Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Aetna, Inc. (NYSE:AET)

Q3 FY08 Earnings Call

October 29, 2008, 8:30 AM ET

Executives

Jeffrey A. Chaffkin - VP of IR

Ronald A. Williams - Chairman and CEO

Joseph M. Zubretsky - EVP and CFO

Mark T. Bertolini - President

Matthew Borsch - Goldman Sachs

Analysts

Charles Boorady - Citigroup

Josh Raskin - Barclays Capital

Gregory Nersessian - Credit Suisse

Justin Lake - UBS

Scott Fidel - Deutsche Bank

Doug Simpson - Merrill Lynch

Brian Wright - Banc of America Securities

John Rex - JPMorgan

Carl McDonald - Oppenheimer

Operator

Good day ladies and gentlemen. Welcome to Aetna's Third Quarter 2008 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]. It is now my pleasure to turn the conference over to Mr. Jeff Chaffkin. Please go ahead sir.

Jeffrey A. Chaffkin - Vice President of Investor Relations

Good morning and thank you for joining Aetna's third quarter 2008 earnings call and webcast. This is Jeff Chaffkin, Head of Investors Relations for Aetna and with me this morning are Aetna's Chairman and CEO, Ron Williams and Joe Zubretsky, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we'll be pleased to respond your questions. Joining us for the Q&A portion of this call is Mark Bertolini, President and Head of Business Operations.

During the call, we will make forward-looking statements. Risk factors that may impact our statements and could cause actual future results to differ materially from currently expected results are described in Aetna's 2007 10-K as well as our third quarter 10-Q we filed with the SEC.

Pursuant to SEC's Regulation G, we provided reconciliations of metrics related to the company's performance and the non-GAAP measures in our third quarter 2008 press release, third quarter 2008 financial supplement and our guidance summary. These reconciliations are available on the Investor Information portion of the aetna.com website. Also as you know, Regulation FD limits Aetna's stability to respond to certain enquires from investors and analysts in non-public forums. So Aetna invites you to ask all questions of material nature on this call.

Aetna's third quarter results including impact of our Schaller Anderson and Goodhealth Worldwide acquisitions, which closed in the third and fourth quarters of 2007, respectively. For the third quarter of 2008, these acquisitions did not have a material impact on our operating earnings or net income. As financial results are analyzed, it will noted with the inclusion of these acquisitions impacted the operating metrics.

I will now turn the call over to Ron Williams. Ron?

Ronald A. Williams - Chairman and Chief Executive Officer

Good morning. Thank you, Jeff and thank you all for joining us this morning. Earlier this morning, we reported operating earnings per share of $1.12 for the third quarter 2008, an increase of 15% compared to the third quarter of 2007, in line with our prior guidance. We are very pleased with our performance in light of the challenging economic environment.

The recent turmoil in world financial markets is unparalleled and has affected companies in every industry. As you will hear later, our industry and our company are no exception to that. But I believe, we are well positioned to weather this difficult economic environment and emerge from it even stronger and more competitive. Now, more than ever, it is important for us to remain focused on successfully executing our strategy and meet the need of our customers. Accordingly, I will focus my comments on our third quarter business accomplishments, in the context of our strategy as well as our outlook for 2008 and 2009.

We continue to execute on the four dimensions of our strategy: segmentation, integration, consumerism and operating excellence. Our third quarter results reflect continued success as demonstrated by our well-diversified membership in revenue growth, disciplined pricing actions in our insurance business, a continued commitment to managing quality and total cost for our customers, operating expense efficiencies and effective capital deployment.

Our segmentation strategy continues to drive profitable growth. We achieved net medical membership growth of 169,000 members this quarter, and 815,000 members year-to-date, bringing total medical membership to almost 17.7 million as of September 30th. Our student health, government and middle-market customer segments, all posted solid commercial membership gains, as did Medicaid.

These gains were partially offset by some expected in-group attrition particularly our national accounts, customer market segment, due primarily to the slowing economy. Our strategy to create preference in the marketplace through integration and innovation continues to yield positive results for 2009 membership.

In addition to the previously announced Banc of America and Home Depot large customer wins, during the third quarter we were awarded the business of Progressive Insurance and expanded our existing relationships with Citigroup. We are also having a very good January 1 selling season in the lower end of the national accounts, customer market segment, and the upper end of the middle-market customer segment, underscoring that our value proposition continues to resonate in the marketplace.

Consumerism is another key aspect of our strategy. And during the third quarter, we had several notable accomplishments, as we continue to enhance the consumer experience for our members. Very specifically, we announced the expansion of our suite of healthcare transparency tools into eight new markets, now providing approximately 70% of our members with valuable information to help to make more informed health decisions. We were recognized for the fourth year in a row by the HR Policy Association for meeting their pharmaceutical coalition's stringent transparency standards. And, we have partnered with Microsoft to enable Aetna members to transfer their personal health record information to Microsoft health wall [ph] creating a truly portable record of their healthcare information.

We also continue to focus on operational excellence as a key component of our strategy. Our third quarter commercial medical benefit ratio was 79.2%, excluding prior-period development. And we achieved an 80 basis point year-over-year improvement in our operating expense ratio in the third quarter, further demonstrating disciplined cost management, even as we continue to invest for future profitable growth.

Our ability to continue to successfully execute our strategy, despite the current economic climate is due in part to the strength of our operating model. But we are not immune to current economic forces. We believe that our disciplined management processes enable us to identify potential risk early and take appropriate actions designed to mitigate those risks.

Our underlying business fundamentals, capital position and liquidity remains strong. As such, we have no current need to raise additional capital. And, in fact, our businesses are expected to generate more than $1 billion of excess capital this year. And, we will continue to deploy it to create value for our shareholders.

Our year-to-date results provide us with good momentum, and continued powerful until achieving our 2008 forecasted underlining results. However, this positive core business momentum will be tempered somewhat in the fourth quarter by lower-than-expected investment income, largely due to deterioration in the debt and equity markets. As such, we are adjusting our 2008 full-year operating earnings per share outlook to $3.90 to $3.95, representing year-over-year growth of 12% to 13%. Although this represents a reduction from our previous guidance, it is a direct result of the turbulent investment environment, rather than healthcare underwriting performance, and still represents industry-leading year-over-year operating earnings per share growth.

In addition, while our 2009 operating plan has not yet been finalized and our new business selling season is still under way, we are pleased with our membership growth momentum going into 2009. The current uncertainty surrounding the economy and capital markets preclude us from providing a detailed outlook for 2009, as we have traditionally done at this time of the year.

However, we are able to share with you our current thoughts with respect to 2009. Under normal economic conditions, we would remain permitted to our long-term operating earnings per share growth goal of 15%. However, these are not normal times. And we believe it is prudent to plan for the economy to be in a protracted weakened condition with respect to housing, employment and continued credit and equity market disruption in 2009 and into 2010.

This environment will affect our customers' work forces and their purchasing patterns, potentially contribute to variability in medical utilization and directly impact aspects of our operating results related to the capital markets, such as investment income. As such, our current 2009 planning assumptions contemplate additional uncertainty regarding factors, such as; slowing net membership growth, especially in commercial-insured products, increased benefit by allowance and pricing pressures, upward pressure on medical unit costs, potential implications of a changing political environment other than those we have already modeled and prepared for and, increased pressure from capital market forces, including a significant increase in our pension expense. We expect these pressures to be more pronounced than those which we would otherwise experience under normal economic conditions.

Based on these assumptions, we therefore expect 2009 performance to reflect first quarter net medical membership growth of approximately 800,000, primarily ASC members with a potential for addition upside based upon the strength of our middle-market pipeline, and our success during the upcoming open enrollment period. As well as, potential downside due to uncertainty regarding employment levels and 3% to 5% operating earnings per share growth, which includes the absorption of increased pressure from capital market forces, including a potential $0.30 to $0.40 per share increase in our pension expanse, which Joe will speak to later in the call.

In summary, in light of current market conditions, I am very pleased with our results for the third quarter. I would like to thank our employees for their unwavering dedication in meeting the needs of our customers. It is through their efforts that we believe, we will continue to be successful through 2009 and beyond. I will now turn the call over to Joe Zubretsky to provide additional insight into our third quarter performance, the strength our financial position in light of recent capital market events, and our outlook for 2008 and 2009. Joe?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Thank you, Ronnie and good morning. Earlier today, we reported third quarter after-tax operating earnings of $536.7 million or $1.12 per diluted common share, representing year-over-year increases of 6% and 15% respectively. I will begin by discussing the drivers of our third quarter financial performance, starting with opening margin and its key components; revenue, healthcare cost trend and operating expenses.

Third quarter pre-tax operating margin was 11.4%, a 70-basis point decrease from the third quarter of 2007. This is was due primarily to lower year-over-year investment income, driven by lower yields and reduced returns on alternative investments, as well as prior-period development. Partially offsetting this was an improvement in the year-over-year operating margin in our Medicare business.

We continue to execute our strategy for profitable growth. This quarter's strong top-line growth was driven by continued membership gains and disciplined pricing actions. Revenue, excluding realized capital losses, increased 14.4% from $7 billion in the third quarter of 2007 to $8 billion this quarter. Healthcare segment revenue increased 17% year-over-year or 16%, excluding the impact of acquisitions.

Commercial premiums increased 8% year-over-year, driven by 4% volume growth and a yield increase of 5%, partially offset by a 1% decline from the effective product mixed. Medicare premium increased 91% over the year-ago quarter, driven by the membership gains and conversions, we have spoken about previously.

Turning now to our healthcare cost experienced in the third quarter, which includes $23 million of unfavorable prior-period development for all products combined, $56 million of unfavorable development in commercial products, partially offset by favorable development of $26 million in Medicare and $7 million in Medicaid.

Specifically, our commercial medical benefit ratio was 80.3% or 79.2%, excluding prior-period development. On a year-to-date basis, our commercial medical benefit ratio was 80.2%, slightly higher than our 2008 full year target, but still reflecting our continued ability to forecast, manage and price the medical cost trend. The commercial unfavorable prior-period development was driven by unusually higher pay claims activity in the quarter, related primarily to second quarter date of service.

Our Medicare-medical benefit ratio was 83%, 140 basis points favorable to the 84.4% reported in the year-ago quarter. Since reported Medicare results this quarter and in the year-ago quarter included favorable prior-period development, a more meaningful measure is our 2008 year-to-date Medicare-medical benefit ratio of 85.3%, which represents a 160-basis point year-over-year improvement driven by favorable results in our Medicare advantage products. Our Medicaid-medical benefit ratio was 81.1% this quarter, an improvement over 89.8% reported in the second quarter of 2008, primarily due to the favorable prior-period development.

Our reserving practices remain consistent and appropriate. Our reserves take into account the second quarter completion patterns that have emerged in our commercial book of business and we have updated our 2009 pricing models for the slightly higher view of medical costs. We ended the quarter with a prudent level of reserve adequacy. Our healthcare cost reserves were $2.4 billion at September 30th, essentially in level with June 30th levels. Days claims payable were down one day during the quarter, to 42.9 days at September 30th due primarily to the timing of pharmacy payments in the prior-period development, mentioned previously. And medical cost trends within major healthcare cost categories for 2008 continued to be in line with the expectations we have shared with you previously.

We are also pleased with our group insurance operating results this quarter. Group insurance operating earnings are $47.2 million after-tax, represent a 24% increase over the prior-year quarter, as favorable underwriting results more than offset a $6 million year-over-year decline in net investment income.

The third key component of operating margin results is operating expense efficiency. We continue to invest in our future to generate new revenue streams to market and product expansions. We fund these growth investments with unit cost reductions and by leveraging our fixed costs. This quarter, we achieved an operating expanse ratio of 17.4%, representing an 80-basis point year-over-year improvement, or 100 basis points when adjusted for acquisitions.

The second driver of our financial performance is investing for profitable growth. During the quarter, our net medical membership growth was 169,000 members, bringing year-to-date growth to 815,000 members and total medical membership to almost 17.7 million as of September 30th. Sequentially, commercial membership increased by 165,000 members, including solid gains in both ASC and insured business.

Insured membership gains were driven by growth in newer customer segments, as membership in our traditional core commercial segments was essentially unchanged. Medicare membership declined by 8000 members, as modest growth in this business was more than offset by the conclusion of the 13,000 ASC-member Medicare health support program and Medicaid grew by 12,000 members.

The third and final area of financial performance I will comment on is our investment performance and management of capital and its accretive deployment, including cash flow dynamics and holding company liquidity. I will begin with the impact of the stressed financial markets on our investment portfolio.

Third quarter net income of $277.3 million included after-tax realized capital losses of $232 million, consisting of three components: $41.8 million after-tax due to asset sales, as we begin to unwind certain investment positions driven by deteriorating credit market conditions. $69.8 million after-tax related to the write-downs of specific credits, including Lehman Brothers and Washington Mutual. And $120.4 million after-tax for the accounting for other-than-temporary impairments, that is certain fixed income investments that decreased in market value this quarter, due to the credit-spread widening experienced by the broader market and which we do not assert that we will hold to recovery.

We have classified securities with a market value of $1.6 billion as other than temporarily impaired. This classification which recognizes mark-to-market changes in our portfolio as a realized loss, provides our investment professionals with increased flexibility to sell audit [ph] positions rather than hold them to recovery. It is important to note that these securities are performing assets generating investment income to support the needs of our business.

We also had a third quarter pretax net unrealized capital loss balance of $487 million, related primarily to our Healthcare and Group Insurance segments, as a result of the change in the market value of assets due to credit spread widening. These are accounting-based losses only, as we intend to hold these securities to recovery. These assets are also performing assets, generating investment income to support the needs of our business. In addition, although this unrealized loss impacts GAAP shareholders' equity by $316 million after-tax, it has no impact on our regulatory capital.

Lastly, another impact of the Lehman Brothers' bankruptcy resulted in our recording a charge to third quarter net income of $27.4 million after-tax, or $0.06 per share for an allowance recorded on our reinsurance recoverable with Lehman Re.

In light of the current economic and financial market environment, I will now provide some additional insight into the specifics of our investment portfolio. Our portfolio is well diversified and durationally matched to our liabilities. Our holdings are generally consistent with the profile we shared with you, during our investor conference in March. The summary of our September 30th investment profile is included in this quarter's financial supplement. But, I will provide some additional details on our holdings and performance.

As of September 30th, the fair market value of our total investment portfolio was $18.5 billion. $5.4 billion of the portfolio supports experience-rated and discontinued products in our large-case pension segment, and does not impact reported operating earnings. The remaining $13.1 billion primarily supports our Healthcare and Group Insurance segments, and those impact reported operating earnings.

Our core strategy remains focused on fixed income securities, with an emphasis on investment-grade corporate credit. Our $14.5 billion debt securities portfolio is broad diversified across a broad cross-section of corporate and other credits. With an average credit quality of A+, 95% of this portfolio is investment-grade. Credit spreads widened across all bond sectors during the third quarter. The average spread on our investment-grade corporate bond portfolio widened by 150 basis points, 30 basis points favorable to the 180-basis point spread increase on Merrill Lynch's investment-grade Corporate Bond Index.

Included in our $3 billion mortgage and asset-backed securities portfolio is $1.3 billion of residential mortgage securities, which are all agency-backed, AAA-rated, and have valuations reflecting the benefit of the Fannie Mae in and Freddie Mac federal backstop. Our $1.7 billion mortgage loan portfolio is well seasoned and diversified by both, geography and property-type. Our current loan-value ratio was 65%, and all loans are fixed rate, having amortizing principle and are currently performing.

Finally, our alternative investments include real estate, private equity partnerships and hedge funds, which are primarily fund-to-fund structures with diverse strategies. Hedge fund performance, which is recorded as net investment income can be and has been volatile. Year-to-date performance is lower this year compared to recent years, but has outperformed comparable hedge fund benchmarks.

Turning now to liquidity and capital management; while we were not immune to recent events in the financial markets, our financial position, capital structure and liquidity, all continue to be very strong. We have no current need to raise additional capital. In fact, despite market conditions, we expect a dividend more than $1 billion of available capital from our operating subsidiaries to the holding company in 2008, as our subsidiary, earnings and dividend capacity remained strong.

We began the quarter with holding company liquidity of a $102 million that combined with third quarter dividends to the parent of $317 million in the $500 million of ten-year notes we issued in September, enabled us to repay $147 million of commercial paper and fund $473 million of share repurchases. We ended the quarter with $270 million of holding company liquidity. During the quarter, we repurchased 11.1 million shares bringing year-to-date share repurchases to 37.6 million, for a total of $1.7 billion. Our basic share count was $461 million at September 30th, down from 472 million at June 30th.

We are also pleased to note that during the past year we have taken several actions to further strengthen our financial profile, and are therefore very well positioned in this challenging economic environment, with respect to capital and liquidity. Specifically, recognizing that we had outgrown our prior bank credit facility, in March of this year we expanded our facility from $1 billion to $1.5 billion and extended its maturity to 2013. Our enhanced facility also has a more favorable financial covenant and better pricing.

In early September, we recognized an opportunity to term out the portion of our commercial paper and issued $500 million of ten-year debt at 6.5%, further enhancing other liquidity profile. The commercial paper market continues to view us as an attractive issuer of the AQ, PQ paper. And commercial paper issuance remains a viable option for us to manage holding company liquidity albeit at a somewhat higher cost than we would normally incur. In addition, the optimal capital structure we developed last year continues to be appropriate in this environment. As of September 30th, our debt-to-capital ratio was 30.7%, with a commercial paper balance of $483 million, and a well laddered long-term debt maturity profile with the earliest maturity being in 2011.

Our operating subsidiaries also continued to be well capitalized, and we expect to meet our target consolidated risk-based capital ratio of 300% of company action level or 600% of authorized control level at year-end. We continue to have excellent operating cash flows. Healthcare and Group Insurance GAAP operating cash flow of $734 million, represents 139% of operating earnings for the quarter and year-to-date cash flow of $1.9 billion represents 134% of operating earnings. For the full year 2008, GAAP operating cash flows are expected to be approximately 125% to 130% of operating earnings.

I would now like to provide some additional comments on our 2008 guidance and our outlook for 2009. Given another quarter of solid performance, we have confidence in our ability to sustain our business momentum for the remainder of 2008. For the full year 2008, we expect most operating metrics to be in line with those we shared with you in our second quarter earnings call, other than those, I will now note.

Net medical membership growth of 750,000 to 800,000 members, approximately 40% of which is insured membership, as we now expect to gain of approximately 100,000 State of Connecticut Medicaid members to be effective in the first quarter of 2009, rather than the fourth quarter of 2008. A commercial medical benefit ratio of approximately 80% with a total medical benefit ratio of approximately 81.5%. Operating earnings per share of $3.90 to $3.95, or growth of 12% to 13% based on a full-year weighted average share count of approximately $490 million. This $0.05 to $0.10 decrease in full-year guidance is due primarily to lower-than-expected investment income, particularly hedge fund results driven by the deterioration of the debt in equity markets.

Turning now to our outlook for 2009. Normally, at this stage in the planning process, we have clear visibility into the drivers of expected business results. And in many respects we do this year, as well. However, the impact of the economic turmoil on the healthcare marketplace are still emerging during this 2009 planning cycle. It is therefore prudent to recognize the potential for some of our planning assumptions to change before we finalize our 2009 plan later this year. For example; although we expect a very strong start to the year with first quarter net medical membership growth of approximately 800,000 members primarily ASC, there still is uncertainty regarding membership growth during the remainder of the year for reasons noted previously.

Consumer confidence and purchase patterns could influence the type of products and level of buy downs our customer select, thereby impacting 2009 revenue growth. Although, we continue to price in line with trend, which we estimate will be 8% plus or minus 50 basis points, driven by a modest increase across several medical cost categories, economic forces could potentially put additional pressure on medical costs.

Other aspects of our business are even more directly impacted by capital market conditions, specifically 2009 net investment income is likely to be higher than in 2008, but lower than we would expect under normal circumstances. And we expect a significant increase in our 2009 pension expense due to a decrease in the value of the assets supporting our pension plan. This increase in expense could be as much as $0.30 to$0.40 of operating earnings per. Although, these expenses are non-cash items, it would reduce our reported earnings per share growth rate by 7 to 10 points.

This financial challenge will be an offset to the underlying operating earnings growth of the core business. Our pension plan is still expected to be fully funded and we'll have complete visibility into our pension expense when plan assets are valued, at the end of 2008. Absent any acquisition opportunities, we expect to execute a capital plan similar to that which we have executed in the recent past.

Taking all of these factors into account, we expect 3% to 5% operating earnings per share growth in 2009. We look forward to providing you with additional details regarding our 2009 outlook during our fourth quarter earnings call in February. Another item of note; in 2009, we will be discontinuing the practice of providing quarterly guidance. However, we will ensure that you have the appropriate information to understand and analyze our results and outlook.

In summary, I am pleased with our financial performance this quarter, given current market conditions. Our underlying business fundamentals, our well-diversified investment portfolio, solid liquidity and capital profile, position us well to continue to deliver profitable growth for the remainder of 2008 and in 2009.

Before we begin the Q&A portion of our call, I will now turn it back over to Ron for some additional comments. Ron?

Ronald A. Williams - Chairman and Chief Executive Officer

Thank you, Joe. I realize this quarter's report includes much new information for you to absorb. And due to the nature of the economic environment, less clarity than what you used to hearing from us regarding our 2009 plan.

In that context, I thought it would be helpful to summarize my perspective as the CEO of Aetna and as someone, who has been in this industry for a long time; on Aetna's projected 2008 performance and 2009 outlook. This has been a very good year for Aetna, our customers and our constituents. Based upon our 2008 full-year outlook, it is clear to me that Aetna will deliver industry-leading performance, including 750,000 to 800,000 growth in medical members as a result of our segmentation strategy.

At least 15% health revenue growth, operating earnings per share growth of 12% to 13%, strong cash flows and a solid balance sheet with capital metrics that are in line with our year-end targets. Our three-year operating earnings per share growth rate from 2006 to 2008 is expected to be approximately 21%, testimony to our goal of sustainable profitable growth.

For 2009, we are looking forward to another year which demonstrates Aetna's continued business momentum, with 3% to 5% operating earnings per share growth. While at the same time, withstanding the continued impact of volatile capital market forces, including a potentially significant increase to our pension expense, which likely will dampen our 2009 operating earnings per share growth.

We will continue to work diligently to mitigate this impact, while balancing the need to invest for long-term sustainable profitable growth. I believe, Aetna is extremely well positioned, and when our 2009 plan is finalized, I'm confident that it will produce a solid result for our shareholders, given the context of this unprecedented environment, as we continue to be the preferred healthcare brand in the marketplace.

With that, I will now turn the call back to Jeff. Jeff?

Jeffrey A. Chaffkin - Vice President of Investor Relations

Thank you, Ron. The Aetna management team is now ready for your questions. We ask that you limit yourself to one question and one follow-up, so that as many individuals as possible have an opportunity to ask their questions. Operator, the first question please?

Question And Answer

Operator

Thank you. We'll hear first from Charles Boorady with Citi.

Charles Boorady - Citigroup

Thanks. Good morning. My first question relates to current medical trends. I'm wondering if you can comment on the components recent medical trends, and why the slowdown that we've been hearing about from hospitals, pharmacies and others, isn't having a positive rather than a negative impact on your prior-period reserve developments for the commercial business?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Charles, hi. This is Joe. As we indicated at the end the second quarter, we saw our medical trend of 7.5% plus or minus 50 basis points, start to move to the upper-end of the range. And clearly, we're confirming that it has done that and in fact should move to 8% for 2009. I can honestly say, it's no one major healthcare cost category that's providing that increase, utilization is clearly under control and we're seeing some modest uptick in unit cost. I'll turn it over to Mark for further comments.

Mark T. Bertolini - President

Sure, Charles. We're actually seeing in the potential for some pressure on the provider side for higher price... unit price increases in 2009. And so, we're guarding against that. We actually bringing in pricing into our renewing business back in April, late April, an extra point to a point and a half, across all of our books of business segments, to accommodate for what we thought would be an increase of this half a base... 50 basis points in the trend going into 2009.

Charles Boorady - Citigroup

And then a specific component to medical trend, is that something you can give us the specific sign in terms of those unit increases and volumes?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

We'll give detailed guidance at our fourth quarter earnings call for 2009. We'll update you on the medical cost categories. Right now they're all behaving as plan and guidance hasn't changed for 2008.

Charles Boorady - Citigroup

Okay. I'll just ask my last question then on Medicare Advantage group retiree business. Has that opportunity sort of fizzled with the elimination of deeming or large employers in light of the state of the current economy, looking even more aggressively to shift retirees towards your group that may operate?

Mark T. Bertolini - President

Charles, this is Mark. We still see a lot of interest in group private fee-for-service retiree business. There is a slowing as we go through this political change to see what indeed may happen to funding for the product. However, we continue to have discussions. The deeming issue for us is not as big an issue. We have a couple of years to get in front of that, we already have the network efforts underway to support the markets where we have group retiree business.

And I would remind you that the business that we have written on the private fee-for-service has been business that we have supplemental before and therefore, had a good experience good market price and ability to rate that business appropriately.

Ronald A. Williams - Chairman and Chief Executive Officer

Yes, we probably add Charles, that the decisions for each company takes into it's the context, its strategy, with its benefits its retiree population. So I think, generally we continue to see interest Mark has described. But I think it's always in the context of each company's strategy.

Charles Boorady - Citigroup

Thanks and congrats on the quarter.

Ronald A. Williams - Chairman and Chief Executive Officer

Thank you.

Jeffrey A. Chaffkin - Vice President of Investor Relations

Thank you.

Operator

We'll take or next question from Josh Raskin with Barclays Capital.

Josh Raskin - Barclays Capital

Hi. Thanks. Good morning. A question on the pension, incremental pension expense. I was wondering Joe, maybe could you walk us through your assumptions on you pension plan and maybe any changes you've made since the end of '07?

Ronald A. Williams - Chairman and Chief Executive Officer

Sure. Good morning, Josh. Yes, Joe would be glad to answer that.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Yes, I think from context around the pension plan is really important to sort of understand fully how that's going to impact us going forward. In the early 2000s, we funded... made cash contributions to our plan, of in excess of $1.5 billion which built up an over funded status of over 120%, which we enjoyed in 2007. Assets at $5.8 billion and projected obligations at 4.6 for $1.2 billion surplus.

The plan is total-return driven. We have an asset allocation that's really straight in line with the way corporate America operates, with 60% equities, 30% fixed income and 10% alternatives. So what's really happened is obviously with the equity markets where they are, the assets have declined in value and when they declined in value, as you know in pension accounting, you have to record a portion of those losses actually through your P&L as increased pension expense. So, really the indication we gave you right now, was doing a pro forma calculation, based on current values. The actual accounting will be based on a December 31st, valuation of the plan. And so, we will give our detail guidance at the beginning of 2009. You'll actually know the number within a very tight range for the entire year.

Josh Raskin - Barclays Capital

I guess, Joe, a couple sort of follow-ups on that. You're making the assumption, is that based on the 930 funded standards or is that sort of a more updated view as of today?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

No, we... the numbers we gave you were as of September 30th.

Josh Raskin - Barclays Capital

Okay. So, theoretically it's even worse I guess, if you will?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Well it could be worse but, briefly you can agree, it's volatile.

Josh Raskin - Barclays Capital

Yes. No, that's right. I guess because going backward I look to the pension plans were sort of in a net funded position at the end of '07 of about 913 million or so was the number I was coming up with. And if I assume that the fair value of the plan assets was down even sort of 25% to 30%, I guess I don't know what the benefit obligation did, but are still coming with a funded status of sort of slightly negative. So, what's the accounting? Is there are big catch up coming here or is this just, we've assumed that the 8.5% return is no longer valid?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Let me comment on your the first portion first, because you make a good point. Even with the decline in asset values to September 30th, our plan will still be in a positive-funded status and in fact, it's a long way away, perhaps 25% and 30% of an additional decline to ever get to a position where a cash contribution is required. So, when we said non-cash, we truly meant non-cash. They will recover and no mandatory contributions will be required.

The way the accounting works, the accounting doesn't recognize the fact that you are in surplus. And so, the decline in asset values and the expected return on a lower investment base is what's driving the accounting result. And obviously, you can be working with Jeff Chaffkin and others to truly understand the accounting model. But it's the traditional accounting model, there is no black box to it, it's pretty formulaic. You have to spot rate your assets and that will influence your accounting for an entire year, based on December 31st values.

Josh Raskin - Barclays Capital

Right, okay. And then I'm sorry, last follow-up on this issue; the 10-K disclosure around a 1 percentage point decrease in the assumed rate of return on your asset I believe was, I have the number. I thought it was something around $40 million or so. So, I'm curious how we reconcile that with sort of $250 million of additional expense next year?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

The numbers that we are dealing with would be a 1% change in the market value of assets, would be approximately of $10 million pre-tax number. But, a 25-basis point movement in the discount rate would also be a $10 million number. So you have the two factors that work either against or they either work in tandem or they offset each other. But those are the sensitivities that we are dealing with.

Josh Raskin - Barclays Capital

And that's not the rate of expected return, that's the actual 1% change in assets.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

That'snot correct. That's not the change in the expected return, but change in the asset base.

Josh Raskin - Barclays Capital

Okay, that may change. Okay, thanks for answering all those questions.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

You are welcome.

Operator

We will take our next question from Greg Nersessian with Credit Suisse.

Gregory Nersessian - Credit Suisse

Hey, good morning. The first question was just, Joe based on the capital plan that you referenced to in your comments. I was just curious that your '09 share count that you are building into 2009 guidance is based on a commensurate decline in the weighted average count as a in 2008?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Yeah. As you know we don't pre-announce the exact number of shares we will purchase. In fact we said very clearly that M&A opportunities have first call in capital, but absent that we would repurchase shares that we find then attractive value and you've been seeing 7% to 8% declines in our share count in the last couple of years and in your model you can assume that, that would continue absent any other opportunities in the capital.

Gregory Nersessian - Credit Suisse

Okay, great. And then on the commercial reserve development, was that predominantly related to earlier quarters in 2007 and was there a specific component of the cost trends that we saw there?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

No.

Gregory Nersessian - Credit Suisse

Geographical area or anything?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Sure with the commercial unfavorable development of $56 million, was really just a very aberrant payment and reporting pattern that caused the second and third quarters. So most of it is actually related to second quarter dates of service in our commercial book. The good news is with the revised upward medical cost outlook it was still within the bands of our pricing guidelines and we built it into the pricing models. And then we fully contemplated that reporting pattern in our September 30th reserves.

Gregory Nersessian - Credit Suisse

Okay. Great. And then just a last quick one; if you could give us any color on your expectations for MA and PDP enrollment for next year?

Ronald A. Williams - Chairman and Chief Executive Officer

Mark? I think, before Mark answers, I think the point I would say is that, we've given general guidance about membership in terms of 2009, speaking about the first quarter. We haven't really broken it out yet because we're still in the process of finalizing our plan. And so, we really won't give segment-level specifics. But I think I would say that we feel very good in general about our national account business activity. Mark you might want to provide a little more color there.

Mark T. Bertolini - President

The national account activity with Home Depot and the Banc of America wins is fairly robust for January. We are also though factoring into the economic... the economy for 2009. Our point of view is some headwinds associated with attrition, in group attrition in national account as we have seen over the last six months of the year. As it relates to Medicare Advantage, the PDP membership we have lost some regions for January 1, so that will have a negative impact on our enrollment there, on our Medicare Advantage. It's still too early to tell, we are in enrollment season. We have a lot of interest and we are following up on leads and we are interested to see what will take to close the business as seniors face the prospect of the economy and what it might do to their own personal situation. So, it can either make it happen or it could freeze them in place, given what's going on in the economy.

Gregory Nersessian - Credit Suisse

Okay, great. And, how many licenses to progressive account? Progressive, you pick up?

Mark T. Bertolini - President

It's not one of our larger accounts.

Gregory Nersessian - Credit Suisse

Okay. Thank you.

Operator

We'll take the next question from Justin Lake with UBS.

Justin Lake - UBS

Thanks. Good morning. I apologize if I missed it but, can you give us an update of what you're seeing on the commercial pricing side from you peers and also Mark, maybe just some thoughts on how small employers are reacting for this economy as far as their ability or willingness to offer the benefit at all?

Mark T. Bertolini - President

Sure, we are seeing no fundamental change in the pricing environment. It still remains rational but competitive. We haven't seen anybody take any over actions one way or the other, quite frankly as a result of economic conditions in the industry. So, across our market, across our segments things seem to remain pretty much the same as they were last quarter. And I think a lot of the reports including yours have pointed out that pricing is relatively rational in the markets.

As it relates to small group, we're watching it very, very closely. We have a lot of activity. We expect benefit buy downs to be higher and we're preparing a whole suite of products for next year for employers and individuals as the potential displacement of coverage in those employers and individuals coming out of larger employers through layoffs need to get access to products. So, we have a group of people focusing on how we can maintain some market share and actually provide a set of products with higher buy downs, higher deductibles, lower price points, that meet that need. Our expectation in the small group market is that we'll continue to see small group employers drop coverage for their employees, particularly in this environment.

Justin Lake - UBS

That's helpful. And just to take a whack at this, the pension accounting issue that what we're going through here. Joe can you just give us a little more granularity around how you get to this let's just call it the $300 million number pretax as far as how to build up, I mean occurs. And I could understand, I mean and I back to the envelop here about $4 billion and, in equities if you lose 35% on that, that's may be $1.5 billion. So, $1.5 billion at 8%, I could see, how you gets 100, 120 as far as the vast contribution on those assets that obviously go away as the equity markets declines. But, then there's appears to be some of the part here that maybe at least I am a little more, a little confused about that may be you can give us some color on?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Sure, maybe this will help. There's two components of the swing and if you look at our 10-K and 10-Q disclosures and look at the pension footnotes, it actually lays out how the pension accounting works pretty clearly. Two components; one as you suggested, the expected return on a lower asset base, will drive it increase to the expense in 2009, that's component number one. Component number two is the difference between your expected returns on assets and your actual returns is actually deemed to be an actuarial loss which is then amortized. To the extent that exceeds a quarter of 10% of your asset values that is amortized into expense over the remaining service lives of your employees, which in our case is ten years. Those two components drive the change that we are talking about.

Justin Lake - UBS

Okay. And that makes sense. I guess the question I had, as I look at some of your peers out there inside of managed care and outside of it. Most of them try to smooth out that volatility in returns over more than one-year period. For instance, I think the one of your peers does it over a five-year period. And, I am just curious as to why you are running that, given that this is a long term kind of set of assets here?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

I think you might be referring to the choice in the accounting policies that companies can select, using the spot rate value of the assets or market-related values that smooth. And the history of the company is they chose the former not the latter, and we do a spot rate. And that's just the way our accounting model works.

Justin Lake - UBS

Okay. Is there any thoughts of revising that or do you feel like most companies do that or do you feel like yours is a little more conservative or aggressive depending on which kind of market most?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Our information is that ours is the more prevalent convention.

Justin Lake - UBS

Okay, that's helpful. Thanks Joe.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Next we will hear from Matthew Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs

Yes. Hi, good morning. If I could ask a question about what you're seeing on the Medicare Advantage products, as you look at some of your competitor offerings. One or the other companies in this sector had talked about Medicare Advantage product offerings that were looking aggressive in some cases for 2009 relative to 2008. Just wondering if you have a view on that, if you are seeing some of the same thing and if so is there any geographic basis to it? Thanks.

Ronald A. Williams - Chairman and Chief Executive Officer

Good morning Matt, Ron here. I would start up by reminding you than in our case a big part of our Medicare Advantage, particularly private fee-for-service is group based and as Mark pointed out, these are situations where we often have the Medicare supplement experience to begin, with so there are rating is based on our actual claim experience and we have a really good sense of what represents from our point of view a very disciplined pricing model and disciplined pricing approach. I think the competitive environment, because it's local and geographical, it's going to vary all over the place in the context of each of the geographies that we participate in. So, Mark, anything you'd add?

Mark T. Bertolini - President

Yes, I would add a couple of things Matt, just a few of the Medicare Advantage part into four pieces, described for others the Prescription Drug Program, PDP. I think you've seen over the last few years rate increases rise. And a lot of movement of members as people lose their benchmark status in certain areas of the country, we've lost some this year, some of our other competitors had significant rate increases. So, I think the PDP market is much more rational. A lot of lessons have been learnt over the last three years as people have worked with that.

I think in the Medicare Advantage the pure HMO market, that market has been very rational. We don't see a whole lot of competitive pricing in that part of the market. I guess the business, it's been around for a long time. In the group private fee-for-service, I can tell you we do see some aggressive pricing. However, again we have and have been converting our groups from our supplemental products into private fee-for-service.

So we have years of underwriting history that we can build into the rates and we understand those groups very well. We also in those groups put bands around for loss ratios when we price them so that is there are any extraordinary gains, we share those with the client in a number of cases. I think we have seen in that markets, some aggressive pricing, particularly in Pennsylvania with a number of groups that we've lost, but that was one specific instance.

In the individual private fee-for-service market, we only have 20,000 members and those members are in markets where we have very solid network relationships. And so our individual private fee-for-service business has been built off a very solid network basis. Unlike some other companies, who have expanded it quite dramatically

Justin Lake - UBS

Okay. That's very helpful, thank you. And if I just I could ask one follow-up, back to the commercial pricing side. I hear your message is stability there. We have been hearing some anecdotal indications in some markets that the pricing is actually... industry pricing has actually strengthened relative to a year ago. Do you see that yourself, if you compare where we are now versus where you were this time last year as compared to what you're seeing from competitor pricing, if not your own?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Well, in our own pricing, we have indeed added a point to point and a half across our segments, since late April. So, we did strengthened our pricing, and have been and continue to do so, as we go into 2009 to protect against the potential that we see with the 8% trend. So, that's we have taken the trend up 50 basis points across the range.

And, the competitor side, again we've not seen any noticeable change in pricing other than we reported last quarter. So we saw some rationalization going on in the Southeast, getting a little stronger in the Southeast. We saw strengthening particularly in the Mid-Atlantic. We anticipate and hope for strengthening in the Northeast, particularly in New York and New Jersey, but have not seen that yet in the rate filings.

Justin Lake - UBS

Okay. Fantastic. Thank you.

Operator

We'll go next to Scott Fidel with Deutsche Bank.

Scott Fidel - Deutsche Bank

Good morning. First question; wondering if you can maybe tease [ph] out what medical cost trends have been looking like in California recently in the last quarter. I'm just thinking that trying to get a sense of what happens from the economy. California obviously was one of the first states to really start to see economic pressures. So wondering what, have you seen anything different there on utilization maybe as a indicator, what could happen with the slowing economy?

Ronald A. Williams - Chairman and Chief Executive Officer

Yes, good morning Scott. When you look at California, it has been on the leading edge, both on the housing challenges and also when you look at the unemployment numbers. Then one of the things we've done is to look at the pattern of utilization for individuals who are often in their last quarter of being with us, sometimes it's a layoff, sometimes it's a change in jobs to try to discern, are there any patterns related to this type of transition.

And I'd have to say particularly around the elective care, we've not seen any unusual utilization patterns that are driven by that. I think that California in general for us continues to be a very good market. It's a market where we see our value proposition really resonating as people are looking for the types of products and capabilities that we have. And I think our medical cost there is reflected of the underlying model, which tends to be still a little bit more toward the captivated where unit cost and utilization is combined on the negotiation side. So overall, I would say it's not materially different than what we see internationally, other than the fact that it would be towards the lower end of the range.

Scott Fidel - Deutsche Bank

Okay. And then, as a follow-up; just thinking about the changing political demographics here with the elections just around the quarter. Two-part question, one, how would you think about sort of weighting your Medicare portfolio versus the Medicaid portfolio, when you think about some of the commentary coming from the Democrats on the Hill around those markets. And then, also Ron maybe just your thoughts around the viability for real commercial market reform or the warm-up plan here just to giving the extreme rises we're seeing in the Federal budget outlook?

Ronald A. Williams - Chairman and Chief Executive Officer

Let me first do the Medicare-Medicaid. I think our strategy has been to position ourselves with government programs in a way that we could participate in a more meaningful way. If you go back to our acquisition of Schaller Anderson, it was really predicated on the fact that we didn't have a very solid Medicaid entry. That acquisition has worked very well for us. We have expanded into Connecticut, they've had some other wins in other states. And we have other states that have a very full pipeline. So, our point of view is, should Medicaid turn out to be the preferred vehicle, we believe we have the right capability and platform to really take advantage of it in many states.

I think Medicare for us also as Mark outlined, we've targeted certain geographies where we think we have good networks and good cost structures. I think we'd be consistent typically with the places where we have a reasonable market share and where we very carefully and methodically built our networks to give us a very good solid unit cost position there, with an eye to the fact that should these programs expand in Medicare, we really wanted to have a good cost structure. I think the answer is unknown at this point, which way the bias will be as we move from the politics of it into the actual policymaking. And, I think as we get past the election and into the transition, we'll be in place to really begin to get a sense as to which way it's going to go.

I think in terms of commercial reform, I think some of the areas that we might very well see a great deal of interest, will in fact the individual market reform and how do we increase access in the individual market. I think on the commercial side, I think that a large employers offer coverage and we'll continue to offer coverage, I think also proving for this small groups as one area that we can expect some activity. I think also the state level of component of this, I'll ask Mark to say few words about it.

Mark T. Bertolini - President

A couple of comments on the Medicare and Medicaid, I think the funding of those programs is going to have an interesting impact on the industry over the next couple of years. So, if the Congress goes back to Medicare for more funding particularly in private fee-for-service, there's some revenue potential impact therefore Medicare. In particular they want to use to fund Medicaid and so we voted those numbers and we believe that we can still run a very profitable business over the next few years, with some revenue impacts to Medicare.

On the Medicaid front, state governments are under severe pressure from the standpoint of falling tax revenues and so we're very closely watching what may happen. And it's one of the reasons that on some states are delaying decisions to move into programs, as they're working at their funding requirements, as Medicaid is one of their top-two budget line items in any given year.

On the commercial front, I think at the state level we are concerned that if the economy and other issues overtake the agenda coming out of the other side of the election that states will start to act on their own in many different ways and we call just by a thousands cuts [ph], having state regulation across 50 different states and having direct each of those regulatory environments could be problematic for large national employers.

Scott Fidel - Deutsche Bank

Okay. Thank you.

Operator

We'll take our next question from Doug Simpson with Merrill Lynch.

Doug Simpson - Merrill Lynch

Hi, good morning. I just wondered if you could just talk through the guidance for next year and just help me from understand the math; it sounds like the midpoint is some where around 408 and then if you add back the $0.30 to $0.40 for the pension and then $0.20 to $0.40 for the annualized Q4 hit from investment income. It looks like the base case is somewhere in the 460 to 490 range. And I guess can you just sort of talk to that, because that would been a very dramatic growth rate over '08 and what would the expectations be underlying such a strong growth rate for next year?

Ronald A. Williams - Chairman and Chief Executive Officer

Yes, good morning Doug. Let me start out framing this. I would first remind everyone that what we have given is preliminary guidance. That our operating plan has not yet been finalized or presented to the Board. I think what we'll try to do is build a prudent plan that takes into account what could in fact be a protracted weakness in the economy. The preliminary planning assumptions assume that they would be slow and that membership growth might be increased benefit by announced pricing pressure. We looked at the and talked a little bit about the pressure on medical unit costs, moderate pressure but nonetheless moving as up to the upper end of the range, we've talked about as 8%. And then, taking into account the capital market forces and the lower interest rate environment. So, I think it's just important to understand what we're saying about '09 in the context of this, I have Joe, kind of take you through the elements that we thought about to answer your specific question.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

And I think very simply speaking, the range of 3% to 5% range half of the expectations 2008, would range out at $4.02 to $4.15 and we're saying that that includes the accounting for pension expense, which could cost us $0.30 to $0.40 per share. And so, would you pro forma for that clearly you're in the $4.30 to $4.55 range. And what we're saying is that core business, the underlying business is still operating very strongly. And we're not at this point parsing how much of that is going to be true operating earnings growth versus capital actions, but we'll update you, in early 2009 as to those affects. But, you can assume that our capital plan is unchanged, and the operating earnings are strong and you should pro forma the pension expense back into sort of look at a view of the underlying business.

Doug Simpson - Merrill Lynch

So, is it fair though to say that it also includes kind of $0.20 to $0.40 annualized hit reflecting the $0.05 to $0.10 dip in Q4 this year. I'm just trying to understand if, has the capital markets not have to chop in as to the last six weeks, would the number... is the apple-to-apples base case is that $4.60 to $4.90 right?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Our numbers did not include the phenomenon you just projected. The way I spoke to is the way you should think about it, $0.30 to $0.40 on top of $4.02 to $4.15.

Doug Simpson - Merrill Lynch

Okay. And then, just maybe one follow-up question. The LPV on the commercial mortgages I think last year that was somewhere in the mid-60%, 64%, 65%. Can you just update of somewhere that stands now?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

It's approximately 65%.

Doug Simpson - Merrill Lynch

Okay, thanks.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Okay. And we'll hear next from Brian Wright from Banc of America Securities.

Brian Wright - Banc of America Securities

Thanks, good morning. Can you just give us a little color on the MLR outlook for next year? What's assumed in guidance first of all?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Generally speaking we assumed that we're going to experience an 8% a medical cost trend and demonstrate our continued ability price to it. But at this point we're not giving any more granular guidance on that.

Brian Wright - Banc of America Securities

But then you said, on the pricing starting in May you could be doing 7.5-plus 1 to 1.5 which should be 8.5% to 9% in the back half of the year versus 8% medical cost trend. Is that correct?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

I'm not following your math, so I can't respond to your question.

Jeffrey A. Chaffkin - Vice President of Investor Relations

I think you are confusing what we're putting in the pricing trend versus what we're putting in the underlying trend. The 1 to 1.5 we're putting into rate since late April or early May have been associated with our pricing trends.

Brian Wright - Banc of America Securities

So, it's just general stability.

Jeffrey A. Chaffkin - Vice President of Investor Relations

Yes.

Brian Wright - Banc of America Securities

Okay, thanks.

Operator

And we'll hear next from John Rex with JPMorgan.

John Rex - JPMorgan

Thanks. I just want to revisit again this. I've been thinking about the run rate that you're implying for '09. So are you suggesting that we pull the $0.30, $0.40 out or that indeed if the market stay just like they are today at really kind of 408 midpoint of that guidance, is the right run rate to be thinking about as we are looking ahead that we don't for a $0.30, $0.40 back in the out years?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Yes. That's exactly the way to look at.

John Rex - JPMorgan

That 408 is the right base run rate assuming markets don't change. I guess this is going to be amortized in over a few years correct... is that correct?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Assuming a pension expense of $0.30 to $0.40, that is correct.

John Rex - JPMorgan

Great. And then that would... okay great. And then can you update us also on what the investment portfolio did, whatever you can do through October for us. I know that changes daily but I'm sure you've looked at some point here?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

I believe we do look at it daily, we don't want to get into the sort to habit of weekly and daily reporting to the markets on it. But as you know, our spreads continue to widen throughout October and in fact, during the three weeks ended October 27th, investment-grade corporate spread widened by an additional, least the Merrill Lynch Index, says that they widened by an additional 159 basis points. So, early October was not great for the credit markets but just in the past few days, we're seeing some easing and hopefully we'll get some relief here for the balance of the year.

John Rex - JPMorgan

Okay. And then can you just provide perspective again, as we think about experience of past recessions, and I know you've done this in past calls. But when I think about utilization in both the group medical books and also disability books, and you talked the disability in past calls, what you're expectations in corporate, with regard to disability and kind of how you would expect utilization of medical book to trend in recession based on your past experience.

Ronald A. Williams - Chairman and Chief Executive Officer

Yes, John. Mark, will give you some perspective on medical and then Joe will talk a little bit about this clearly.

Mark T. Bertolini - President

The way we think about medical and have been thinking about it although that has changed in recent weeks a little bit is that unit pricing has some pressure upward. Particularly, as commodities were increasing, we were expecting to see that pass through both hospitals and physicians in someway shape perform. We have seen some increases in the pharmaceutical sector in wholesale prices in the last quarter which has been reported widely in the press. I think now with commodities easing, we're not as concerned but we'll still watching for unit price increases and the reason for our up season trend for 2009.

As it relates to utilization, we would expect as people get near, the end of their employment or potentially near the end of their employment that there is some uptick in utilization. And then, that would ease off afterwards. We think there is some offset and that people don't go in new services particularly, where they have a lot of out-of-pocket target expense because of the economy and the use of their personal disposable income. So, and we've actually seen that in the pharmacy sector going into 2009 where people... the utilization in drugs is dropping due to the economy. So, we think there's an offset on the utilization.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

What would see uptick in unit price is pretty much flat on utilization maybe lumpy depending on how people move through the system. But overall for the year flat on utilization.

John Rex - JPMorgan

So, is you view on utilization that it's a wash so there is kind of really no impact in recession and utilization or it one of those that is nearing the end of employment versus kind of those with coverage not going as much because of the out-of-pocket cost. Which in one kind of... which have you seen in the past win in a recession?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

It's a wash, we would call it a wash right now, we are calling it a wash as we factor that into our plan. In relation to this facility I was going to

Ronald A. Williams - Chairman and Chief Executive Officer

And this something we look at extensively and people can change behavior. So we are reporting on what we are seeing and we are using that to project what we expect to happen. And, given the reductions we have seen this year, we think it's a pretty good sample. Joe, you want to --

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Withrespect to disability we had a very good year in our group underwriting experience and our good lines of share particularly long-term disability. But you've seen the consumer confidence numbers both the Michigan study and the conference board study that usually is a leading indicator, of incidents rates in the disability line. So, we are not projecting that that line of business will have the same level of underwriting margin that it had this year and that is fully baked into the guidance we gave you.

John Rex - JPMorgan

Are you actually seeing a drop in claims line disability competitor coverage is in a different business actually on the insurance side we have seen significant and declines by servicing of vast drop in utilization on that side, I was wondering if you see that in your books.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

It would be the incidence rate I think is what you're referring to not utilization, and no, we see no change whatsoever in this economy.

John Rex - JPMorgan

Great. Thank you.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

We have time for one more question at this point. We'll hear from Carl McDonald with Oppenheimer.

Carl McDonald - Oppenheimer

Thank you. There's been a little bit of confusion about the response to John's prior questions. As you think about 2010, assuming no change in market values, are you thinking about 408 at the midpoint as the base or more like 440 as the base?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

Yes. This is Joe. If pension expense is $0.30 to $0.40, we are saying that our earnings per share growth rate is 3% to 5%, half of the 390 to 395 and that would be a range of $4.02 at the low point and $4.15 at the high point, and we put the $0.30 to $0.40on top of that, that's the way you should think about the performance of the underlying business.

Ronald A. Williams - Chairman and Chief Executive Officer

I think Carl, your add-on question was what are the implications in 2010 for that I believe?

Carl McDonald - Oppenheimer

Correct.

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

If the markets do not change and your pension expense stays at the same level. So, it's in the run rate, then you shouldn't have a $250 million, the same $250 increase that you're experiencing in 2009 would not occur in 2010.

Carl McDonald - Oppenheimer

Okay. So, this is what you're saying then it's more of a one-year impact as opposed to something that's going to be spread over multiple years?

Joseph M. Zubretsky - Executive Vice President and Chief Financial Officer

No, if the pension expense itself doesn't change it would be at an equivalent level in '09 and '10. But it would impact the growth rate in a much different way.

Carl McDonald - Oppenheimer

Got it. Okay, thank you.

Operator

At this point we have no further questions. I'll turn the conference back over to our presenters for any closing or additional remarks.

Jeffrey A. Chaffkin - Vice President of Investor Relations

Thank you. A transcript for the prepared portion of this call will be posted surely on the Investor Information section at Aetna website at aetna.com. If you have any questions about matters discussed this morning, please feel free to call me or any of my colleagues in the Investor Relations office. And thank you again for joining us this morning.

Operator

Once again, thank you all for your participation. This does conclude our conference today. You may disconnect. .

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aetna Inc. Q3 2008 Earnings Conference Call Transcript
This Transcript
All Transcripts