was very attractive.

As we sit here today, that close ratio against the regional book is about equal to where it was last year, and again we feel good about that.

Justin Lake - UBS

You said the close ratio in national accounts, was that up or down?

David Cordani

For going into 2008, it’s up somewhat.

Justin Lake - UBS

Thanks a lot.

Operator

Ladies and gentlemen, this does conclude CIGNA's third quarter 2007 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 47167839.

Thank you for participating. We will now disconnect.

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