Ladies and gentlemen, thank you for standing by for CIGNA's fourth quarter 2008 results review. At this time, all callers are in a listen-only mode. We will conduct a question-and-answer session later during the conference and review procedures on how to enter the queue to ask questions at that time. (Operator Instructions)
As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. We will begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.
Good morning, everyone, and thank you for joining today's call. I am Ted Detrick, Vice President of Investor Relations, and with me this morning are Ed Hanway, CIGNA's Chairman and CEO; David Cordani, President and Chief Operating Officer, and Mike Bell, CIGNA's Chief Financial Officer.
In our remarks today, Ed will begin by briefly commenting on CIGNA's 2008 results and 2009 outlook. David will provide his perspective on the outlook for CIGNA's ongoing businesses. He will also discuss our medical membership results and outlook, and provide a current assessment of the health care marketplace. Mike will then review the financial details for 2008 and provide the specifics for the 2009 financial outlook. We will make some concluding remarks and then we will open the lines for your questions.
Now, as noted in our earnings release, CIGNA uses certain financial measures, which are not determined in accordance with Generally Accepting Accounting Principles, or GAAP, when describing its financial results. Specifically, we use the term labeled "adjusted income from operations" as the principle measure of performance for CIGNA in our operating segments. Adjusted income from operations is defined as income from continuing operations, excluding realized investment results, special items and the results of our guaranteed minimum income benefits business. A reconciliation of adjusted income from operations to income from continuing operations, which is the most directly comparable GAAP measure, is contained in today's earnings release, which was filed this morning on Form 8-K with the Securities and Exchange Commission and is posted in the Investor Relations section of CIGNA.com.
Now, in our remarks today, we will be making some forward-looking comments. We would remind you that there are risk factors that could cause actual results to differ materially from our current expectations and those risk factors are discussed in today's earnings release.
Now, before I turn the call over to Ed, I will cover a few items pertaining to our fourth quarter and full year 2008 results and disclosures.
Our fourth quarter results included an after-tax charge of $35 million related to CIGNA's cost reduction initiative. This charge is reported as a special item and, therefore, is excluded from adjusted income from operations in today's discussion of our 2008 results.
As a reminder, in an effort to improve the quality and transparency regarding our investment asset disclosers, we again provide this quarter additional information about our bond and commercial mortgage portfolios in the quarterly statistical supplement, which is posted in the Investor Relations section of cigna.com.
Now, regarding our run-off operations, I would note that CIGNA's 2008 net income included after-tax losses of $437 million, or $1.58 per share related to the guaranteed minimum income benefits business, otherwise known as GMIB. Now, remember that CIGNA adopted financial accounting standard number 157 in the first quarter of 2008, which impacts the measurement of fair value of the assets and liabilities of our GMIB business.
I would also remind you that the impact of statement 157 reporting for our GMIB results is for GAAP accounting purposes only. We believe that the implementation and perspective application of this statement would not represent management's expectation of the ultimate liability payout. Instead, management believes that a more relevant measure of GMIB results is its impact on statutory capital. In a few moments, Mike Bell will provide an update on our capital management outlook, which will include the impact from losses in our run-off reinsurance business, including GMIB.
Now, because of statement 157, CIGNA’s future results for the GMIB business will become more volatile, as any future change in the exit value of GMIB's asset and liabilities will be reported in net income.
CIGNA's 2009 earnings outlook, which Mike will discuss in a few moments, excludes the results of the GMIB business, and therefore, any potential volatility related to the perspective application of statement 157.
And with that, I am going to turn it over to Ed.
Thanks, Ted. Good morning, everyone. Full year 2008 adjusted income from operations was $946 million, or $3.42 a share. This included losses of $0.96 a share from the run-off VADBe operation driven primarily by unfavorable equity market performance.
In 2008, our ongoing businesses, that is our Health Care, Group Disability and Life, and International Operations, each posted year-over-year earnings growth despite a difficult economic environment. With regards to Health Care, 2008 was a year of mixed results.
In 2008, we closed the Great-West transaction and continued to be very excited about this acquisition, as we expect it to support future profitable growth, particularly by accelerating our expansion in the select market segment, which we define as employers between 51 and 250 members.
Our ASO business posted attractive year-over-year earnings growth, driven by strong results in our specialty programs, which are key to our value proposition. On the other hand, our guaranteed costs and experience-rated earnings were below our expectations, and our medical membership declined in 2008 due to the competitive pricing environment coupled with rising unemployment levels.
Our Group Disability and Life business grew earnings by 11% in 2008, and our International Operations had double-digit earnings growth on a local currency basis. These results reflect another year of competitively strong top line growth and profit margin in these businesses.
While our ongoing businesses had solid earnings, our Run-Off Reinsurance results were adversely impacted by the capital market turmoil. Although disappointing, these results were manageable from a capital perspective and at yearend, our operating subsidiaries were capitalized well in excess of regulatory minimum.
Very importantly, our investment portfolio performed well in 2008 and produced competitively strong returns despite challenging market conditions. We believe that this is a direct result of maintaining our investment discipline.
In summary, 2008 was a challenging year and our results reinforce the importance of our diversified portfolio of ongoing businesses, particularly during the periods of challenge in the healthcare sector.
And regarding our 2009 outlook, we now expect our full year 2009 earnings per share estimate to be in a range of $3.95 to $4.25 a share, excluding any provision for future VADBe losses. This outlook represents EPS growth in a range of 15% to 24%. This outlook is modestly lower than our previous guidance, primarily due to tightening of the healthcare outlook range.
And you should know that I am not satisfied with this EPS forecast. We are all keenly focused on ways to improve it, with special emphasis on improving our operating expenses. While our comprehensive review of operating expenses completed during the fourth quarter will yield meaningful expense savings, we are not finished with our expense review work.
Our ongoing cost reduction efforts are designed to identify further efficiency gain and may result in an additional cost reduction related charge in 2009. Our 2009 outlook does not include this potential charge.
With the economic outlook deteriorating further since our last update, we now expect medical membership to decline in 2009 by approximately 3%. We now expect 2009 Health Care earnings to be in a range of $700 million to $760 million, as we leverage the capabilities brought to us by the Great-West acquisition and realize the benefits of our cost reduction initiatives.
For 2009, we expect continued good earnings and strong margin in both our Group Disability and Life and International businesses.
Overall in 2009, despite the difficult economic times, we expect to succeed in the marketplace for our competitive strength and capabilities. We remain committed to achieving our financial and operational goals for the benefits of our customers and shareholders.
I am going to turn it over to David, who will cover a number of topics, including a more detailed review for the 2009 outlook for our ongoing business. David?
Thanks, Ed, and good morning, everyone. Yeah, I am going to review some brief highlights of the 2008 earnings for ongoing businesses, provide some perspective on the conditions in the health benefit marketplace and the potential impacts of those conditions on our businesses. I will also share an overview of our 2009 outlook for each of our ongoing businesses. I will provide some insights and the action we are taking to further enhance our competitiveness and continue to build for sustained profitable growth. And finally, I will provide a brief update on the integration of our Great-West acquisition.
Let me begin with brief overview of our 2008 results. Our 2008 results reflect year-over-year earnings growth for each business. It's important to note that the diversification of our business portfolio positions us for ongoing profitable growth, even in these challenging times. In 2008, Health Care earnings increased by 5% over 2007. Our healthcare medical membership increased by approximately 1.6 million members, due to the net addition of Great-West members.
Overall, our client retention rates are strong. However, we did experience lower new sales in our guaranteed costs and experience-rated book and higher levels of disenrollment in our overall book of business. Our specialty businesses had another year of strong contribution. Here, we also benefited from good retention rates, as well as additional cross-selling success, and sales success with new programs.
Our comprehensive health service portfolio continues to be a key part of our integrated solutions strategy that focuses on improving health, wellbeing, and sense of security. However, our guaranteed costs results and experience-rated margins did have some pressure for the year. Mike will expand on the drivers a bit later.
Overall, 2008 was a challenging year for the health care industry and for CIGNA. And while we are pleased with our service levels, our clinical results, our sustained specialty performance, and our ongoing CDHP results, we do recognize the improvement opportunity we have in guaranteed costs and experience-rated earnings, as well as in operating expenses. A little later, I will highlight the actions we are driving to accelerate our strategy and, as such, further improve our results.
Turning to Group Insurance, we had another strong year, with 11% earnings growth over 2007. We generated good top line and bottom line growth with competitively strong margins. Our Disability Management value proposition, which focuses on helping people return to work quicker, continues to be well received in the market. We help people recover from disability and get back to work 10% more quickly than the competition. These results are generated by leveraging a deep and diverse coterie of clinical and vocational experts, who work to help our customers. I think you will all agree that the ability to improve worker productivity is important, especially in this economy.
Our International business also generated strong results. Excluding the impact of unfavorable foreign currency exchange, we achieved double-digit earnings growth in 2008, including good contributions from our emerging markets.
Our International business remains well positioned for profitable growth in individual markets and in support of the rapidly growing expatriate needs of global employers.
Now I will provide some perspective on the conditions of the health benefit marketplace, and the potential impact of those conditions on our businesses. In a market where corporate profits are challenged, employers increasingly are coping by restructuring or reducing their benefit programs. This shows up in reactive cost shifting or proactive changes to seek to engage employees in health improvement in informed health purchasing.
Employers today, more than ever, are looking for solutions to help manage their medical costs. We are able to meet their needs through our approach of leveraging our knowledge of our employer customers and their employees to drive active participation of individuals in their health improvement, which results in cost savings for the individuals and the company.
Our strong January client retention rates, for example, approaching 90% for our middle-market business, are perhaps the best validation that our capabilities and value propositions are resonating well in the marketplace.
I will now provide an overview of our 2009 outlook for each of our ongoing businesses. By way of backdrop, we do expect that the rising unemployment levels will drive higher disenrollment levels and this will have an adverse impact on our businesses. We also recognize that the pricing environment in our industry remains very competitive, especially in the insured market. In this environment, we will see the balanced pricing discipline with our objective to grow profitably.
Now, specific to health care, we expect our 2009 membership to be down approximately 3%, which includes our view of a continued increase in the level of unemployment. Our outlook includes an increase in disenrollment levels for our book of business of approximately 35% over 2008.
For January 1, our health membership is estimated to be down approximately 2% from yearend 2008, which is inline with our prior expectations. For earnings, we do expect to realize the full year impact of our Great-West acquisition, ongoing stable earnings from our specialty and experience-rated of book of business. This is offset somewhat by lower guaranteed costs earnings, driven by lower volumes and stable margins, and lower ASO earnings, driven largely by operating expenses.
Turning to medical costs, we continue to expect aggregate medical cost trend in the range of 7% to 8% for 2009.
Now I'll provide some insights into the actions we are taking to further enhance our market position in health care, where we continue to strategically build for sustainable profitable growth. We expect to further improve our health care earnings power by focusing on the following five areas.
First, we are continuing to focus on reducing our operating expense structure. On January 5th, we announced the restructuring of our global workforce by approximately 1100 positions, which is about 4% of our employees, as well as planned consolidation of certain real estate locations. We are also planning to take additional actions during 2009 to further reduce operating expenses and improve our competitive position in the marketplace.
Second, we are intensifying our new product development efforts to stimulate growth for our guaranteed costs and experience-rated books of business. We have recently developed a number of new leaner product offerings for guaranteed costs and experience-rated that we expect will accelerate growth in the second half of 2009.
Third, we are investing in further total medical costs improvements. We expect to drive utilization, as well as volume and mix of service improvements, by directing members to high quality efficient providers through our health coaches and through leveraging cost and quality tools.
Fourth, we are working to identify additional opportunities to further drive the level of specialty cross-selling we have.
Our fifth priority is market expansion. We remain committed to growing our segments with particular focus on individuals and select segments for employers with 51 to 250 employees.
Turning to Group Insurance, we expect to deliver good growth in 2009, largely through strong middle market sales and retention results. In addition, we will continue to build capabilities, and capitalize on opportunities in the small business and voluntary benefits market.
We are also investing in additional clinical resources to address the potential impact of the economy on our disability results, and in new technology to improve self service capabilities, which are increasingly required for small and middle market employers.
For International business, we continue to see very attractive growth opportunities in our life, accident and supplemental health businesses, especially in Asia. With evolving economic conditions in health trends, our supplemental health and life products continue to be very well positioned to fill the gaps in coverage that are left by local government health systems.
More specifically, we continue to see very good growth in South Korea, which is an important market for us; in China, where our five-year joint venture with China Merchants Bank just renewed; and in many other emerging markets, where we have low established business operations.
Relative to expatriate benefits, we anticipate good growth opportunities now and in the foreseeable future, as more companies seek to expand and diversify their market positions through global expansion. For 2009 overall, we expect International earnings to grow double-digits, adjusting for currency on a local basis.
Finally, I will provide a quick update on Great-West. Our integration is proceeding according to plan. We achieved the vast majority of our 2008 objectives with respect to integrating networks, clinical programs and infrastructure transition. We continue to drive strong progress on total medical costs improvements. Here we expect to have about two-thirds of the total improvement completed by the end of the first quarter of this year, and well over 90% completed by the end of 2009. While the challenging economic conditions have slowed earnings trajectory somewhat, we continue to be very excited about the potential this acquisition has to deliver good value for our customers in the small and middle markets.
To wrap up my prepared comments, the diversification of our business portfolio positions us to continue to generate ongoing earnings growth even in these challenging economic times. We have delivered these results by maintaining our emphasis on service excellence. Our focus on keeping people healthy, which we believe is the only sustainable way to manage rising costs, our balance between pricing discipline and growth, and smart and steady investments in the people and technology we need to operate efficiently and effectively in meeting our customers' needs.
Having said that, we are taking the steps necessary to ensure our ongoing competitiveness in the difficult market, and to grow the business profitably now and in the future.
At this point, I'll turn the call over to Mike.
Thanks, David. Good morning, everyone. In my remarks today, I will review CIGNA's 2008 results. I will also discuss our outlook for full year 2009. In my review of consolidated and segment results, I will comment on adjusted income from operations. This is income from continuing operations, excluding realized investment results, GMIB results and special items. This is also the basis on which I will provide our earnings outlook.
Our full year consolidated earnings were $946 million, or $3.42 a share, compared to $1.18 billion, or $4.08 a share in 2007. Full year results for our three ongoing businesses were higher than 2007, while results for our Run-Off Reinsurance business emerged unfavorably in the second half of the year.
Now I will review each of the segment results, beginning with Health Care. Full year 2008 Health Care earnings were $715 million, which was 5% higher than 2007. Excluding Great-West, Health Care earnings decreased by 4% year-over-year, primarily reflecting the unfavorable impact of the competitive environment and the challenging economy.
The fourth quarter Health Care results were above our most recent estimates, reflecting favorable operating expenses and higher Great-West earnings. Expenses were better, largely due to a significant reduction in management incentive compensation, as well as other favorable adjustments.
Fourth quarter earnings were tempered by lower than expected guaranteed costs and experience-rated of results. Specifically, our guaranteed costs MLR came in worse than expected, primarily due to an increase in catastrophic claims.
Fourth quarter experience-rated results reflected higher medical costs for deficit accounts. For full year 2008, health care membership, excluding Great-West, was down 1.3% versus yearend '07, due to lower new sales and higher level of disenrollment.
Yearend 2008 Great-West membership was 1.6 million, which was modestly better than our most recent estimate. Our full year guaranteed costs MLR was 84.8%, excluding our voluntary business. This result was 90 basis points higher than the reported 2007 results, primarily reflecting the unfavorable impact of catastrophic and flu-related claims. As a result of the higher MLR and lower membership, guaranteed costs earnings declined year-over-year.
Experience-rated earnings, while still our strongest book of business on a per member basis, were also lower year-over-year due to greater pressure on deficit accounts, in part reflecting economic and competitive market conditions.
For our total book of business, we completed the year with a strong medical costs result, with a full year trend of approximately 7%. Within our ASO book, we experienced increased specialty earnings in 2008 and favorable operating expenses.
Great-West contributed $60 million of after-tax earnings in 2008, excluding the financing costs, which are reported in the corporate segment. I would reinforce that this result was higher than our most recent estimates, partly driven by favorable medical costs and operating expenses.
As a reminder, beginning in 2009, we no longer report Great-West results separately, as we will view this as an integrated operation embedded within our Health Care results.
Health care premium fees for the year increased 9% versus 2007, primarily due to the acquisition of Great-West Health. So overall, our full-year Health Care earnings were 5% higher than 2007.
Now I will discuss the results of other segments. Full year 2008 earnings in the Group Disability and Life segment were $275 million, which was an 11% year-over-year increase, including the favorable impact of reserve studies and other adjustments throughout the year.
This result was driven by competitively strong Disability Management results and strong top line growth. Premiums and fees increased by 8% year-over-year and reflects an increase in our market share. While we experienced an uptick in the disability cost ratio in the fourth quarter, I would note that full year disability results were stronger than our expectations, and better than our 2007 results.
In our International business, full year 2008 earnings were $188 million, an 8% year-over-year increase. This result reflects competitively strong margins and continued growth in the life, accident and health and expatriate benefits businesses.
This full year result also includes an unfavorable $13 million after-tax impact from foreign currency changes, primarily due to significant currency movement in South Korea, CIGNA's largest non-US market. Excluding this impact, earnings increased by 15% year-over-year. The diversification of our earnings streams from our Group and International businesses continues to be an important positive for our consolidated results.
Earnings for our remaining operations include Run-off Reinsurance, Other Operations, and Corporate to loss of $232 million for the year. This includes an after-tax loss of $267 million related to our Variable Annuity Death Benefit, or VADBe product. The VADBe loss is primarily market-related, driven by a variety of factors, including the severe turbulence in market returns and increased volatility in the second half of the year.
While the 2008 reported losses in our total Run-off Reinsurance block were disappointing, they are not indicative of our longer-term expectations. In addition, the most relevant impact is on our yearend capital position, which I will discuss in a few minutes. In summary, we continue to view the 2008 results as manageable from a capital perspective.
I will now comment on our investment portfolio and results. In 2008, our investment portfolio continued to perform well, demonstrating the quality and strength of our investment team and the diversity of our holdings. Our full year net realized investment losses totaled $110 million after-tax, and we view this as a strong outcome, given the challenging market conditions.
Now I will provide some key highlights of our investment portfolio. First, as we have discussed before, we continue to have no direct exposure to sub-prime, Alt-A loans, credit default swaps or auction rate securities, and have no material exposure to residential mortgages.
Our current commercial mortgage portfolio of $3.6 billion is strong, driven by our consistent disciplined approach to investing. Problem loans in this portfolio continue to be minimal. All but one of our loans in this commercial mortgage portfolio are fully performing. We do have one mortgage 30 days delinquent and, nevertheless, we believe that the market value of this particular property is greater than our loan value.
So overall, our mortgage portfolio continues to be well diversified by property-type, with the highest concentration in office buildings and the lowest concentration in retail properties.
I would also remind you that we match the duration of our assets to the duration of our liabilities and, therefore, the majority of our investments employ multiyear fixed rate returns. We do not expect the short-term interest rate environment to materially impact our consolidated 2009 net investment income.
So overall, we continue to be pleased with our investment management results relative to the current market conditions.
Now I will discuss CIGNA's capital management position and outlook, including the summary of our subsidiary capital position and our parent company liquidity.
Overall, we continue to have a strong balance sheet and good financial flexibility. Our current subsidiary capital position is strong and well in excess of regulatory minimums. Specifically, we estimate that we ended the year with RBC ratio of 530% of the authorized control level.
We estimated that we ended 2008 with $3.4 billion in statutory surplus in our domestic subsidiaries. Both the RBC ratio and the overall level of surplus are consistent with our expectations in November. Also consistent with prior estimates, yearend subsidiary capital was approximately $350 million below our long-term targets, primarily due to the 2008 Run-off Reinsurance losses.
As a result, in 2009, we expect to manage our subsidiary dividend to increase these capital levels. I will provide further details on our 2009 outlook in a few moments.
Next, I will review parent company liquidity. We ended 2008 with cash and short-term investments of the parent of approximately $90 million, and commercial paper borrowing of approximately $300 million. During the fourth quarter of 2008 and end of the first quarter of 2009, we continue to have access to the commercial paper markets and have experienced reduced interest rates since yearend.
Regarding the outlook for 2009, we began the year with approximately $90 million in parent company cash. Our current estimate of 2009 earnings would normally generate approximately $800 million to $900 million of subsidiary dividends. Since we currently plan to retain more earnings in the subs to restore capital longer term targets, we currently expect 2009 subsidiary dividends for the parent of approximately $520 million.
We expect the pension plan funding to result in a net after-tax use of parent company cash of approximately a $130 million. All other sources and uses other than pension funding requirements are currently expected to be a net use of approximately $300 million. This assumes no net change in the company's total debt levels. In assuming credit market conditions are stable, we expect to issue long-term debt to pay off our commercial paper balance.
I would remind you that we do not anticipate having capacity for share repurchase in 2009 and, as a result, we expect our yearend 2009 parent company cash to be in a range of $150 million to $200 million. I would also remind you that we have no long-term debt refinancing until 2011. So to summarize, our current capital outlook is positive.
I will now review the earnings outlook for full year 2009. For the year, we currently expect consolidated adjusted income from operations of $1.08 billion to $1.15 billion, which is modestly lower than our previous estimate. We expect EPS to be in a range of $3.95 to $4.25 per share, representing growth of 15% to 24% versus 2008.
This excludes any provision for future VADBe losses, since we believe our yearend 2008 reserve assumptions are appropriate. And while Run-off Reinsurance results can differ materially from our estimates, we do not believe that 2008 results are indicative of a future run rate.
I will now discuss the components of our 2009 outlook, starting with Health Care. We currently expect full year Health Care earnings in a range of $700 million to $760 million, which is lower than our previous estimate. The range has been updated for the current guaranteed costs and experience-rated outlook, coupled with further pressure on membership, reflecting the challenging economy and competitive conditions.
This was partially offset by the 2009 favorable impact of expense reductions. We will also continue to review opportunities for additional operating expense reductions throughout the year.
Now, I will discuss the drivers of the expected Health Care results. We now expect total medical membership to decline by approximately 3% for full year 2009. Turning to medical trend, we continue to expect trend on our total book of business to be in the range of 7% to 8% in 2009, which would be approximately 50 basis points higher than full year 2008.
Relative to our guaranteed costs book, in addition to a lower expected membership result, we now expect our full year 2009 guaranteed costs MLR to be in a range of 84% to 85%, which is higher than our previous expectations.
Within the traditional guaranteed costs book, we expect 2009 earnings to be approximately $15 million to $20 million after-tax below our 2008 results, driven by expected membership declines. Offsetting this is an expected earnings increase in the segment expansions, specifically individual small group and seniors. We continue to expect this block to approximately breakeven in 2009, which would represent a $15 million to $20 million after-tax improvement relative to 2008. So net-net, we expect these two guaranteed costs areas together to be approximately flat year-over-year.
Regarding our experience-rated book, we continue to expect approximately flat earnings in 2009, excluding the first quarter 2008 charge related to the non-medical account. Relative to ASO earnings, our 2009 outlook reflects significant margin expansion on the Great-West stop loss book, partially offset by higher expenses across the entire ASO book of business.
Regarding operating expenses, we expect that the fourth quarter cost reduction charge will result in annualized expense savings of $110 million pre-tax for the enterprise in total, with the vast majority of the benefit in Health Care.
Overall, our updated Health Care outlook for more favorable operating expenses contributes approximately $35 million after-tax in additional earnings in 2009 relative to our earlier estimates. So overall, we now expect 2009 Health Care earnings in a range of $700 million to $760 million.
Turning to our non-Health Care segments, in aggregate our estimates are unchanged from November. We currently expect our 2009 Group Disability and Life earnings to be flat with the 2008 reported result. We expect this to be driven by revenue growth with some expected downward pressure on margins.
International earnings are expected to grow in the low single-digits in 2009, driven by strong revenue growth and margins, largely offset by the expected negative impact of several foreign currency exchange rates, particularly in South Korea.
So all in, we expect 2009 consolidated EPS to be in a range of $3.95 to $4.25 per share; this excludes any provision for future VADBe losses. So, to recap, our full year 2008 results for our three ongoing businesses were higher than 2007. Our current capital outlook is strong, and our investment management results continue to be competitively attractive. We expect to achieve year-over-year earnings growth in aggregate in our ongoing businesses in 2009.
And with that, I'll turn it back to Ed.
Thanks, Mike. Now, before we take your questions, I want to underscore several points. First, our capital position is strong, and we expect to have the financial flexibility to deal with the current challenges in the capital markets. In addition, our investment portfolio is of high quality and is very well managed.
Second, our three ongoing businesses, Health Care, Group Insurance and International are well positioned to provide value to customers and investors in these very challenging times. Our products, customer service levels, clinical quality, and consumer engagement and information capabilities are all recognized as competitively strong.
Good progress with our Great-West integration also positions us to capitalize on the earnings growth opportunity represented by this important market segment.
Third, we are focused on further reducing our operating expenses. The benefits of the actions from our fourth quarter charge, while meaningful, represent the first step in an ongoing process of operational expense review and reduction.
And finally, we continue to actively participate in the health care reform discussion that we expect will increase in intensity throughout 2009. Our efforts will focus on three key issues: costs, access and quality, and developing market-based solutions that leverage the capabilities of the employer-based system.
The prospect for meaningful reform will create both potential challenges and opportunities. Our investments in the select group, individual and voluntary segments will improve our position in areas, which could be favorably impacted by reform. At the same time, our minimal exposure to Medicare will insulate us from an area where margin contraction in the short-term is possible. And while the ultimate outcome of reform is difficult to predict, CIGNA, as well as our industry, are working hard to position ourselves as a key part of the solution.
So, in summary, we are committed to growing earnings in 2009 in our ongoing businesses and improving our competitive position, thereby creating value for the benefit of our customers and shareholders.
Now, this concludes our prepared remarks. At this time, we would be glad to take your questions.
Question and Answer Session
(Operator Instructions) Our first question comes from Matthew Borsch, Goldman Sachs.
Matthew Borsch - Goldman Sachs
Yes, hi, good morning. My first question is on the Health Care business and, specifically the pricing environment as you see it across the fully insured book up to the ASO spectrum. If you can give us any sense of how that may have changed from incrementally from your view late last year.
Matthew, good morning, it's David. I'll start, and I'll ask Mike to provide some additional color. I think the recorded question is, what does the environment look like and potentially how it has changed? First, relative to our January 1 view in terms of guaranteed costs, experience-rated, rate execution, we're quite pleased with what we've seen to-date in terms of our renewal rate increases, whether it's in the experience-rated portfolio or the guaranteed costs portfolio.
Second, we continue to see it, as I indicated in my prepared remarks, as a very competitive marketplace. Hence, strong rate executions required, as well as our ability to continue to provide alternatives and lean benefit programs. So, overall, by way of framing it, I would say the marketplace continues to be very competitive. We're pleased with the rate of execution we've seen, especially when we juxtapose the rate execution to the retention rates, we are seeing in our book of business for 1-1. Mike?
Matthew, it’s Mike. The only thing I would add is, obviously the overall competitive environment, coupled with the economic environment, is putting downward pressure on our overall membership expectations, but I certainly agree with David's comments. I think our execution for the 1-1s and the improved customer retention rates, particularly in the middle market, and particularly in the experience-rated book were powerful positives.
Matthew Borsch - Goldman Sachs
And my follow-up question. As you look at the lower end of the market, what are you seeing in terms of enrollment attrition there? And does that play any role in your expectation for 50 basis point higher trend in 2009, in the sense that maybe there could be some degree of risk pool deterioration or adverse selection going on there?
Matthew, David, I'll start. I think the first part of your question is, do we see a different disenrollment or attrition rate in the lower end of the employer (Inaudible) segment versus broadly speaking. First, as I noted, our outlook is for uptick in unemployment levels and, therefore, we upped our disenrollment forecast. That's pretty broadly across our portfolio. We do not have a high bias toward the low-end of the segment versus high-end of the segment.
I would remind you that, in under 50 and under 250, it is a very small percentage still today of our overall 11-plus million members for our portfolio. But today we do not see the disenrollment pattern being materially different there. We are keenly aware, though, of your second point, which is the demographics changing in the employer profile as disenrollment is unfolding. And as we noted in 2008, we did see some movement in that. We've made changes in underwriting and pricing assumptions that correlate to that and we will continue to rapidly inevitably update that. Mike?
Matt, just to add, going back to our prepared remarks, we continue to model a 50 basis point higher medical costs trend for 2009, as compared to full year 2008. And embedded in that is essentially 50 basis points, for lack of a better term, a plug for the combination of the economic pressures, potentially at some point increasing utilization. If people are concerned about losing their jobs, there's a greater propensity to consume medical costs, and also the impact, as David noted, around disenrollment in that, tending to lead to an older demographic of employees and independents. Now, again, I would not characterize that as a sea change, but that was a part of our reasoning around the modeling a higher medical costs trend in 2009.
Matthew Borsch - Goldman Sachs
Okay. Thank you.
Thank you, Mr. Borsch. Our next question comes from Josh Raskin, Barclays Capital.
Josh Raskin - Barclays Capital
Hi, thanks. Good morning. First question just on the experience-rated account. You mentioned that there was some pressure on the deficit accounts, and I was just curious – did you see any lapses at the end of last year on those accounts that were running deficits? Could you characterize the pricing on those accounts as you came into 2009?
Josh, it’s Mike. Overall that your comments are inline with our actual results. We did see higher medical cost trend in deficit cases and in particular, there was one case that left us in fourth quarter that had cost us approximately $10 million after-tax in 2008. I'll just say I would not expect that case to have any impact on our results in 2009, since it's now gone.
But, in general, the persistency has been reasonably if you exclude that case for a second, in general, the persistency has been reasonably consistent throughout this year and into 1/1/09 for the deficit cases. It's modestly improved our current outlook here for 1/1/09, but not a material change there.
Josh Raskin - Barclays Capital
Okay. And then switching topics on the capital side, I know you've got $2 billion of long-term debt accounts that aren't due till 2011, but I was wondering, are there any covenants in there or anything related to a debt-to-cap or anything around your shareholders equity?
Obviously, that was $1 billion reduction in the fourth quarter due to the losses, but not unexpected. I'm just curious if there are any provisions in the debt right now that would force any short-term repayment or anything like that?
Josh, the short answer is no. There are no covenants, no significant covenants in the long-term debt around what you're asking about. It is fair to remind you that we do have in our bank lines, in our 1.75 billion of bank lines, we do have a 40% debt-to-cap covenant that would obviously then limit in today's environment, would limit to around $1 billion of how much combination commercial paper and bank lines we could have outstanding at any point in time. But not relevant in terms of our existing long-term debt.
Josh Raskin - Barclays Capital
Okay. The $1 billion amount and you only have $300 million right now anyway, right?
That's correct, Josh.
Josh Raskin - Barclays Capital
Okay. Okay, thanks.
Thank you, Mr. Raskin. Our next question comes from John Rex, JPMorgan.
John Rex - JPMorgan
Yes, I was wondering if you could talk to us first just about what kind of pricing yields you're expecting on your guaranteed costs business for '09. Just maybe a little more color on what drives the extra 100 basis points of medical cost ratio deterioration versus what you were expecting prior?
Hi, John, it's Mike. In terms of our overall expectations for 2009, we expect to secure renewal pricing yields approximately 50 basis points higher than the underlying medical cost trend. And I'm talking about the existing book, excluding the segment expansions. So, we would expect on that basis (inaudible) low to mid-8s in terms of premium yields for 2009.
In terms of your question on why the deterioration in the MLR 2009 versus what we had previously estimated – basically, John, that mainly reflects the deterioration that we saw in fourth quarter. We saw higher level of tax claims in fourth quarter. We saw some unfavorable development related to cats from earlier in the year and, essentially, what we're now assuming for 2009 is that the same cat level activity that we saw in 2008 is essentially what we're assuming for 2009. So, we're assuming no improvement for that, and as a result of all of those factors, the 2009 outlook for us, for the MLR, is approximately 100 basis points higher than what we had previously estimated.
John Rex - JPMorgan
So does that indicate, then, you indicate when you include the higher catastrophic claim activity, your expectation is your pricing yields trail your all-in cost trend, is that correct?
John, that's not correct. I meant what I said earlier. I expect that the renewal pricing yields will exceed the year-over-year trend, '08 to '09. The main point here is that the 2008 starting point is likely now to be higher, based on our assumption that the tax that we saw in 2008 will improve in 2009.
John, it's David. So, as Mike said, we've assumed that same level of catastrophics. We've historically not seen that, but because we saw it throughout several quarters in 2008, until we're able to remediate that, we're going to make the assumption in the MLR erosion, and each quarter we'll update you on that in terms of our ability to mitigate that further.
John Rex - JPMorgan
I want to make sure I understand. Are catastrophic claims excluded from that, or included in that cost trend outlook you have for '09?
John, catastrophic claims are included in that trend, but the point is that that trend is being calculated off of a 2008 starting point; it's now higher than we had estimated 90 days ago.
John Rex - JPMorgan
Okay. And then maybe just a little more color on what's going on. What you think is going on with the catastrophic claims?
Well, you're obviously asking me to hypothesize here, and I would not overweight any particular quarter. But I do think it's fair to say that this could be a combination of bad luck. It could be a combination of potentially some anti-selection, particularly in the small-group markets that have been slowly dwindling in our membership. And I think it also may be a combination of the disenrollment and just the older demographic phenomenon that we referenced earlier.
John, it's David. I would just add to Mike's point in terms of his second point. In 2008, we were essentially actively decreasing our posture in several markets under 50 book of business. You could use the term "purge", if you like. You can use the term "part harvest" or "soft exits". When you execute that strategy, the risk goes up and seems catastrophic. Again, as we go into 2009 in a bit more steady state, we would like to think that the results will normalize. But, as Mike said, we're going to project they are in there until we see evidence they are not in there.
John Rex - JPMorgan
Okay. And could you just run down for us, when you think about your overall 3% decline in enrollment? Can you give us, by major category, so GC and Great-West, and major categories of what you expect in those books?
Sure, John. I'd be happy to. First, in guaranteed costs, what we're currently modeling is a 10% overall decline in the guaranteed cost book. Now, that's actually it's 12% excluding the segment expansions, so to excluding the individual and the under 50 rollout in specific geographies, it would be down 12.
The experience-rated membership, we expect to be down 7% versus yearend '08. We expect the Great-West membership to be down 13%, although I would emphasize that since more and more scrambled the eggs here with Great-West, that's going to be a hard number to specifically track here in 2009, since it will be embedded in the overall results. But then ex-Great-West, we would expect the ASO membership to be approximately flat.
Thank you, Mr. Rex. Our next question comes from Justin Lake, UBS.
Justin Lake - UBS
Thanks, good morning. Couple of questions. First, on the membership side, I'm just curious if you could kind of spike, I know there are a number of moving parts in the Health Care revision on op income, but can you spike out what the impact of that 1% decline in membership actually had on the operating profit forecast, so we can get some kind of sensitivity to the potential for further declines?
Sure, Justin, it's Mike. The combination of the lower guaranteed cost membership expectations for 2009 and the lower ASO membership expectations now for 2009 together would be worth approximately $15 million after-tax. Now, there are obviously other moving parts in terms of our 2009 estimates, but isolating on that, it would be 15.
Justin Lake - UBS
And that includes the flow-through to the specialty businesses and the add-ons and things like that?
Justin Lake - UBS
And so as we think about the 2009, is that a reasonable sensitivity total for every 1% decline in membership, you would get about a $15 million hit?
Not particularly, Justin, because it will depend very much on which book of business is specifically impacted. So, again, I think it would be very different, for example, if you reduce our guaranteed cost membership expectations rather than minus 12 ex the segment extension, if you down drafted that, that would have more of an impact than, for example, if you down drafted the ASO book.
Justin, it's David. To add to Mike's point, I think there are two critical pieces for the sensitivity. Mike's point, relative to funding mechanism and second is retention versus new sales. Our view of 1-1 is strong retention result overall for the portfolio, and we would expect to have good retention results, which we will speak in quarter with you. That is a critical driver in addition to the funding mechanism.
Justin Lake - UBS
That's helpful. And then just a question on the capital side. It sounds like you've laid out your sources and uses pretty well here, and you're going to end up with $150 million to $200 million by the end of the year. I know your guidance doesn't include any further deterioration on the VADBe side and the other significant realized losses.
To the extent you have them, what is your ability to offset that, either moving some of the other cash flow uses out so that we don't see, obviously, the big question is could there possibly be a need for a capital risk?
Sure, Justin. I understand your question. First, in terms of the any potential VADBe losses, I wouldn't necessarily draw the conclusion that every dollar of potential VADBe loss in 2009 would negatively impact subsidiary dividends. And we have several options to deal with that kind of situation. One would be, of course, to not achieve precisely the yearend 2009 long-term targets that we have for our subsidiaries, specifically CG Life. I think again, if we were a little bit short there in 2009, but with the strong commitment to make up that difference in 2010, it's always dangerous to speak for the rating agencies, but I believe that they would find that a tolerable scenario as long as it was a manageable amount.
In terms of other options, it's really the same list that we went through at the Investor Day. Obviously, at this point, long-term debt markets are in better shape than where they were during the dark days of October. So that is certainly an option. We obviously have commercial paper and bank lines, as we talked about to Josh's question earlier. So that gives us a significant amount of capacity. I also believe we can wait, in terms of strengthening the parent cash until 2010 as well. I think the most important point is that under current conditions, we have absolutely no plans to issue equity. There could be a lot of other options that we would look at first.
Thank you, Mr. Lake. Our next question comes from Greg Nersessian, Credit Suisse.
Greg Nersessian - Credit Suisse
Hey, good morning. First question is on the experience-rated book. I wonder if you could sort of dig into the moving pieces there a little bit. I think you mentioned flat earnings next year. You're losing the one account, or I think you said you had a loss of $10 million and you have the negative impact from the lower enrollment. Any other moving pieces within that gets you to, in other words, is the makeup primarily the debt recovery from the accounts in deficit?
Greg, it's Mike. I think that's a fair overall conclusion. The way I think about it, is that we do expect membership to be down 7% for the full year. It's somewhat higher than that on a member month basis, but 7% on a full year basis, and that's approximately offsetting a $10 million after-tax margin expansion that we have planned for 2009.
And you could tag it to the one account that we lost. I mean, in fairness, in any given year, there tend to be accounts that have bad experience. I'm not sure I would necessarily tag it just to that, but we have built in $10 million of margin expansion, and the combination of losing that account and the fact that we estimate that for 1/1/09, we did secure renewal rate increases that were somewhat in excess of trend, along with persistency in the mid-80s. We feel like we're well positioned for that.
Greg Nersessian - Credit Suisse
Was that higher incidence of catastrophic claims only applicable to guaranteed costs, or was there some of that in experience-rated as well?
Yes, ironically, Greg, the experience-rated book, which tends to have stop loss coverage coupled with it, the stop loss results for the experience-rated book, knock on wood, ran well this year. In fact, it was a disproportionate impact for the guaranteed cost book really throughout the year.
Greg Nersessian - Credit Suisse
And then if I could squeeze one more in, could you update us on your pension funding status as of the end of the year? And then, to the extent that your cash flow comes in perhaps better than expected, can we just expect that you would continue to fund the pension in excess of that $130 million, or is that a hard target for the year?
Greg, a couple things there. First, in terms of the funding status, it has not changed materially from the numbers that we talked about at Investor Day. But we did benefit from two specific actions. First, we benefited from the legislative relief that we received here, along with other companies for yearend 2008.
The legislative relief for us reduced our needed contribution in 2009 by allowing some smoothing of investment losses over a longer period of time. In addition, we split the plan at yearend 2008 which also gave us some benefits.
So the bottom line is that we'll need to make a funding decision by mid-March and at this point, we expect that that will, in effect, require a full year parent company cash contribution of $130 million after-tax. But that funding decision would be made in mid-March. In terms of your other question on would we make other contributions throughout the year, I think it's a little too early to try to speculate on that at this point. So I think at this point, 130 is really a best estimate.
Greg Nersessian - Credit Suisse
Okay. Thank you.
Thank you, Mr. Nersessian. Our next question comes from Ana Gupte, Sanford and Bernstein.
Ana Gupte - Sanford and Bernstein
Thanks. Good morning. Can you comment on your routine claims experience, aside from the catastrophic experience, as some of the shorter claim cycle drivers are [X] outpatient position going from the third quarter into fourth quarter? Are you seeing any changes with the economy? I think you had guided up quite significantly on the Rx side on trend for next year. And then the second question was, how are you doing on your hospital contracting renewals in the economy?
Sure, Anna. It's Mike. I'll start and ask David if he wants to add. The short answer is we did not see a material change in medical cost trend in fourth quarter versus what we had seen earlier in the year. Now, remember that fourth quarter is still relatively immature at this point. So we'll have additional information in first quarter of 2009. But to-date, there is nothing that would suggest really in the second half of 2008 that we saw materially different trend level than in the first half.
Again, the main outlier, as I've referenced now a couple times, is the higher level of cat claims for the guaranteed costs book. But I see no evidence that that is showing up as trend acceleration for the ASO or experience-rated books. As it relates to 2009, we have not materially changed our trend outlook for 2009 by category.
So we continue to expect high single-digit medical cost trends in facility, both inpatient and outpatient of professional in the mid-single-digit range and then mid-to-high single-digits for pharmacy, again, which I would not characterize as being a sea change from the mid-single-digit pharmacy experience that we saw here in 2008.
On the hospital side, again, no material change from what we've talked about previously. As David mentioned, the Great-West network re-contracting has been our highest priority in the recent past, and that continues to trend really right on track. David, you want to add anything?
Sure. Good morning, Anna. Two things. One, close up on Mike's comments relative to the pharmacy trend. Maybe from prior conversations, you might have picked up a note of a couple of points as you referenced. The only item I would just flag in there for you is, we had tremendous, tremendous, tremendous uptick in generic utilization rate in 2008. That utilization rate stays in 2009, but the rate of change is not as significant as it was from '07 to '08. That will be the primary item to point to. But the overall pharmacy cost profile and trend is still quite attractive.
On hospital, I would note a few things. First, overall, I would say even in this environment – proceeding well. Mike's point, the Great-West CIGNA alignment, we're real pleased with. We're real pleased with the work of the team and the alignment with the provider network. Secondly, very importantly, our service proposition to the hospitals and the provider communities continues to perform well, whether it's off the Great-West claim platform or the CIGNA claim platforms.
And finally, as Mike referenced in his prior comments, if we've seen any movement at all in terms of unit, there's a slight uptick in our expectations overall in the facility unit trends. But I would say it's in the slight category. So overall, hospital contracting is performing well, the Great-West alignment, as well as our continued service proposition to the hospitals.
Ana Gupte - Sanford and Bernstein
Thanks very much.
Thank you, Ms. Gupte. Our next question comes from Charles Boorady, Citi.
Charles Boorady - Citi
Thanks, good morning. On the experience-rated business, how much of the 7% decline that you expect for the year already occurred effective Jan '09? And what was the approximate loss ratio of the business retained versus the business lost?
Charles, it's Mike. First, on your first question. We estimate that our experience-rated membership dropped by 4%, or will drop by 4% for first quarter of 2009. So it's essentially four of the seven. In the particular question of the loss ratio of the renewing accounts versus the lapsing accounts, I don't have that specific number committed to memory here for the experience-rated book.
I can tell you is that our estimate is that the persistency on the deficit accounts for first quarter of 2009 is approximately 69%, as compared to the mid-80s overall. So again, you could conclude that because they were in deficit, they would have had a higher NCR. As a result, I would wager that the loss ratio is higher on the lapsing accounts than the renewing accounts. I just don't have that number committed to memory.
Charles, David, just two other points of color. First, about 70% or so retention rate on deficit accounts is not unusual. You should expect that if we are going to generate something in the 80s, we should expect, generally speaking, margin accounts to be greater than that and deficit accounts to be less than, because margin accounts, by their very definition, are building up some revenue offsets for future renewals. And secondly, as Mike mentioned previously, just to tie back in, relative to the rate execution, the rate execution, also, you would expect that to realize on any given renewal cycle would be a higher relative rate on deficit cases versus surplus cases, and that is indeed what transpired on January 1.
Charles Boorady - Citi
Thanks. My second question, if I could ask, on the commercial real estate portfolio valuation, the footnote mentioned you relied on the most current full year. Was that '07 or was that based on '08 results? And what key assumption changes did you make in valuing the commercial real estate in terms of cap rate or other key factors?
Sure, Charles, it's Mike. The footnote that we have in the inset supplement references the very detailed review of the portfolio that our investment organization goes through every year, and that was completed in third quarter of 2008. So, literally those loan-to-value calculations are made as of third quarter 2008, using the best information that we have.
Now, specifically in terms of audited financial statements, normally that would be for the prior calendar year, so it will be based on audited financial statements of 2007, but then updated for what else we know about, the particular market conditions and the attractiveness of that property, what the vacancy rates are, et cetera. I don't know off the top of my head the change in the cap rate assumptions. That's certainly something you could follow up with Ted afterwards.
Charles Boorady - Citi
All right, thanks.
Thank you, Mr. Boorady. Our next question comes from Scott Fidel, Deutsche Bank.
Scott Fidel - Deutsche Bank
Thanks. First question, just if you can update us on some of the assumptions that you're assuming for the VADBe business to breakeven in terms of level of SNP and current use on interest rates and market volatility that are built into that assumption?
Sure, Scott, it's Mike. In terms of the 2009 expectations, I'd first emphasize that there are a lot of unpredictable factors here that could cause actual results to differ materially from any number that we would put out on the out of the table. So the most important point that I was making, or most important couple of points that I was making, is the comment that we have zero built in for 2009 is number one, we believe our reserve assumptions here at year end 2008 are, in fact, appropriate.
Again, these reserve assumptions have been based on historical averages, and while they bounce around quarter-to-quarter or any particular year, we continue to believe those long-term assumptions are appropriate. And second, we don't believe that the September-October severe turbulence that we saw is somehow indicative of our new run-rate going forward. So those are the most important comments that I would make.
In terms of your question around S&P and volatility related impacts. The rule of thumb that I personally use, that maybe you'll find helpful here, is that a 10% drop in equity markets is typically worth $20 million to $30 million after-tax, based on the direct impact on our reserve for future partial surrender. So if you have a 10% drop in the equity markets, all things being equal, we increase the reserve for future partials and that would cost us approximately $20 million to $30 million.
Now, other items like volatility related impacts or interest rate changes, et cetera, those are much more difficult to get a good rule of thumb for, because they just tend to bounce all over the place. But for a long period of time, they have been unbiased, meaning they have averaged close to zero, but they can certainly bounce around.
The other data point that I can give you here is, looking at January 2009. In January 2009, we estimate that with the S&P 500 drop of 8.5%, the rule of thumb that I gave you a minute ago, if you use the 8.5%, you would say, okay, that would be worth approximately $25 million after-tax, plus anything you want to build in for volatility related impacts or interest rates.
Now, we did a run of the reserve on January 31 and concluded that if the quarter had ended that day, we would have a $30 million after-tax loss. And so what that tells me is that, if it's roughly 25 for the drop in the stock market, the other items, each of the other items would be in the single-digit category in terms of changes. Again, it gives me some comfort that, in fact, the September and October severe turbulence that we saw is not the new run rate thus far in 2009. So, unpredictable, but hopefully those facts are at least helpful for you.
Scott Fidel - Deutsche Bank
That's very helpful. And then if I could ask a follow-up on the new commercial product launches. If you could give us an update on the small group and individual expansions, how initial enrollment for '09 is tracking in those and maybe your updated membership target, if there's any change in the Investor Day around those two expansions.
Scott, good morning, it's David. So broadly speaking, on target for the early launches as you recall, they started in the fourth quarter of 2008. If anything has changed directionally, we expect to be a bit more intense relative to the individual activities. We'll still be focusing on under 50, but the individual activities, that's partially driven by local competitive dynamics, as well as increasing state regulatory changes that effect under 50 marketplace.
Today it's quite early to measure success overall, so I'll give you a little color and ask Mike if you want to add to that. Our broker activity, as we launch in markets, a couple markets per quarter, continues to be extremely, extremely positive. The volume of the energy level there is quite high. The early sales success we've generated through the last few months of 2008, early January is quite attractive for the individual block of business and the few markets are focusing on under 50.
Overall, the membership outlook for 2009, yes, for the full year, as a little tempering primarily for the under 50 book of business, not the individual book of business right now and we will be excited and optimistic on the outlook here.
Scott Fidel - Deutsche Bank
Thank you, Mr. Fidel. Our next question comes from Peter Costa, FTN Equity Capital Markets.
Peter Costa - FTN Equity Capital Markets
Not to beat this issue too hard, but just back to the medical cost issue again, just to be clear, you are talking about catastrophic things that could be either one-time anomalies or some adverse selection as a result of the soft exits, which are theoretically slowing, you continue to project that out into next year.
Is there something else causing you to be overly conservative in terms of that MLR for next year? Presumably some of this is prior period development, so did you see other stuff that was in the fourth quarter that suggested that it's going to continue?
Peter, good morning, it's David. I’ll start and I'll ask Mike to add to it. First, if you look at 2008 for the overall book of business, our overall medical trend, which I might point out was the midpoint, was at the low end of the industry range, came in strong for the year, which meant our ASO book of business performed very well. And overall, with the bouncing around the experience-rated of book of business, our overall portfolio performed well.
Looking into 2009, our overall trend projection in the 7% to 8% range, and we feel quite good about that outlook right now.
Back to the guarantee costs, small book of business and as we indicated, we saw a significant number of catastrophic events. As Mike pointed out, we didn't see the same pattern experience-rated, nor the larger scale ASO book of business.
At this point in time, given that we've seen those catastrophic for several quarters, we felt as though it was prudent to project that forward again, until we saw the level of catastrophics, which we would expect to see abate; but until we see that step down, we're not going to project that step down.
Thanks, David. I certainly agree with David's comments, Peter. Just to add a couple of other things. Couple of other things that are going through our heads here. One is that we believe that the economic conditions, as well as the competitive pressures potentially impact the guaranteed cost book most heavily than, for example, the ASO book.
And so you couple that with David's accurate comment that while cats bounce around, we certainly had enough of these bounce against us in 2008 that it did not seem prudent to us to basically say, that was just bad luck and we're going to count in on trends somehow being lower for the guaranteed cost book in 2009 than what we're expecting for the overall book. And so from that perspective we view it as a prudent outlook.
The relative comment I would make is that we are being very thoughtful about how we manage that book in 2009. Specifically, we're focused on optimizing the results for the renewal book and that means we're really being very thoughtful in having very targeted strategies in each of the local markets; and in many cases, a different approach for the under-50 business versus the over-50 business.
Peter Costa - FTN Equity Capital Markets
Just the one mortgage loan that's not performing, what's the amount of that loan? Is that the same $59 million that moved into the 99% or 90 to 99% loan to value ratio?
Yes, you have an excellent memory. It is $59 million.
Peter Costa - FTN Equity Capital Markets
Okay. Thank you.
Thank you, Mr. Costa. Our next question comes from Carl McDonald, Oppenheimer.
Carl McDonald - Oppenheimer
Thanks. Just wanted to get an update on the expectation for the Great-West earnings in '09. Is that still 140 to 160, or should we assume that's a touch higher now?
Carl, it's Mike. Regarding Great-West, before I comment on your specific question, I cannot emphasize enough that this is really a scrambled eggs situation here. It's going to be impossible to track with precision these results here for 2009.
I think it is fair to say that the most important levers are on track for us for 2009 as we have talked about previously. Specifically, we expect to improve the MLR. We continue to expect the MLR in 2009 on the stop loss book to be in the mid-70s. So, we continue to expect significant earnings lift there. We continue to expect good operating expense improvement as we capture synergies through the integration work.
The only piece that's a little bit softer than what we had talked about previously is membership. As I discussed earlier, we now expect that membership will be down approximately 13% for the full year, or 14% on the member month basis. So, while we will not be able to do detailed accounting, I think it's fair to say that we're likely to be within that range, but again, very importantly, the scrambled eggs issue will make it impossible to track that next year. David, would you like to add?
Carl, just a couple things to highlight. First, as we have said several times, we feel quite good about this acquisition, capabilities and I would give compliments to the team working on the integration activities to-date. A couple things on the P&L, we flagged this before as well.
The traction on the medical cost improvements has been quite strong and actually partly accelerated from our time line in 2008, so we saw the contribution of that. So, we see a little bit of an acceleration of the realization of that and Mike pointed it out in the MLR.
And finally, just to remind you, in my prepared remarks, we expect to have about two-thirds of that total medical cost improvement in hand, in the first quarter of this year, and then greater than 90% of it in hand by the end of 2009. So, again inline with our expectations overall.
Carl McDonald - Oppenheimer
Okay. And then just to focus on the HMO risk piece within guaranteed cost. So, enrollment there down about 38% in '08. Can you just walk through some of the factors there? Is there any amount of switching from the HMO into the POS and PPO, or is it just the competitive pricing and some of the reductions on the smaller market you referenced?
It's Mike. Primarily the former, we've seen over the last several years, a significant shift in the market interest from the traditional HMO products into these open access kinds of plans and that continued into 2008. And as we've talked about consistently over the last couple of years, I really would suggest that you look at the guarantee cost block, as an overall block and not get hung up in the HMO versus open access split.
Thank you, Mr. McDonald. Our last question will come from Michael Baker, Raymond James.
Michael Baker - Raymond James
Yes, I was wondering. If you could give us a sense within the in-group attrition, what percentage of those people are opting for COBRA and then give us a sense of how those MLRs are tracking?
Michael, it's David. Unfortunately I don't have those data points at hand, either in terms of the percentage. I would expect you would see a slight uptick there. I do not expect as I look at our individual business, which is where the COBRA roll-up would take place. There is not a sea change in the overall COBRA uptick.
Michael Baker - Raymond James
Can you give us a sense in terms of your membership assumption of down 3%, how much of that's attrition related?
Sure, Michael. Maybe if I come back to the attrition, the attrition shows up in two ways. We talk about it in disenrollment, so that the in-group disenrollment. As we talked about for 2008, it also shows up in less yield, when you sell a new piece of business in terms of less employees.
Broadly speaking, our view of the 2009 outlook, our view is that unemployment levels will move from the approximate 7% where we are today, and grade toward a 9% unemployment level. To point you back to our prepared remarks, I indicated that we increased our disenrollment assumptions year-over-year by about 35%. So, broadly speaking, you should conclude that our prior view of minus 2 moving to minus 3 is essentially all driven by the disenrollment activities. That should be your conclusion.
Michael Baker - Raymond James
Thank you, Mr. Baker. Ladies and gentlemen, this concludes CIGNA's fourth quarter 2008 results review. CIGNA Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call.
You may access the recorded conference by dialing 888-203-1112 or 719-457-0820. The pass code for the replay is 5505944. Thank you for participating. We will now 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: email@example.com. Thank you!