Ladies and gentlemen, thank you for standing by for Cigna Second Quarter 2016 results review. At this time, all callers are in a listen-only mode. We will conduct a question-and-answer session later during the conference, and review procedures and how to enter keys to ask questions at that time. [Operator Instructions] As a reminder, ladies and gentlemen, this conference, including the question-and-answer session is being recorded. We will begin by turning the conference over to Mr. Will McDowell. Please go ahead, Mr. McDowell.

Good morning, everyone, and thank you for joining today’s call. I am Will McDowell, Vice President of Investor Relations. Joining me this morning are David Cordani, our President and Chief Executive Officer; and Tom McCarthy, Cigna’s Chief Financial Officer. In our remarks today, David and Tom will cover a number of topics, including Cigna’s second quarter 2016 financial results, as well as an update on our financial outlook for 2016. As noted in our earnings release, when describing our financial results, Cigna uses certain financial measures which are determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. Specifically, we use the term labeled, adjusted income from operations and earnings per share, on the same basis as our principal measures of financial performance. A reconciliation of these measures to the most directly comparable GAAP measure is contained in today’s earnings release, which is posted in the Investor Relations section of cigna.com. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2016 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today’s earnings release and in our most recent reports filed with the SEC. Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. In the second quarter, we recorded an after-tax charge of $26 million or $0.10 per share for merger-related transaction costs. And we reported this charge as a special item. As described in today’s earnings release, special items are excluded from adjusted income from operations in our discussion of second quarter 2016 results. Also, consistent with past practices, when we make any prospective comments on earnings or EPS outlook, we will do so on a basis that excludes the impact of any future capital deployment or additional prior year development of medical costs. And with that I will turn the call over to David.

Thanks, Will. Good morning, everyone, and thank you for joining us. It’s been over a year since we’ve held formal earnings call due to our pending combination and clearly much has happened. We wanted to take the opportunity to connect directly with you, first to reaffirm our goals and how we are delivering on our strategy; second, to provide an update around this quarter’s results and the actions we are taking to remedy this specific performance headwind that has caused us to miss our expectations; and third to provide some perspective regarding the actions from the U.S. Department of Justice to block our proposed combination with Anthem. After I share my remarks, Tom will briefly highlight our second quarter financial results and updated outlook in more detail and we’ll take your questions. After that, I’ll leave you with a few closing thoughts following the Q&A portion of the call. I’d like to begin by underscoring that over the past year our goals had been clear, first and foremost to continue to effectively run and operate our businesses with a focus on our customers and clients and on delivering long-term value for you, our shareholders; second, to support and guide the proposed transaction through the regulatory process, as Anthem leads that process and we support it; and third, to keep the company well positioned with optionality in a variety of scenarios, given the uncertainty around the regulatory approval process. We are delivering our strategy. We have maintained focus, and continue to grow and invest in our businesses, while delivering differentiated value for our customers and clients; and also this quarter, deliver on our shareholder commitments. While our results underperformed expectations in the second quarter, to be clear, our diversified businesses remain grounded in solid fundamentals and we continue to innovate and…

Thanks, David, good morning, everyone. And my remarks today, I will briefly review key aspects of Cigna’s second quarter 2016 results and discussed our outlook for the full year. Overall, key highlights in the quarter are consolidated revenue growth of 5% to $10 billion. Consolidated earnings of $515 million, quarterly earnings per share of $1.98 and continued to strong capital efficiency and free cash flow in line with our full year expectation. Regarding the segments, I will first comment on our Global Health Care segment. Second quarter premiums and fees grew to $26.9 billion. Second quarter earnings were $486 million reflecting medical and specialty business growth and continued favorable medical cost and quality outcomes particularly in our commercial employer group business. These drivers were partially offset by higher medical costs in our individual business and increased costs related to our Medicare advantage CMS audit response. Turning to our Global Supplemental Benefits business, on a currency adjusted basis, premiums and fees grew 12% and earnings grew 15% quarter-over-quarter to $83 million. This was another strong quarter for our Global Supplemental Benefits business. Group Disability and Life reported a second quarter loss of $12 million, results in the second quarter reflect continued impact, modification to our disability claims process and poor experience in group life claims. While, second quarter results in our disability business were better than results in the first quarter, the improvement was less than we have expected. Results in the Group Life business were also below expectations. We experienced elevated claims early in the quarter, our life claims were more in line with expectations later in the quarter. This quarter’s results also included $17 million after tax unfavorable impact from reserve study on our life business and for comparative purposes the second quarter of 2015 results included $37 million…

[Operator Instructions] Thank you. Our first question comes from Matthew Borsch of Goldman Sachs. Your line is now open.

Thank you. And thank you for your decision to hold the call. I think it makes sense in light of where we are and also the volatility and results. Would you mind just stepping into little more detail on the Group Disability & Life? And help us understand the $0.90 lower outlook. How much of that is Life? And I gather on the Life side, that’s just pure variability. There really isn’t any causation that you can point to there nor any reason why we should expect that to repeat. And on the Disability side, how much of it is because you put in this new systems process that you missed some of the claims expense from earlier periods or maybe I’m misunderstanding what it is?

Good morning. It’s David. Let me try to paint the picture on your various questions for both the Disability and Life piece. First, just to frame our group insurance business has been a strong and consistent performer. We recognize we’re having an audit pattern year. We understand that and as I noted in prepared remarks, we are taking specific steps to improve that. Let me talk about Disability first and then Life and I think I’ll put all your questions into that context. From the Disability standpoint, first, we made operating changes to our business processes. Very importantly, these are not systemic changes or changes in technology. These are business process changes starting at the first quarter of this year with a goal of improving our customer service, driving further efficiency and effectiveness over the long-term, all while complying with a merging regulatory best practices. It’s clear that the operational disruption is more significant and prolonged than we have planned for. Importantly, our customers continue to see good strong service. However, as we noted, the financials have suffered. We’re already seeing improvement in the patterns as we go through the second quarter. So we see the pattern improving and expect to continue to see that improve throughout 2016 and as we step into 2017. These are not catch-ups for prior year claims. Don’t think about it that way. It’s operational process changes of meaningful magnitude and we’re already seeing improvements to the pattern and we will see improvements throughout 2016 and into 2017. Relative to the Life book, your basic hypothesis is right, we have a meaningful book that over time has performed very well. Unfortunately, from time to time our Life book of business has a temporary dislocation or spike. And the second quarter of this year was one of those years. Order of magnitude, operating-wise in the quarter, about $45 million after-tax; it’s important to note that the claims did settle back, generally speaking, within historical patterns by the end of the second quarter. Additionally, as you’d expect, we conducted a variety of detailed analysis to see if there were any other unique causes to the pattern we saw a spike, and we found none. Also, as we noted, we completed reserve study in the second quarter, that resulted in a reserve strengthening of about $17 million after tax. So when you think about Life, taken together from an operating standpoint and from the reserve standpoint, altogether a little more than $60 million after tax. So net-net, clearly not happy with the results, we clearly believe they’re temporary. Life will recover more quickly for the reasons you stated and disability will continue to recover throughout the remaining portion of 2016 and into 2017. As to the latter part of your question, you could think about the current year change in the outlook. It’s split roughly 50-50 between the two lines of business.

Okay. Thank you for all that. I appreciate. And just so I understand though, that the - as you made these process changes, did that result in a lower level of catching disability claims that should have been remediated differently. And so in seeking to improve things it’s gotten temporarily worse, is that the right way to think about it?

Matthew, a way to think about that is, as you change the processes, and as I noted in my prepared remarks, more upfront and broader medical reviews, what you have is essentially, we’ve triggered a temporary environment of longer claim durations and higher inventory, which we will work down throughout the residual part of this year as I noted. And we’re already starting to see improvement relative to that.

And last question if I could, on the Medicare sanctions. Any outlook there, any - are you hopeful that you will get them resolved? Are you optimistic you’ll get them resolved before open enrollment?

Yes, Matthew, relative to the CMS audit, our team continues to work to resolve the issues and to drive the sustainable operational improvements that are necessary. As per timing, as you might frame there is three variety of alternatives here. We can get it remediated and validated before AEP, Annual Enrollment Period. We can get it remediated and validated during the cycle, or thoroughly we can get it remediated and validated after the cycle. Our team clearly understands the importance of that, but our broader objective here is to ensure that we successfully remediate all the issues and create a sustainable environment on a go-forward basis. And we will manage the next several months to make sure we’re within the right position.

Okay, thank you.

Thank you, Matthew. Our next question is from Justin Lake of Wolfe Research. Your line is now open.

Thanks, good morning. I just to want to follow-up first on the Disability & Life business, David, you talked to this segment creating an earnings trajectory opportunity going forward, so looking for some more color here. What’s a reasonable expectation in terms of the trajectory back to historical margins and earnings power in this business and how does that happen? Is it simply like you said, fixing the claims processing issue and Life reverting to normal? Or do we have to do some meaningful re-pricing here?

Justin, good morning, your former conclusion is proper. We believe that the Life results will return to historical patterns and the Disability results, we continue to start seeing improvement throughout the second quarter and it will continue throughout the course of the year. Long term, we believe the - both the growth and earnings and margin profile of the business remain intact. We have work to do to establish that. And we will do that in the second-half of this year with a positive trajectory and continue that trajectory into 2017.

So, David, I mean, on the margins. I mean, your margin is going to be 1% to 2% this year on a business that historically been closer to 8%, let’s call it. So can you just give us some color in terms of how should we think about that trajectory back to 8%, I mean, can you get half-way there, the 4% to 5% next year on the way back to 7% to 8% in 2018. Do you expect to get all the way back there next year? I mean, just can you help us with some visibility there?

Yes. Justin, first and foremost just to make sure, we are clear on your first part of your initial question. I want to underscore this is an operational problem in disability, not fundamentally a pricing problem for us relative to the book of business. Hence if you, bring it across to your margin question, I think, a way to think about it is this arguably presents the single largest earnings step up opportunity for us, as we step from 2016 to 2017. So if you think about the headwinds and tailwinds, this is our number one tailwind. We expect to see meaningful improvement. We’re not going to give you 2017 guidance at this point in time but away punctually that is as I noted in my prepared remarks, we expect to see the life business recover more rapidly. We expect to see the disability business continue to improve its performance throughout 2016 and into 2017. So for that, I would ask you to think about an ongoing improvement trajectory for the disability of portfolio flow through the second-half of this year, as well as into 2017. Giving us a good run rate, as we step out of 2017 into 2018.

Great. And then, just my follow up on capital deployment, I think, investors would love to hear anything you could share with us plan B, if this deal doesn’t go through. I mean, I know the focus on getting the deal done. But it’s not. You’re going to have with a breakup fee something like $4 billion of cash that deploy and in under lever balance sheet. Can you share with us any thoughts there?

Sure. So first and foremost, we have a long and clear track record of strong capital deployment and capital management. And it’s part of that. We understand the importance of not letting surplus capital lie idle for any length of time. Our priorities remain clear and the same for supporting our business. Second strategic M&A and third returning excess capital to shareholders. To your point, we fully recognize the tremendous both capital as in free cash flow, as well as capital through balance sheet leverage flexibility we built over the last several years. In the event, taking your statement that the DOJ process is not successful. Our view is that as we look towards the second-half in later part of 2017, we would have $5 billion, a bit more than $5 billion of deployable cash plus a balance sheet. In the current situation, it sits at about 27% leverage. Our view is that normal course of business, we could add 10 points to that leverage. For strategic M&A, we could add 15 points to that leverage. So taking together truly tremendous value creation opportunity for shareholders in the event the DOJ process is not successful. We fully understand that and would expect to responsibly deploy that.

Great thanks for the color.

Thank you Justin. Our next question is from Josh Raskin of Barclays. Your line is now open.

Thanks. I guess, I’m just a little confused as to why this is also temporarily right. It sounded like last quarter, maybe let’s start with disability in life. It sounded like that was considered a timing issue it doesn’t sound like - it sounds like it’s gotten materially worse. So I guess, I’m just confused to why a process change would increase your actual incidents or is it not incident. It’s just the inability to manage down these claims quickly. And I guess, I’m just curious why that disappears so fast and then on life business, it doesn’t sound like we kind of know the driver of the spike. So I’m curious why your confident will get better.

Good morning Josh. Very fair. So we’ll take in a reverse order. Let’s take life first. If you look at the life industry, players in the life industry unfortunately, it’s the nature of the book of business will experience short-term temporary spikes or dislocations in cost. It transpires ideally, we like that not to happen, because you want consistent predictable environment. So to add to your point, as we noted that spike to a place in the early portion of the second quarter and as I noted in my prepared remarks and my comments, we saw a reversion of the life pattern within historical ranges towards the later part of the quarter. Secondly, we did a significant analysis to try to determine whether or not there were any unique drivers of that, as you would expect. And we didn’t find any, and thirdly, there was a reserve study which was triggered a $70 million after tax strengthening, a way of looking at it otherwise it only triggered in a $70 million after tax strengthening. Specifically, disability you’re right, we flagged this last quarter. Their operating changes that we put in places we noted, the results step down meaningfully in the first quarter, as I noted in my prepared remarks. We’ve already seen progress in the second quarter relative to the improvement albeit any slower pace than we would like or projected. And we expect to continue to see that progress going forward and that offset ultimately the longer claim durations in the insurance rates that we’re incurring currently as well as the elevated claim inventory. So important to know, we are seeing improvement in the disability results through the second quarter and expect that pattern to continue throughout the remaining portion of this year and into 2017.

And David, did you say, it’s a 50-50 split on the $0.90 reduction in guidance between life and disability?

Yes. Maybe let me try to - I did say that but I was looking at kind of where we are intra-year versus a full year. When you look at the full year pattern, I think it’s a little safer to look at that is a two-third, one-third, because of the recovery pattern of the life being more rapid versus the disability pattern. What we have intra-quarter, I mean, it’s a good $60 million delta in for quarter, but you have the two-thirds in the disability side and the one-third in the life over the course of the full year.

Okay. That makes more sense. And then follow up just on the healthcare business. Could you parse out - I guess one, I’m a little surprised on the CMS cost, right. You guys knew about those sanctions before last quarter was announced, so is the process more onerous? Is it going to take a little bit longer? What’s causing the CMS sanctioned response cost to be higher? And then how big is your individual book and maybe what’s the size of the - how much of the $0.30 is individual versus CMS?

Hey, Josh. I will start on the CMS piece, and I’ll frame a little bit of the Individual, and then ask Tom to time to enhance that piece. First and foremost relative to our MA book of business. The fundamentals of the MA book of business continued to perform well. Very important and we’re pleased with the performance both the service performance as well as the overall earnings performance of the book. You’re correct, our cost of remediation is grown, we are seeking to ensure that the remediation is both completed is rapidly as possible, but also as comprehensively as possible. And it’s unfortunately the case when you are doing a variety of complex bodies of work sometimes they are more complicated. Our number one priority, though, is to get this issue fully remediated and create the sustainable platform for the growth in the ongoing performance we expect for many years to come. So ultimately what transpired is more complexity to the work, necessary to build sustainability that we want for the growth profile, we see over the long term. But the operations in the day today fundamentals of the earnings performance to the base book of business continued to be strong. As relates to the Individual book of business, I last time to talked about the financials, but as you recall with continued to take a very focused and disciplined view to the marketplace primarily because we viewed from day one, the 2014, 2015, and 2016 would be, as we call it Version 1.0 of the marketplace, underscored by a smaller aggregate size and we initially projected, we call it a little bit of a choppy operating environment for the new marketplace as well as we projected for the industry to have more loses than not. And in hindsight, that’s demonstrating itself. So I will ask Tom to describe a little bit about the financial impact for us.

Josh, you are right, Individual is a small component of our business unfortunately sometimes it has more impact and we’d like, particularly, it just sticking about the MCR, in fact this year quarter-over-quarter it explains most of the variability in our Commercial MCR, so small business, but shows up in some metrics that we don’t like. And if we think about the revised outlook for the year, I’m not going to give specifics, but let’s say there’s big chunks of both driving that maybe 50-50 somewhat in that range.

So the individual - Tom, do you have what the premium level or just a revenue number on the individual book is? I thought you guys were somewhere around 100,000 lives or something?

A little more than that, I mean, that is disclosed - but that all those details are disclosed in the step supplement. Now if you’re suggesting that, gee, how can it have that much of an impact. If you do the math, it actually can have that much of an impact.

Okay, all right. Maybe I will follow up with the math off-line. Thanks.

Thank you, Josh. Our next question is from A.J. Rice of UBS. Your line is now open.

Thanks. Hello, everybody. I know you hadn’t given your medical cost trend for the commercial before, but I think you came out and said 4.5% to 5%. Can you just comment on away from the individual business, what are you seeing there? Any buckets that are running hot or any that are particularly positive? That cost trend obviously is lower than what others are saying they are seeing.

A.J., Thank you, yes, we are really pleased with our medical trend results and we continue to build an very strong trend result we reported for several years as you pointed out with industry leading medical cost trends. Since most of our commercial customers are in self-funded arrangements and you recall they directly benefit from this well-managed medical trend. Our outlook has remained consistent this year with a full year trend outlook of 4.5% to 5.5% range decided. And that is in line with our 5% trend we reported in 2015, so consistent result. So overall, we’re expecting to deliver another year of competitively strong medical trends and that reflects our focus on engaging customers in healthcare professionals to improve quality and affordability of care. And I wouldn’t really call out any specific major changes in the underlying components.

Okay. And then just my follow up I ask, I appreciate the comments David, you offered about the DOJ process and so forth and it makes sense that they came out with a decision to challenge the deal and you want to evaluate your options. Am I hearing you right to assume that, that sort of evaluation process whatever entailed has happened. And that now signals basically view, as we’re going to play out the litigation and the interaction with the DOJ through to its conclusion and whatever evaluation was done has concluded. Is that the way to think about it?

A.J., yes. But so you’re absolutely correct in my prepared remarks. So I indicate that we briefly step back we wanted to make sure we understood the fact statements from the DOJ and that states quite well and deeply and understand that. The bad aspect of it means we were fully engaged, continue to be fully engaged in the process. We both support our contractual obligations as we have provided. So but to continue on that dialogue to be clear as we noted, Anthem has been running the regulatory process which is consistent with the contract. Anthem independently decided to pursue the lawsuit with the DOJ, as such we are party of that suit. We will take the appropriate steps obviously, to protect the interest of our shareholders, which includes ongoing evaluation and monitoring more options as they unfold. But we are fully engaged in the process as you noted. And we should think about that, but it’s a dynamic process right. There is no static process season life and this is not a static process, but we’re fully engaged.

Okay. All right. Thanks a lot.

Thank you A.J., our next question is from Gary Taylor of J.P. Morgan. Your line is now open.

Hi, good morning. A few questions, first, just going back to the disability segment, on disability itself how much of the quarterly, your annual premiums are short-term versus long-term disability, ballpark?

Follow up with that. I mean, much of our short-term disability business is so oriented, but we’ll follow up with you exactly.

Okay. And you talked about an improvement in the segment, particularly in the life and the near term and obviously the implied guidance for the second-half of the year and the segment is much better than the first-half, then you talked about improvement in the 2017. Is it fair to say that if we take I believe the implied guidance for disability might for the second-half of the year is $37 million to $77 million. If we annualize that is it fair to say that would be the low end what 2017 should be. Given that, you think there is an improving trajectory.

Gary it’s David. Again, we’re not providing 2017 guidance. We have expectations for ourselves to dramatically improve the result as we step into 2017. We think, we have the opportunity to obviously to see the life results revert to historical patterns more rapidly and the disability pattern will continue to improve overtime. I don’t want to validate your numbers again, because we’re not providing 2017 guidance, but as I mentioned to Justin, this represents the largest contributor or largest tailwind. And as when we step from 2016 to 2017 and we hold ourselves to the higher expectation to achieve those numbers a better.

Two more quick ones if I could. Could we just go back to, you keep saying this disability which is an operational, as you’ve driven by these medical claims or views. So are you saying that you’re doing more detailed longer duration reviews and it’s causing to pay out more days of disability than you believe it will be on these claims in the future. And…

Gary, at a macro level the picture you carry is I think, directionally correct. Just stepping back and add to that. So more resources, clinical resources, specialties and other wise, added to the front end of the processes to enable more comprehensive reviews than even was being done before, over long-term enhances, further enhances customer experience, further enhances the efficiency of the overall process. And it is aligned with emerging regulatory best practices for the space. Over the immediate term, the description is some of the effect that you may reference to. And we are rapidly working to improve those results, day in, week in, month in, month out.

So these are self-inflicted delays, basically, you are trying to fix.

That is absolutely correct.

And last question. I think in response to Justin, you talked about taking leverage potentially into the mid-30s if the Anthem deal doesn’t move forward on possibly other strategic M&A, or just conceptually willing to do that. What about for share repurchase? How much would we be willing to move debt to cap for accelerated share repurchase, or is the same ballpark in the scope of possibilities?

Gary, the - we don’t parse in terms of which of the deployment components we would prioritized moving leverage up or down for, other than as I noted in the prior comments, strategic M&A enables your from our point of view to temporarily expand leverage at even further. I think your broader point and to reiterate, we recognize that is there is in unsuccessful DOJ process, as you go into the latter part of 2017, we would have ordered magnitude $5 billion or $5 billion plus of deployable cash. A current environment of leverage situation of approximately 27% in the ability to add at least 10 points to that in the various scenarios we identified. And share repurchase would be a part of the calculus we would be looking to. Net-net under a variety of scenarios the opportunity to create significant shareholder value off of both the cash-on-hand and leverage capabilities.

Okay. Thank you very much.

Thank you, Gary. Our next question is from Kevin Fischbeck of Bank of America. Your line is now open.

Great. Just wanted to clarify a question earlier, when you were saying the breakout in group and life being one-third, two-thirds for the year, that’s on the $0.90 you are saying, basically that $0.30 is life and $0.60 is disability. Is that what you were saying?

Correct.

Okay. And then I guess just wondering if you’ve seen - obviously you’ve had the deal out there for a year now. Wondering if you’ve seen any impact to the core business at all from the customer perspective, either on retention or as you go out to bid? Is this creating an overhang as far as your ability to retain or to win new business?

Hey, Kevin, good morning. This is David. So broadly speaking our team has done an outstanding job of ensuring we first and foremost are delivering on our promises to our existing customers, which is job one, hence, our client and customer retention levels have been very strong, and we are pleased and proud with that. Second, we expected as we announced this deal that given the long regulatory timeframe we anticipated that over that timeframe as it continued to extend, it may cause a bit lower traction on new-new business. And I say new-new purpose, because in between that is new business off of existing relationships. So point one is our retention has been strong and outstanding due to great service deliver by the franchise, and high attention, and then support from our customers and clients, and we obviously work very hard for that every day. Two, we’ve been able to successfully expand relationships throughout our various lines of business. And three, we have been able to grow new relationships. Net-net, our covered lives are up and our portfolio penetration is up. We have seen some impact of a little lower close ratio in some situations where some clients want to weighted out, but I would say that’s the smallest portion of the overall equation. When you put a bow around the whole package, we are pleased to have achieved our revenue outlook thus far for the year and is aided by that very strong retention rate in the strong expansion relationships.

Okay. And then just I guess on the MA side of things, I guess we’ve obviously seen how the MA membership has gone from an attrition perspective from quarter to quarter with the sanction. Is this way you will think of - if we assume a negative outcome, and you are not able to get this fixed by the open enrollment period, would that transition from kind of Q4 to Q1 be a similar drop in your view? Is that the way to think about it, or would you think that that would be a more disruptive time period around membership?

So Kevin, let me just make sure I understood your hypothesis for starters. A way to think about 2016 is we started the year with good covered life growth for MA mid- to upper- single-digits. And we expect that to flatten out throughout the course of the year due to the non-ongoing enrollment and disenrollment pattern that would unfold. Therefore, under your hypothesis, if we are not active in any dimensions of the annual enrollment period, obviously we wouldn’t be picking up the new lives and you’d have attrition throughout the course of the year. And I would actually think about it is that - attrition throughout the course of the year, not attrition in any one might - obviously the annual enrollment period is an important marker that would manifest itself. So we’ve seen continued attrition throughout the course of the year coming more to a flat result at the end of 2016, in terms of net life growth, and there would be arguably stated a similar pattern overall for 2017 in the event of your scenario, but we wouldn’t be starting with step-up point that we started up for 1-1-2016.

Okay. The question is, if you have to go through an open enrollment period where you can’t get new lives and there’s going to be theoretically some shopping, I was just trying to understand how persistent you think your core business would be in that scenario over the next year. Is it just a situation that we always lose, I don’t know, 5%, but you always gain 15%, so you are growing 10%? Now you would be entering an open enrollment period where you lose 5% and there’s no ability to pick something up. I just wasn’t sure if that Q4 to Q1 was going to be a more disruptive drop point or if that membership is just more sticky?

I think, first and foremost your normal kind of pattern of assumptions is more direct. Secondly, our retention rate in this portfolio tends to be quite strong, especially when we have relationships that are onboard for over one year in our MA book of business. Those relationships become very well established with our physician collaborative model and have a high retention, and we would expect to carry a very strong retention rate in, but your notion relative to not having the new business would be an offset. I wouldn’t view any unique event would transpire beyond that.

Okay, great. Thanks.

Thank you, Kevin. Our next question is from Ralph Giacobbe of Citi. Your line is now open.

Great, thanks. Good morning. Just wanted to clarify, yes, last quarter, in the release, it was cited that the timing of reserve review on the disability and life would move from second to third quarter, and I think I heard you say you did do the review this quarter? Is that fair, so there shouldn’t be risk of further adjustment? And then a couple of times, David, you’ve cited emerging regulatory processes. Just hoping maybe you can provide some color on exactly what that is.

So Ralph, it’s Tom. I will address the reserve study dynamics first. So we completed this quarter with a life reserve study and that study covers in fact claim development factors interest rate assumptions, all the normal things you look at life businesses. What we highlighted last quarter was that we’re deferring a disability claims study to later in the year given the changes in the visibility claims process. And in fact, we haven’t completed that study. We still are completing it - expecting to complete it in last half of the year. And of course, we won’t know the results of that study until it’s completed. But I would just observe to maybe get to the heart of your question, that given the current environment any significant impact from that study one way or the other seems unlikely.

Relative to the regulatory question. First, we have a very differentiated disability model, despite the earnings issues we’re confronting in 2016. Like all of our businesses, they all come under a variety of regulatory forces. Relative to the disability space, specifically emerging best practices are pointing towards more. While we always have had upfront medical resources. For example, emerging best practices are pointing towards more upfront resources, more user specialists, more comprehensive physical examinations upfront for a broader variety of scenarios. And those are illustrative of the types of changes we are putting in place, as we see where the regulatory direction is going. And we want to ensure that we continue to position this book of business as an industry leader, as it relates to the disability management process and the disability productivity management process. So those are illustrative of some of the right type of emerging regulatory patterns.

Okay. All right. Fair enough. And then, just in terms of the financial flexibility that you cited, I think, commentary last quarter in the release that was unlikely that you’d make sort of further repurchase above and beyond what you had done through I guess, May, and make any incremental this quarter. That language wasn’t sort of in the release this time around. I guess, I’m just wondering if you’re open to or maybe remind this what you can do in terms of share repurchase at this time. And how we should think about sort of capital deployment if there is a challenge that goes into next year? Thanks.

Sure. Ralph, so we carry the flexibilities. You asked a broader question on capital deployment. You asked relative to share repurchase. Let me take the other dimension of it. Under the merger agreement, we have the ability to be active from an M&A standpoint. There are mutual limits going in both directions. The mutual limits point toward in aggregate over the life of the contract $600 million and a transaction cap of $200 million. So transactions up to $200 million and cumulative transactions up to $600 million, that mutual going in both directions, relative to share repurchase, there are also limits in both directions specific to us we have about $725 million of capacity left under those contractual obligations. At this point in time, again with the transaction pending we view it as less likely that would be the significant share repurchase over the immediate term horizon. But we do have the capacity to do so under the merger agreement and as I noted, approximately, $725 million of remaining capacity.

Okay. That’s helpful. Thank you.

Thank you Ralph. [Operator Instructions] our next question is from Andrew Schenker of Morgan Stanley. Your line is now open.

Hey, thanks. I just wonder, if you could just help us maybe try to quantify in total the CMS audit costs incorporated in 2016 earnings, including the new assumptions you heighted today. And then just how we should be thinking about some of this cost. I mean, how much of them are one-time just preparing for the audits versus what are really actually now ongoing cost that we needed to strengthen your MA systems to help your positioning there? And then how is that reflected all in your bids for next year, assuming the sanctions are lifted. Thank you.

So Andy, its Tom. You’ve got couple dynamics going in there. First, we are spending more than we expected on CMS audit remediation costs. And the total spend in the second quarter was about - or year-to-date was about $30 million, at second quarter it was about $30 million after tax. So that kind of gives you an order of magnitude of the size of the total spend we’re talking about. So we haven’t mentioned exactly the overall outlook for the year. But you can - based on that spend, you can expect a sizeable amount. Some of that probably does end up back in the run rate and at least in the near term as we institute more robust processes. But much of that is one-time spend to get us to the remediation period. And I don’t think, we’ve seen any significant impact on our bid related to that dynamic.

Okay. And then, for individual, once again always with the caveat that I understand it’s a small portion of your business, but a volatile one. I mean, can you maybe talk about how you did position that book for next year? It looks like you are maybe actually entering a few new market. So do you think total costs or profitability for individual is actually going to approximately decline next year. Given new market entrants or given any repositioning in existing markets? Could we see overall profitability for individual actually go up next year. Thank you.

Andy, good morning. It’s David. So as for the results just for your context as we noted we continue to experience losses within elevated impact in certain markets. Important to know, we have seen the performance of what we look at as our newest offerings as being markedly better than the traditional offerings that we had placed in the market and many have in the market. So those new offerings are aided or driven by very focused and aligned collaborative delivery system models. And those are performing better. As well as in 2017, you’re right. First and foremost at this point we plan for and expect to continue to participate. We’ve taken posture to position ourselves in a limited number of new markets, where we have the ability to put in place those aligned collaborative delivery system models. And also relative to the disruption we’re seeing from a results standpoint, we continue to have active engagement and dialogue with both CMS and state agencies to ensure that we are mutually enabled to be focus on those areas and programs, where we could address this sustained value which really are pivoting of those collaborative delivery system models. We would expect to improve our performance year over year, but this is a volatile marketplace which is why we kept it is a relatively speaking small portion of our portfolio.

Okay. Thank you.

Thank you Andy. Our next question is from Christine Arnold of Cowen. Your line is now open.

Hey, I’m still confused on the disability situation. I’m just not a disability expert. I would think that if you are doing more upfront examinations and medical specialist intervention, you’d find people who really aren’t qualified for the disability benefit, maybe the fakers and the frauders. So how - I don’t understand how the upfront medical management improvement is actually resulting in an increase in disability claims.

Christine, good morning. It’s David. So as they indicated, as we put these process changes in place to be clear and obviously we expect the net result of it to be on improved outcome. Half of a book of business that has generally and consistently delivered industrial-leading productivity and financial performance in part for some of the hypothesis you make reference to, to make sure we’re more pinpointed, even more shortly pinpointed in terms of the disability events. The result though of changing the processes, the staffing, the workflows etcetera has resulted in the temporary disruption. Not one that we like and that is more prolonged than we have planned for. But the outcome and result will be improved customer experience and improved overall efficiency and effectiveness. And that’s what your comments point toward. So we are fully aligned with that.

So the fact that we have all these specialists reviewing means that for those that are legitimate they are on disability longer because we are spending more time with them, but I don’t see how that reverses.

Christine, a different way of thinking about it is, if you think about a multi-location significant workflow change, staffing model change, operating protocol change. What’s transpiring is in your question your base hypothesis of where the engagement destination is right, but in the interim, what’s happening is actually in some cases more people on disability or longer duration disability events which are temporary until, we work through and finalize the process enhancements. And as I noted, we’re already seeing improvements in those patterns in the second quarter, albeit not at the rate and pace we would like them to be and expect to continue to see that improvement pattern Q3, Q4, Q1 as we go forward.

Okay. And then the government loss ratio was up year-over-year kind of more than consensus and certainly what we expected. Is that because of the sanctions? Are we experiencing maybe a higher loss ratio, because we are not getting in the healthier MA numbers? How do I think about that, what appears to be an elevated government loss ratio? Thank you.

Christine, that isn’t a factor at all. So underlying the MCR, our focus on physician engagement continues to deliver exactly the results we’d expect - quality and affordable care to Medicare Advantage customers. So the sanctions have not had an impact. The quarter-over-quarter impact is two major factors. First, there’s less favorable impact from prior year development - from favorable prior year development, so we had significant favorable prior year development last year de minimis amount of prior year development this year. Second, we are seeing some impact from the growth in the recent market expansions, and those markets, when we first did launch a market, tend to run at a higher MCR than our established markets, so that’s somewhat shown up as a little bit of an increase in the quarter-over-quarter comparison. But underlying the results, so excluding the prior year, our Medicare advantage business results in the MCR are very consistent with our expectations.

Thank you.

Thank you, Christine. Our next question is from Scott Fidel of Credit Suisse. Your line is now open.

Thanks. I had a question just on the CMS review and the interplay in terms of M&A, and David, saw you highlighted that you have the ability under the agreement to do some acquisitions. So just interested in terms of on the Medicare side, are there restrictions on whether you can participate in doing acquisitions, while you have a sanction in place, or is that sort of a separate dynamic?

Good morning, Scott. We expect to see M&A opportunities as we go forward in the marketplace. So as you recall first broadly, one of our priorities for M&A has been and continues to be seniors and MA in a broader sense of the word. We are not aware of any impediment in any way, shape or form correlating the sanctions to our ability to be active from an M&A standpoint even in the current period.

Okay. And then just a follow-up question. Just on individual, can you just give us an update, Tom, on where you are expecting the individual margin to be for 2016 in the guidance now?

Scott, I don’t think, we are going to give specific details, but you can rest assured it’s going to have a negative sign in front of it.

Okay, all right. Thanks.

Thank you, Scott. Our next question is from Chris Rigg of Susquehanna. Your line is now open.

Good morning. Just wanted to come back to disability quickly here. Historically, you would guide by segment and I guess because of Anthem you just threw out a blanket number. Clearly, you substantially overhauled the business. Can you give us a sense for what was in the original baseline, how much earnings pressure you were expecting versus the $0.60-ish we are seeing now? Thanks. [Technical Difficulty]

One moment participants. We are just experiencing a technical issue.

Hello.

Again, apologize, it sounds like we temporarily had a line issue.

Hi, David. Chris still here. Can you hear me?

If you don’t mind starting over your question, unfortunately the line blanks out for period.

Okay, yes, I just asked what was in the original baseline for disability and life given you didn’t provide guidance by segment. How much pressure were you expecting because of the overhaul of the disability business in the original outlook versus the $0.60-ish of additional pressure we are seeing now? Thanks.

Yes, so, Chris, I don’t think it’s helpful to reconcile in detail. But a way to think about it is, and we tried to be very clear both in the press release and our comments today, you could think about, as we step from the first quarter results to this quarter, taking everything into consideration for the impact of the Disability business and the Life business, we noted a $0.90 change for the full-year to our EPS outlook. And to the prior comments, we indicated - you could think about that as approximately driven by two-thirds of the Disability portfolio and one-third by the Life portfolio.

Okay. But just to - Sorry to come back to this, but were you originally expecting earnings in the Disability segment to decline in 2016 relative to 2015?

We have not provided segment outlook for you. But as we stepped into the year, our expectations stepped down from start of the year through the first quarter. We knew we had operational changes. And as I noted in my prepared remarks, it is clear that the magnitude of the impact and the timeframe to remediate is longer. So we understood we are putting those processes in place. We believe we made provisions for that. But the impact is, order of magnitude is significant to that. So I think the, A, understanding, we knew we’re making the process changes; B, put some provisions forward for that. But at the end of the day, the most important part for you to think about is that $0.90 impact for the year as we sit today, with the majority of that and two-thirds of that were specifically being driven by disability.

Okay, I’ll leave it there, thank you.

Thank you, Chris. Our next question is from Ana Gupte of Leerink Partners. Your line is now open.

Yes, thanks, good morning. So I was trying to figure out your normalized margins and your outlook for some of your segments. And on the Medicare segment, I think you said that the development issue or the lack thereof is not because of the sanctions. I think you are running at fairly low single-digit margins now after a huge amount of margin-compression post the HealthSpring acquisition. Might we still think of your ability to expand margins into next year or have these sanctions and the claims audit process or anything there CMS is asking likely to put some more pressure there or at least leave your margins flat from where they are right now?

Good morning. It’s David. So, first and foremost, the core MA business, absent the step-uping cost for the MA sanctions activity is performing well; two, as we look to 2017, to the core of your question, we would expect to improve margins, in part driven by the run-off or absence of the sanction costs; and three, maybe broadly inferring your questions, we continue to look at this as attractive in both growth and earnings segment, from the ability to both grow it and have attractive margins over time, as we leverage the proven physician engagement models we have.

Okay, great. Then next, the other segment that’s really a big growth segment is your Select segment with the stop-loss. And there was a change in the national definition originally to 100 they then got back from that. Certain States still do it, but maybe they are putting some restrictions on small groups that are trying to do ASO plus stop-loss. How do you see this playing out and might you still see double-digit growth in that segment from a membership perspective on an ongoing basis?

Yes, Ana, thank you. First just to define for everybody’s benefit, when we talk Select segment for our company, this is for employers with 51 to 250 employees, so the over 50 marketplace. We have focused on bringing innovative, transparent, both engagement and incentive-based models. And over time, our results here have been tremendous, not just from a growth standpoint, earnings standpoint, but from the value we deliver back to those employers and employees by having those aligned models. As for results, we yet grown again this year, our customer base and the pattern, at least on a year-to-date basis, is similar to last year’s pattern. And to core of your question, we continue to see this as an attractive growth market as employers in that space continue to look more aggressively toward alternatives that again are transparent and aligned and these programs are performing well and we’re excited and optimistic about the future for this business.

And then finally, just one follow-up on the individual, if I may. What’s the pressure on continued on off-exchange? I recall you had something in the first year of Obamacare, or is this now on-exchange business, so the claims experience is coming in ahead of your expectations?

Well, Ana, we’re seeing pressure both in the on-exchange ACA compliance and the off-exchange ACA compliance.

And you expect both?

Expect both, meaning our assumption for the remaining part of the year, yes. And as we noted before those programs that have the most advanced models with the physician lines collaborative are performing better. And our expectation is to position as many markets as we’re going to be in with those models into 2017.

Thank you, Ana. Our next question is from Peter Costa of Wells Fargo Securities. Your line is now open.

Thanks. Help me with my math here a little bit. I think you talked about the Life business having $62 million in charges in the quarter. So that got like $0.24 and then Disability, you said $0.60 for the year. So if it’s going to improve through the year it’s at least $0.21 this quarter. And then, CMS you described is about a $0.12 problem, so all told, little over $0.60 in pressure this quarter. You only missed consensus by about $0.40. Was there some business, that outperformed in the quarter or did we just have the seasonal pattern wrong and so we missed your expectations by a much bigger amount, and then like accounting the individual business, which would have also impacted the quarter.

Peter, good morning. It’s David. As we noted, our employer healthcare business and our global supplement or our global individual business continues to perform very well. Obviously, that performance was eclipsed by the items you made reference to. So as you’re looking for offsets or the positive forces, the positive forces come out of those two large well-performing businesses with the offsets that you made reference to.

And then, that would imply that there is some further negatives going on in the back-half of the year in those businesses or something you should - unless the numbers were wrong relative to before as well.

Peter, I’d ask you to think about, every business has seasonality patterns that will capture them. So for example, in the employer healthcare business, we always have an uptick in spending in the latter part of the year to prepare for 1-1 activities and enrollment activities et cetera. That’s illustration of moment of seasonal patterns in the book of business. The MORs tends to perform differently because of the high deductibility plans et cetera.

Which is theoretically was already accounted for, I understand that. But I’m trying to figure out if there is something incrementally negative in the back part of the year in those other businesses that wasn’t laid out.

Simple answer is no.

Okay. And then, just as part of that, if you don’t mind. Relative to the CMS audit have you started to change your marketing plans at this point. If you’re not yet approved, there is going to be a point where you have to start marketing. And we’re getting towards. So is there any impact at this point in terms of your marketing plans for seniors?

Peter, obviously, a very important point you raised. We’re quite cognizant of the timing of the decision criteria, et cetera. And our team is poised to be able to dynamically manage that as the next 30 day window unfolds in front of us and we’re prepared to make whatever trade up decisions we need to make as our final judgment around the enrollment cycle unfold.

Do you believe you’ll have a ruling from CMS before certainly the minimum amount of time for you to still be able market for next year as we…?

I’m not going to comment or speculate on CMS’s conclusion. Most important piece is we are 100% focused on fully remediating and getting the validation as quickly as possible so we can put ourselves in a sustainable position. Obviously, we’ll update you as soon as we have clarity and conclusions at our final step there.

If you don’t market what would be the earnings impact? And that’s my last question.

I’m not disclosing at this point in time. As we noted, we expect as we look forward for 2017, we have margin improvement opportunities in the Medicare book of business, in part driven by the removal of the remediation costs. And then we’ll talk further as the year unfolds relative to 2017 guidance more comprehensively.

Thank you, Peter. Our next question is from Tom Carroll of Stifel. Your line is now open.

Hi, there. Just a follow-up on the Disability side of things, will the changes being made take you back to kind of your 7% or 8% margin level or will the process, hopefully improvements being done create a longer term perhaps higher level of margins in this business than we have seen?

Tom, it’s David. Broadly speaking, we’ve been quite pleased over elongated period of times for both the intersection of the service and productivity service delivery provide the clients and customers. The ongoing growth of that portfolio of business in very difficult economic times, low interest rates, low employment or growth rates, et cetera, and a tremendous margin level, our strategic objective has been to maintain margins in line with our historic performance and continue to grow that book in that portfolio. These investments will put us in position to continue to further improve the customer experience, as I note before, be aligned emerging regulator best practices and be in position to, again, achieve those margins on a long-term basis.

Okay. So kind of impact the - or make better the infrastructure, but not necessarily move you to a different margin level, it sound like I’m hearing.

I think that’s a good way of thinking about it. And as we think about infrastructure as I noted before, this is not a technology program, it’s a workflow and human capital program.

Right, and then just one administrative follow-up, did you say, you’d be willing to raise your debt to total cap level higher than the 10 percentage points that you mentioned for a strategic opportunity that was compelling?

So to be clear, we operated about 27% today, low based on historic levels, low based on our goals and objectives. Okay, we see the ability to raise that 10 points where I’ll call it ordinary course of business and illustratively 15 points for strategic M&A.

Thank you, Tom. Our next question is from Sarah James of Wedbush Securities. Your line is now open.

Thanks for taking me in. Can you help us understand what portion of the MA annual sell-in costs are variable, something you could scale back on if sanctions weren’t lifted in time for the normal marketing and selling season? And what’s the timeline of when you have to commit to things like outside call-center contracting, ad-buys, print marketing materials?

Sarah, good morning, it’s David. Broadly speaking, you should think about the vast majority of the cost and resources for purposes of annual enrollment period as largely being variable. So if you’re putting them in buckets, nothing has ever hit 100%. But you should think about them as largely variable. Two, as noted by prior callers, the timeframe is rapidly coming up on us to make final decisions relative to ramping and staging. That’s both beneficial that is not a cliff decision in terms of your structure, that’s the variability aligned with the longitude of dial-up and dial-down. And we would expect to be confronting some focused decisions over the near-term 30-plus-day window and how we focus on that.

Got it, and can you remind us how you are thinking about Medicaid? Is that an attractive business in your opinion? And is there a portion of that market that you are more inclined towards?

Sarah, historically, we prioritized Medicaid below certain other segments, so seniors or Medicare, expanding our global footprint, expanding our retails capabilities as examples. We have a view that over time that the Medicare marketplace would continue to move more toward, we’ll use the broad term, managed Medicaid, programs within States to focus on high-risk populations where we believe we have the opportunity to create differentiated value through physician collaborative or clinical models, et cetera. And we believe over time that will continue to present opportunities, be it organically or inorganically. So as a subset of the Medicaid world as it allows where we believe we could actually differentiated values through either clinical engagement, physician engagement or both.

Thank you, Sarah. Our last question comes from Dave Windley of Jefferies. Your line is now open.

Hi, thank you. Thanks for squeezing me in. So if I read a couple comments in the press release correctly, you talk about lack of meaningful prior-year reserve development in the current quarter and you say a relatively small amount or less than last year in Medicare. Does that imply that the commercial PYD was actually negative or was it just a very small number, small positive number?

Dave, I’d think of the prior-year this way. And so in the quarter we had about the same level of favorable prior-year development in our commercial employer business this year and last year, but we have reductions in both individual and Medicare and that resulted in an overall de minimis amount for the entire company.

Okay. Okay, so kind of answered my follow-up. It was going to be, as it relates to trend, and, Tom, I think you commented on this earlier, but it’s consistent with where you started the year, I don’t think you really commented on individual buckets. But maybe you could comment on any bias within the range? Is the commercial part of the group part of that trend? I don’t think you include individual in trend. But how is that biased within the range, perhaps?

Well, Dave, actually individual is included, but so is our broader employer business. So in the overall scheme of things individual is a smaller contribution to the trend result. And as I said, when this came up earlier, we really don’t see any significant changes in the underlying trend factor in the components.

Okay. Thank you.

Thank you, Dave. At this time I would like to hand the call back to Mr. David Cordani for closing remarks.

Thank you. So just briefly to conclude our call, I’d like to highlight some key points. Cigna’s second quarter results reflected solid revenue and earnings contributions from a Global Healthcare and Global Supplemental Benefits business, and a disappointing financial performance in our Group Disability & Life segment, reflective of short-term challenges that will improve. The 40,000 outstanding members of the Cigna team around the globe work diligently every day to fulfill our mission of improving the health, well-being, and sense of security of the people we serve. And we will seek to continue to effectively operate our business, guided by our strategic framework to create sustained value for our customers, clients and shareholders. Again, we thank you for joining our call today.

Ladies and gentlemen, this concludes Cigna’s second quarter 2016 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 ask us to record the conference by dialing 1-866-421-5864 or 1-203-369-0809. No pass-code is required. Thank you for participating and we will now disconnect.