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Executives

Ted Detrick - VP of IR

Ed Hanway - Chairman and CEO

Mike Bell - EVP and CFO

David Cordani - President, CIGNA HealthCare

Marcia Dall - Financial Officer, CIGNA HealthCare

Analysts

Matthew Borsch - Goldman Sachs

John Rex - Bear Sterns

Stacy Groll - Citi

Christine Arnolds - Morgan Stanley

Scott Fidel - Deutsche Bank

Justin Lake - UBS

Bill Georges - JPMorgan

Douglas Simpson - Merrill Lynch

Carl McDonald - Oppenheimer

Joshua Raskin - Lehman Brothers

Gregory Nersessian - Credit Suisse

Peter Costa - FTN Midwest Securities

CIGNA Corp. (CI) Q1 2008 Earnings Call May 1, 2008 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by for CIGNA's first quarter 2008 results review. (Operator Instructions).

We'll begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

Ted Detrick

Good morning, everyone, and thank you for joining today's call. I am Ted Detrick, Vice President of Investor Relations. And with me this morning are Ed Hanway, CIGNA's Chairman and CEO; Mike Bell, CIGNA's Chief Financial Officer; David Cordani, President of CIGNA HealthCare; and Marcia Dall, CIGNA HealthCare's Financial Officer.

In our remarks today, Ed Hanway will begin by discussing highlights of CIGNA's first quarter results. Mike Bell will then review the financial details of the quarter, and provide the financial outlook for full year 2008. David Cordani will discuss our HealthCare results and medical membership outlook, and he will also comment on the strategic importance of the Great-West acquisition. Ed 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 Accepted Accounting Principles, or GAAP, when describing its financial results. Specifically, we use the term labeled "adjusted income from operations" as the principal 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 beginning in 2008, 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 also posted in the Investor Relations section of cigna.com. Prior period results have been restated to conform to this new basis of reporting adjusted income from operations, and we expect to make available shortly restated quarterly statistical information for the years 2006 and 2007 that reflect this new basis of reporting.

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 turning the call over to Ed, I will cover a few items pertaining to our first quarter results and disclosures. First, CIGNA's quarterly results included an after-tax charge of $24 million related to litigation matters associated with our HealthCare business. This charge is reported as a special item, and therefore, is excluded from adjusted income from operations in today's discussion of both our first quarter results and our full year 2008 outlook.

Next, effective January 1st of 2008, CIGNA adopted Statement of Financial Accounting Standards No. 157 entitled "Fair Value Measurements", which clarifies the measurement of and expands disclosures regarding the fair valuing of certain assets and liabilities. Now, in addition to expanding the fair value disclosures, Statement 157 also affects the results of our guaranteed minimum income benefits business, otherwise know as GMIB, which is reported in the run-off reinsurance segment run off free insurance segment. This pronouncement requires CIGNA to fair value its GMIB assets and liabilities based on exit values using current risk-free interest rates, volatility and other market assumptions.

Now, historically we have used longer term averages for our market assumptions, and we believe that using an exit value approach to fair value the assets and liabilities of this business is a methodology that does not reflect the underlying economics of the GMIB business.

In total, CIGNA's first quarter net income included after-tax losses of $195 million or $0.69 per share related to the GMIB business, of which $131 million or $0.46 per share related to the adoption of Statement 157. I would remind you that the impact of Statement 157 reporting on our GMIB result is for GAAP accounting purposes only and does not represent the actual economics or cash flows of the GMIB business.

Accordingly, the first quarter after-tax losses are non-cash charges and have no effect on our estimate for 2008 subsidiary dividends. Also as a reminder, CIGNA's future results for the GMIB business will become more volatile as any future change in the exit value of the GMIB's asset and liabilities will be recorded in net income. CIGNA's 2008 earnings outlook, which Mike Bell will review in a few moments, excludes the results of the GMIB business, and therefore, any potential volatility related to the perspective application of Statement 157.

Finally, prior year claim development for our HealthCare business has been relatively stable over the past several quarters and is no longer significant to that segment's reported results. Accordingly, beginning this quarter, we will no longer provide a breakout of prior year claim development for the HealthCare segment. However, we will disclose the amount of prior year claim development in future period, if the business experiences significant changes from its current levels. And lastly, I would like to inform you that CIGNA will be hosting its Annual Investor Day this year on November 21 in New York City.

And with that, I'll turn it over to Ed.

Ed Hanway

Thanks Ted. Good morning, everyone.

Our first quarter adjusted income from operations was $265 million, or $0.94 per share. Our quarterly results reflect both the challenging environment for our HealthCare segment, as well as the continued strength of our Disability and Life and International businesses. These results also demonstrate the benefits of our diversified business portfolio, which provide us with unique opportunities to grow profitably in today's difficult market.

HealthCare earnings were below our expectations due to the impact of lower margins on the experience-rated book, and lower than expected guaranteed cost and experience-rated membership. There were also several unfavorable items in the quarter, which we do not expect to repeat in the rest of the year.

Our experience-rated book provides us with a differentiated product in the marketplace and continues to be an important contributor to our earnings. While first quarter experience-rated results were lower than we expected, we are focused on strengthening the margins on this book over the remainder of the year, and David will review in detail the actions we are taking to increase the profitability of this business.

The specialty healthcare business continued to post strong results in the quarter. Specialty programs are key to our value proposition, as they create economic value in two ways; by improving our persistency and by increasing our profit margins.

We grew aggregate medical membership by 2% on an organic basis, which was in line with our expectations for the quarter. This membership result reflected higher than expected growth in ASO. However, our guaranteed cost membership in this quarter declined more than we expected and this reflects our continued focus on maintaining pricing discipline in a very competitive environment. Our overall organic membership growth validates that our value proposition and capabilities continue to resonate well in the marketplace.

In addition, we are very pleased that the Great-West Healthcare transaction was completed on time and closed on April 1st. The timing of the transaction of the high quality of their book of business, are both positive contributors to our outlook. Our acquisition of Great-West brings us a strong organization, with its talented employees, product platform, and distribution capabilities, will accelerate our profitable growth in the small group markets, as well as increase the opportunities for national and mid-size employers to improve the health, well being and security of their employees.

Let me now comment briefly on our other businesses. Our group Disability and Life and International businesses delivered another strong quarter with competitively strong top line growth and profit margins. For the quarter, our group Disability and Life business reported earnings of $68 million on 9% year-over-year premium growth, and an after tax margin that continues to be industry leading. Our International business reported earnings of $52 million on 14% year-over-year growth in premiums and fees.

Overall, both our group and International operations have good growth opportunities and strong market position, which we expect will enable them to deliver another year of good top line and bottom line growth in 2008.

Regarding the full year 2008 outlook, we expect that earnings per share will be in the range of $4.05 and $4.25 per share, which is consistent with our prior guidance. The outlook now reflects the impact of the Great-West acquisition on 2008 results and increased earnings expectations for our group Disability and Life, and International businesses, essentially offset by lowered expectations for our HealthCare business.

And Mike is now going to cover the specifics of the first quarter results as well as our 2008 outlook. Mike?

Mike Bell

Thanks Ed. Good morning everyone. In my remarks today, I will review CIGNA’s first quarter 2008 results; I will also provide an update on our full year outlook. In my review of consolidated and segment results, I will comment on an adjusted income from operations. This is income from continuing operations, excluding realized investment results, GMIB results and special items.

Our first quarter earnings were $265 million or $0.94 a share, compared to $279 million or $0.94 a share in 2007. Our consolidated first quarter 2008 results reflected HealthCare earnings, which were lower than our expectations, partly offset by strong results in our group Disability and Life and International businesses.

I will now review each of the segment results beginning with HealthCare. First quarter HealthCare earnings were $138 million. This result included several items, which we do not expect to repeat in the balance of the year. First, we recorded a $7 million after tax loss on a large non-medical account, which is now managed by CIGNA group insurance. Second, we estimate that we experienced a $4 million after tax impact on our guaranteed cost book, from higher than expected upper respiratory in patient claims, which we believe were related to the increasing incidents of the flu. Third we incurred $4 million of after tax integration expenses associated with the Great-West acquisition.

And in addition, as expected, we had a loss on Medicare Part D in the quarter due to our earnings recognition patterns of this product. So apart from these items, underlying HealthCare results primarily reflected lower than expected margins on our experience rated book, lower net investment income and lower than expected guaranteed costs and experience rated membership partly offset by strong contributions from our specialty businesses.

Experience-rated margins were driven by higher than expected medical costs on accounts and deficit, and lower than expected net premium yields, in part reflecting competitive market conditions. And, we are taking actions to improve experience-rated earnings in the balance of the year, including securing additional renewal pricing increases, and accelerating our deficit recovery efforts.

HealthCare membership grew organically by 200,000 members in the quarter, a 2% increase relative to year end 2007. This aggregate result was in line with our expectations, although the mix was more heavily weighted towards ASO business. Our experience-rated membership grew by 1%, which while positive, was short of our expectations.

Our guaranteed cost membership declined by 9% in the first quarter, and this decrease was higher than we had expected and reflected our focus on maintaining pricing discipline, in an environment which continues to be very competitive.

Our guaranteed cost MLR was 83.8% in the quarter, excluding our voluntary business, and this included approximately 50 basis points in the quarter, related to the higher than expected upper respiratory inpatient claims, which we do not expect to repeat in the balance of the year. And apart from this impact, our MLR was in line with our expectations.

All in, we continue to expect the full year 2008 guaranteed cost MLR excluding our voluntary business to be approximately 83% and this has unchanged from our previous estimate and reflects the fact that all price increases have been higher than medical cost trend. We also continue to expect medical trend for our total book of business to be in the range of 6.5% to 7.5% for the full year 2008.

HealthCare premiums and fees for the quarter increased 1% versus the quarter of 2007, primarily reflecting rate increases and higher specialty premiums, mostly offset by the declining guaranteed cost membership.

First quarter operating expenses increased relative to last year, primarily reflecting higher technology and customer acquisition expenses. While we currently expect operating expenses per member to be relatively flat in the balance of the year, we are valuating our options, particularly in light of the Great-West acquisition.

Now I will discuss the results of our other segments. First quarter 2008 earnings from the Disability and Life segment were $68 million. Earnings in the quarter were strong, due to attractive revenue growth and strong Disability management results. In our International segment, first quarter 2008 earnings of $52 million, reflected continued growth and competitively strong margins in our life, accident and supplemental health and expatriate benefits businesses. Our group insurance and the International businesses continue to be important contributors to our consolidated results.

Results for our remaining operations, including run-off reinsurance, other operations and corporate were $7 million of earnings for the quarter. The first quarter results in the run-off reinsurance segment included the net favorable impact of settlement activity.

And before discussing our 2008 outlook, I'll comment briefly on our investment portfolio and results. As we've discussed before, our investment strategy is to maintain a high quality, well diversified portfolio and we're pleased with our investment management results and our highly experienced team of investment professionals. Our investment portfolio is well diversified, and our performance has been competitively very strong.

We continue to have no direct exposure to subprime loans and de-minimus direct exposure to residential mortgages. Our current commercial mortgage portfolio results are strong, reflecting our consistent disciplined approach to underwriting. All of our loans in this portfolio are fully performing, and, said differently, none of our loans is currently 30 days delinquent.

I would note that we reported net realized capital gains in first quarter, as we expected. Future realized capital gains and losses cannot be reasonably estimated, but based on the current strength of our portfolio and our consistent record of investment management discipline, we currently do not expect our net capital gain or loss results to be material to full year 2008 net income for the enterprise, or to have any material impact on our outlook for full year subsidiary dividends. Overall, we continue to be very pleased with our investment management results.

I'll now comment briefly on our capital outlook and provide an update on the impact of the Great-West acquisition. Our parent company capital position continues to be strong, and our subsidiaries remain well capitalized. We ended first quarter 2008 with cash and short-term investments of the parent of approximately $1.6 billion. This included approximately $550 million and proceeds from debt issuance in first quarter, as well as $120 million of subsidiary dividends received during the quarter. We used approximately $1.5 billion of this balance to finance the Great-West acquisition, which closed on April 1st.

With respect to our outlook, I would note that there is no change to our expectations for full year 2008 subsidiary dividends. In the balance of the year, we expect subsidiary dividends to be approximately $380 million, and this is consistent with our February estimate of $500 million of subsidiary dividends for the full year, and this takes into account approximately $400 million of surplus that we plan to retain in the subsidiaries to support the Great-West acquisition.

At this point, excluding any additional M&A activity, any share repurchase and any additional net debt issuance, we expect other sources and uses of parent company cash in the balance of the year to net to approximately zero.

Now, our capital management priorities remain consistent with our prior communications. We intend to continue effectively deploying capital for the benefit of our shareholders. We now expect to have the capacity to resume share repurchase, or consider additional acquisitions during the second quarter of 2008. So in summary, we continue to have a strong capital position and good financial flexibility.

Next, I will provide an update regarding our acquisition of Great-West HealthCare operations. We closed the transaction on April 1st as we targeted. We acquired approximately 1.4 million full service medical members, as well as some membership in TPA arrangements. Margins on the full service book continue to be strong, and we are currently completing detailed integration plans with a strong focus on stabilizing and in resuming membership growth, and on providing timely access to our more favorable total medical costs.

There are a number of moving parts in our plans. So for example, we are pleased with the estimated earnings power or the current book of business, which is slightly better than our expectations. On the other hand, there is some downward pressure on investment income due to lower market interest rates, and there is some upward pressure on the integration expenses.

So we are currently focused on decisions and actions, which would position us to achieve or surpass our targets for 2009 and 2010 earnings. We expect to provide additional updates on the outlook for our integrated HealthCare business in future earnings calls.

Consistent with our previous discussions, we expect the acquisition to be accretive, relative to the full year 2008 EPS outlook that we discussed on our February earnings call. We continue to expect that the transaction will be further accretive in 2009, and that it will be significantly accretive in 2010 and beyond. Overall, we continue to be excited about the long term growth prospects that our acquisition of Great-West provides.

I'll now review the earnings outlook for full year 2008. The consolidated earnings estimates that I will provide include our current expectations to the impact of Great-West. For full year 2008, we currently expect consolidated adjusted income from operations of $1.16 billion to $1.22 billion and this range is modestly lower than the range we provided in February. I'll discuss the components starting with HealthCare in a minute. I'll provide our HealthCare outlook including, and then excluding Great-West, but first let me provide some additional performance metrics.

We currently expect our medical membership to increase by approximately 2% to 2.5% for the full year 2008, excluding Great-West. The upper end of this range is lower than our previous estimate, and takes into account our current assessment of the weaker economic outlook, and of the competitive pricing environment. We currently expect guaranteed cost membership to decline by an addition 1% in the balance of the year as a result of our maintaining pricing and underwriting discipline in a competitive market.

We expect some very modest additional experience rated membership growth in the balance of this year. We continue to expect medical cost trend for our total book of business excluding Great-West to be in the range of 6.5% to 7.5% for the full year. We expect guaranteed cost pricing yields to exceed trend, and we continue to estimate that the full year guaranteed cost MLR excluding the voluntary business would be approximately 83%.

Our estimate for full year 2008 HealthCare earnings is a range of $735 million to $775 million and this range reflects updated estimates based on our first quarter results and it also incorporates our current expectations from the 2008 impact of Great-West. Our updated outlook reflects a year-over-year earnings increase of $65 million to $105 million after tax, excluding the $8 million of after tax prior year development that we had in 2007.

We currently expect Great-West to contribute approximately $40 million to $50 million in earnings excluding the related financing cost of approximately $15 million after-tax, which will be reflected in the corporate segment. There are several major drivers of the additional year-over-year earnings growth which I'll now summarize.

We expect, growth in our service business including the impact of increased membership and higher penetration of our specialty products to deliver $50 million to $65 million of after-tax year-over-year earnings growth. We expect guaranteed cost pricing actions in excess with medical trend to improve the full year MLR to approximately 83%. And the impact of the improved MLR will be tempered by a projected full year guarantee cost membership decrease of 10%.

We now expect guaranteed cost year-over-year earnings growth of approximately $15 million after tax. We now expect experience rated earnings to be approximately flat with full year 2007, excluding the first quarter loss on the non-medical account. In addition the $7 million first quarter loss in the non-medical account, and our current estimate of the impact of lower short term interest rates, will combine to lower HealthCare earnings by approximately $15 million to $20 million after-tax for the full year relative to 2007.

We also continue to expect that our investments in segment expansion initiatives in the individual, small group and seniors markets will be dilutive in 2008 by approximately $15 million after-tax, but will be accretive the earnings starting in 2009. So summing up the pieces, our all in estimate for full year 2008 HealthCare earnings, including Great-West is a range of $735 million to $775 million.

Excluding Great-West, our full year HealthCare estimates are now $50 million lower than our February range. And this mainly reflects lower expectations for experience rated margins, lower expectations for investment income, and lower estimates for guarantee cost and experience rated membership together with the unfavorable first quarter items that I discussed earlier.

Now regarding earnings for the balance of the year, we continue to expect to see an increase in pattern of HealthCare earnings throughout the year, as we execute our pricing underwriting actions and achieve additional revenue growth including additional growth in our high margin specialty businesses. In addition, we expect Great-West net earnings contribution to primarily emerge in the second half of the year, with second quarter more impacted by integration expenses.

Now to be more specific, I will now discuss our earnings expectations for the balance of the year, relative to our first quarter results and I will do this on a basis that excludes Great-West.

As I mentioned, our first quarter earnings included items which we do not expect to repeat in second through fourth quarters we have removed the non-medical account loss, the higher than expected upper respiratory inpatient claims in guaranteed costs, the first quarter part D loss and Great-West integration expenses. Our underlying run rate in the quarter was approximately $156 million. This run rate would equate to $468 million in earnings in second through fourth quarters. Our updated estimates for the full year excluding Great-West, indicate an increase in the balance of the year of approximately $85 million to $115 million, relative to this run rate.

Now with respect to the components, we expect experience-rated earnings in the balance of the year to be approximately $40 million to $50 million higher than the first quarter, reflecting the impact of the profit improvement actions that we are taking, as well as normal seasonal patterns. We expect guaranteed cost earnings to be approximately $20 million to $25 million higher than the first quarter run-rate, reflecting the projected improvement in the MLR from 83.8% in first quarter to approximately 83% for the full year.

We estimate that service earnings will be approximately $20 million to $30 million higher than the first quarter run-rate due to additional business growth, including the impact of higher penetration of our specialty products, offset by a modest increase in operating expenses. And we expect Part D to move from a loss of $3 million after tax in the first quarter, to positive earnings of $10 million in second through fourth quarters, consistent with the pattern in 2007. So all in, we currently expect full year 2008 HealthCare earnings excluding Great-West to be $695 million to $725 million and including Great-West, $735 million to $775 million.

Now let's turn to the balance of our segments. We expect our remaining operations to contribute approximately $425 million to $445 million of earnings in 2008. We have modestly raised our expectations for Group Disability and Life, and the International businesses, based on the strengths of their fundamentals. We expect both to continue to grow revenue, while maintaining strong margins. Specifically, we expect mid-single digit earnings growth in Group and double-digit earnings growth in International.

Now earnings for the balance of our operations, which include run-off businesses in the parent company, are expected to be lower in the balance of the year. Mainly, reflecting higher debt financing costs, and the impact of lower cash balances on parent company investment income. Updated parent company losses for the full year have been updated to include approximately $15 million of after tax financing costs, related at the Great-West acquisition. And this has been offset by higher expected earnings in the non-healthcare businesses.

As a reminder, our 2008 outlook excludes any potential GAAP results from the GMIB book. Relative to our consolidated outlook, as is customary, our estimates for earnings and EPS assume no repurchase during 2008. On this basis we estimate that our full year 2008 consolidated adjusted income from operations will be in the range of $1.16 billion to $1.22 billion, and EPS in the range of $4.05 to $4.25 a share.

Our estimated range of EPS is equal to our previous range, and we believe this reflects the ability of our businesses to perform in a challenging environment, as well as the benefit of our diversified earning streams.

So to recap, our consolidated first quarter results reflected HealthCare earnings which were lower than our expectations, partly offset by strong results in our Group Disability and Life and International businesses.

As I discussed, we do expect HealthCare earnings to improve significantly over the balance of the year, and our 2008 EPS estimate, assuming no further repurchase and including the impact of the Great-West acquisition, is in the range of $4.05 to $4.25.

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

David Cordani

Thanks Mike and good morning everyone. It has been a challenging few months for a number of sectors in the US and in the broader global economy. As a health service company, we clearly see the economic challenge faced by our customers. Our focus on health, translates productivity and ultimately cost savings for our customers, both the employers and the individuals we serve. Our strategy is to develop innovative products and services that promote consumer engagement to drive personal health improvement at a competitive cost. This approach enables our customers in this economically challenging time to be more competitive. In this environment, our business remains strong, and our strategy positions us very effectively to help our customers.

In addition, our acquisition of Great-West on April 1st expands our reach geographically in the west, and within buyer segments, specifically, the small employer segment.

Today I'm going to share with you some additional thoughts on our first quarter results and the actions we are taking to further expand profitability and our experience-rated book. Second, our 2008 outlook on membership growth, and medical cost trends, and third I'll share an update on market expansion, specifically the Great-West acquisition and integration.

Starting with the first quarter. As Ed and Mike described, our HealthCare earnings for the quarter were below our expectations, in part due to lower than expected results in our experience-rated product, which was partially driven by membership and lower membership in our guaranteed cost product. Both of which were impacted by the challenging external environment. This was somewhat offset by strong growth in our specialty and health efficacy programs.

As a quick reminder, our experience rated product provides competitive differentiation in the marketplace, and generates very attractive earnings per member. The key point of differentiation is the participating nature of the contract between us and our employer customers, in the high rate of penetration of our specialty products.

With respect to experience-rated, we believe the results for the balance of the year will show meaningful improvement, bringing the full year 2008 earnings in line with 2007. This respect to this increase over the balance of the year can be driven by first, a continuous albeit measured growth in membership. Second, further margin expansion on our renewal book of business, and third, further gains on deficit recoveries from active and cancelled cases.

Our specific actions fall into three categories. First, we expect to secure further rate actions on the renewing book of business for the balance of the year, and additional specialty penetration on new business that we plan to write over the remainder of the year. We are committed to maintaining our pricing and underwriting discipline.

Second, we remain focused on improving our medical cost result through a combination of actions, including intensifying our clinical reviews, large claim negotiations and obtaining additional provider discounts in targeted areas. And third, we are accelerating our efforts for deficit recovery to improve profitability on specific accounts.

I'll now move to comment on our medical membership and medical cost outlook. From a membership perspective, our total medical membership grew 2% organically in the first quarter, with higher membership in our service product, partially offset by lower membership in the guaranteed cost product.

As Mike discussed, decline in guaranteed cost membership was higher than expected, reflecting our pricing discipline in a very competitive environment, and higher levels of disenrollment as a result of the economic environment. Our consumer driven health plan membership grew 40% since year end 2007 to 820,000 members, which was consistent with our expectation.

Looking to the balance of the year, we expect higher existing case member disenrollment and lower new sales, reflecting the impact of the economic slowdown on our customers and the former and the very competitive pricing environment on the ladder. Our total membership growth expectations for 2008 are in the range of 2% to 2.5% excluding Great-West. We expect the majority of the growth for the full year to be in ASO products. We expect guaranteed cost membership to be relatively flat and some modest experience-rated membership growth in the balance of the year, as a result of maintaining our pricing and underwriting discipline.

From a medical perspective, we continue to expect the trend for our book to be in the 6.5% to 7.5% range for 2008. I would note that this range is consistent with our previous expectations, and reinforces a very strong competitive result that we are delivering for our ASO customers and overall book of business.

I'll now turn to my final topic, on market expansion strategy. We successfully closed the acquisition of Great-West on April 1st, without any regulatory issues and a little disruption to the business. I'm really pleased with the way the CIGNA team coordinated with our Great-West team to ensure that we were successful with this important first step.

As we previously discussed, we see the Great-West acquisition as a meaningful part of our market expansion strategy. First, it strengthens our geographic presence for a national and regional segment. Second, it accelerates our segment strategy in the small segment area. And third it provides the opportunity to cross sell additional programs and services to thousands of new employer relationships. The acquisition adds approximately 1.4 million medical members in the employer segment, and some additional members served through TPA arrangements.

We expect to create significant value for our customers and shareholders by focusing on four key economical efforts. First, by combining the capabilities of our two organizations, including our strong total medical cost position, we expect to stabilize and resume growth of the Great-West membership. Second, we expect that strong total medical cost position will improve cost levels for employers and margins on the acquired book. Third, our measured approach integration will achieve operating expense synergies over time, and fourth, we will expand choice by offering our specialty products and health efficacy programs focused on improving health to current Great-West members.

I have named Bill Roth as the leader of this business on a going forward basis. Bill, who currently leads our Individual and under 50 business, has taken on the responsibility for ongoing leadership of Great-West. Bill has considerable experience running these unique segments and brings the right perspective and leadership to the team. In addition we have a dedicated team solely focused on ensuring the successful integration of the business.

Looking forward we will operate as one company, CIGNA, in the marketplace. We are focused on preserving and feeding the existing Great-West HealthCare book of business, operating platform and infrastructure, while improving profitable growth. To that end, we have been able to retain nearly 100% of the Great-West team. We recognize the importance of this team in building Great-West, and now on building the next exciting chapter with CIGNA.

I will now move to wrap up my comments. It is clear that our first quarter results didn’t meet our expectations and are not fully reflective of the current market position we've built over the last several years. While our current full year outlook does reflect continued share gain and earnings expansion it is below our potential even when I consider these very challenging in competitive market conditions.

To that end we are focused on first expanding our operating margins on our book of business through a combination of pricing and underwriting, continued effective medical cost management and ongoing improvement in operating effectiveness and efficiency.

Second, we will effectively integrate the Great-West business. This means avoiding service disruption for our customers and physician partners, retaining the strong Great-West team, improving the total medical cost position, securing operational efficiencies and positioning for profitable growth in 2009.

And our third priority is ensuring effective client and member service delivery of our existing programs, while we continue to innovate our health service offering for 2009 and beyond. We remain focused on improving our results for 2008 and ensuring we are well positioned as we look toward 2009.

With that I'll turn the call back over to Ed for his closing remarks. Ed.

Ed Hanway

Thanks David. Now before we take your questions I want to underscore several points. Our quarterly results reflect both the challenging environment for our HealthCare segment as well as a continued strength of our Disability and Life and International businesses. This diverse mix of business provides us with unique opportunities to grow profitably in today's difficult market.

While our first quarter HealthCare results did not meet our expectations we are committed to improving these results over the balance of the year with a strong focus as David noted on pricing and underwriting and continued effect of medical cost management particularly with regard to our experience rated business. In 2008, we will continue to make investments in targeted market expansions for our HealthCare business. We believe this will lead to good growth opportunities in the long-term.

We are very pleased with the time we closed the Great-West acquisition, and we are focused on completing an integration that truly combines the strength of both Great-West and CIGNA for the benefit of our customers. We expect to leverage the Great-West acquisition and strong competitive position we have build in the HealthCare marketplace, and meaningfully grow HealthCare earnings overtime.

Our Group Disability and Life and International businesses delivered another quarter of strong results. A value proposition in both Group Disability and the International Operations will enable us to profitably grow these businesses in 2008, while maintaining their competitively superior margins. And relative to the 2008 outlook, I am confident we will be able to achieve our EPS range for $4.05 to $4.25.

In closing, I believe that CIGNA has solid market positions in each of our ongoing businesses, and that we will leverage these positions to continue to create value to the benefit of our customers and shareholders. And while this completes our prepared remarks, as always we will now be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question this morning comes from Matthew Borsch at Goldman Sachs.

Matthew Borsch - Goldman Sachs

Hi, good morning, thank you. I have a question on what you're seeing in terms of price competition particularly as it's impacting your fully insured business. Are you seeing any signs of potential improvement in the pricing trends in the markets that you are in as it relates particularly to the not-for-profit and public companies?

David Cordani

Matthew, it's David, good morning. We said previously that in prior quarters the pricing environment is very competitive. As we noted in our prepared remarks our guarantee cost membership results are a bit lower than our expectations. This is primarily as a result of that. Specifically if you look at the driver there, the primary driver is lower new business sales and we orient that specifically to the pricing environment and our commitment to maintain pricing discipline.

To the second part of your question is it more pronounced with not-for-profit competitors. We do see it firming up. I think it's geographically specific as we were talking about before. It may be in some geographies you have very dominant not-for-profit competitors. They should look at their surplus patterns. Their returning some surplus and then could be deemed to be pretty competitive. We are on the sideline right now in terms of whether or not we see it firming up. Matthew actually today we see the pattern very similar. If you tell us to be optimistic that it might firm up, I think that will be a good sign. As right now we would say the competitive pricing environment had a direct impact on our new sales in the guarantee cost environment.

Matthew Borsch - Goldman Sachs

And just as a follow-up question, how should we think about the Great-West enrollment in terms of where it fits in your three categories of commercial enrollment? Is it more like the service business or in one of the other categories? Are you are going to break it out?

David Cordani

Hi, Matthew, it's David. My comments will be toward the when we referred to the 1.4 million members that are in the employer segments. The way we first categorized size segments, need that we categorize national accounts is commercial accounts of 5,000 and more employees that are multi-state. It excludes municipalities' et cetera. To categorize our middle market we previously categorized some of these employers in the 200 to 5,000 space and then small segment below that.

As you think about the Great-West membership first and foremost about a third of the total membership falls in what we would call the small segment or what Great-West refers to as the select segment. And about two-thirds falls in to what we would have called the middle market segment, so in the 200 or 250 from where Great-West cuts it to 5,000 and then large single side employers.

The nature of their contracts are ASO with stop loss and then packaged with specialty capabilities. You could think about them as like service products as we know them. But because their service matched up with stop loss and matched up with specialty they have a very nice earnings pattern. And they match up nicely against guaranteed cost products especially in the select or in the 250 life segment.

Matthew Borsch - Goldman Sachs

Okay. Thank you.

Operator

Thank you, Mr. Borsch. Our next question comes from John Rex at Bear Sterns.

John Rex - Bear Sterns

Thank you. I have a question on the experience-rated business. First could you just give us the comp in terms of 1Q ’07 experience-rated earnings versus [progressive] this quarter. As I recall last year in 1Q ’07 you were down about $15 million to $20 million from the prior year. Can you give us a similar comp for 1Q ’08 versus 1Q ’07?

Mike Bell

Sure, John. It is Mike. In this particular case John I think the best way to look at the comparison of first quarter ’08 to first quarter ’07 for experienced rated is in fact to look at the ratio of the experience-rated medical costs to the net premium in ER now. As we've talked about before and that's not a perfect measure, certainly it ignores that investment income, it ignores specialty, it ignores operating expenses. But again since several people like to look at the aggregate loss ratio, let us start there.

John Rex - Bear Sterns

Okay.

Mike Bell

In terms of first quarter '08 versus first quarter '07 that ratio was literally increased by 220 basis points. So if you take 220 basis points hence the $493 million of medical premium that you see in our stat supplement. You could equate that to $11 million before tax, which would be approximately $7 million after tax. I think that would be a reasonable margin measure for you to focus on.

John Rex - Bear Sterns

Perfect, please just tell us a little bit what's going on with the accounts and deficits position. You spoke about how you can increase your efforts to recover those deficits. So what kind of leverage do you really have to recover deficits from an account that walks on you? If they deicide they can go somewhere else, or in a deficit position, how do you that and what's happening also with existing accounts? Are they just resisting your efforts to collects those deficits? It sounds like that's part of the issue that you are seeing here?

Mike Bell

Well first John to answer your question on what kind of leverage do we have? We do not have contractual leverage that would force the customer to in fact enable us to recover the deficit. Now history here is strong in this regard, this book has traditionally run in the 80's in terms of persistency and again we have a long history for the most part being able to recover deficits.

Now your point is a fair one that this is a particularly difficult environment to try to secure deficit recovery and we saw that to some extent here in the first quarter. The persistency on this book in first quarter was 83% which was several points lower than what we had been targeting. What do we expect in terms of the going forward? We still expect that that there will be a meaningful opportunity as a secure deficit recovery over the balance of the year and certainly that's baked into our expectations. David, do you want to add.

David Cordani

Hey John, one point I would add. In the quarter what we saw were some accounts that were in margin moved to deficit. Now that will happen in any given quarter, but we saw a little bit more in this quarter and the relevant point there is, when you think about the relationship with those accounts. They were in margins, they've historically run well, so the employer's seen predictable, good service delivery. Since they just moved into deficit, as you might expect, the deficits are smaller on average that maybe the historical book and that speaks to a healthy relationship and then the opportunity along with good medical cost management and great execution we'd to be able to recover that going forward.

John Rex - Bear Stearns

In terms of your experience-rated earning forecast for rate, do you exclusively build in an assumption of deficit recovery of some amount and if you do, can you tell us kind of what it was and what it is now?

Mike Bell

John its Mike. Yes we do exclusively build that in to our overall earnings expectations for experience-rated. I rather not quantify that the specific amount, but its fair to say that's build into the earning expectations that I described in my prepared comments.

John Rex - Bear Stearns

Would that be a majority of the takedown in your expectations for earnings for experience-rated this year that you describe?

Mike Bell

It's fair to say that it would be a slight majority of the increase in earnings for Q2 through Q4 versus first quarter.

John Rex - Bear Stearns

Okay, thank you.

Operator

Mr. Rex, thank you for your question. Next we'll hear from Charles Boorady at Citi.

Stacy Groll - Citi

Hi, it's Stacy on for Charles. I was just wondering what your capacity is to buyback that stock this year and also what your free cash flow is at the parent after the Great-West acquisition.

Mike Bell

Sure Stacy, its Mike. In terms of our share repurchase capacity, what I would suggest that you do is think back to the go forward that I gave in the prepared remarks. So at the end of first quarter, we ended with parent company cash and short term investments to be a little more precise, $1.63 billion. You can assume that we paid approximately $1.5 billion for Great-West on April 1st, and then if you add to that subsidiary dividends for the last three quarters of the year of approximately $380 million, you would conclude that if we did no repurchases and no acquisition and no additional debt issuance then we would end the year with approximately $500 million of cash at the parent level.

Now, you can compare to our long term target of $250 million. It concludes that we had the capacity again with no further debt issuance at this point to do approximately $250 million of either share repurchase or acquisitions beginning in second quarter.

Stacy Groll - Citi

Okay, can you also breakdown the components of your medical cost trends?

David Cordani

Marcia.

Marcia Dall

As Mike had said our overall medical trend is expected to be 6.5% to 7.5% consistent with our previous guidance. The components of the trends are also consistent with our prior guidance. The in-patient, out-patient and the high single-digits, the pressure on the middle, mid to single digits and finally let's say in the high to single digits.

Stacy Groll - Citi

All right, great, thank you.

Operator

Thank you, Stacy. Next, we'll hear from Christine Arnolds at Morgan Stanley

Christine Arnolds - Morgan Stanley

Good Morning, I have a couple of questions. Great-West ran about $44 million to $48 million in net income each quarter last year and then we have $13 million. We're going to exclude that because they had investment income that you're not taking. So that leaves us with net $31 million per quarter in net income times three suggest that you should have $93 million in contribution for Great-West. Why are you looking for 40 to 50?

Mike Bell

Sure, Christine it is Mike, good morning.

Christine Arnolds - Morgan Stanley

Good morning.

Mike Bell

First in terms of pro forming the Great-West results to our investment income. What I would suggest you do is look at the full year 2007, which was approximately $172 million of after-tax earnings on the book-of-business that we acquired. If we take down the net investment income by approximately $22 million, which takes in to account the lower interest rates and also the lower amount of capital that we have invested in this business versus what Great-West did, you get approximately $150 million as a starting point. So I think a little higher than what you were describing.

So call it $37.5 million a quarter to sound precise. If you look at that and compare it to what we are expecting for Q2 through Q4, you could take that and multiply it by approximately three. So take call it a $110 million to $115 million. So roughly flat with their run rate in 2007 and that's the combination of better loss ratio, revenue leverage offset by a lower membership that we are projecting here for the balance of the year.

If you subtract of that, approximately $20 million of after-tax cost to amortize the intangibles, which I need to emphasize here. We are still working through the purchase accountings. So that's our current best estimate that, you know that's the number there has been a little bit of flux. And then importantly reduce it further by $45 million to $50 million after-tax from integration or transitional expenses. You would get to the $40 million to $50 million of incremental earnings that we expect before the financing, which is picked up in corporate. So that wouldn’t be picked up in HealthCare. Is that helpful?

Christine Arnolds - Morgan Stanley

Yeah it is, but what we are seeing is that the integration costs are not going to be offset by synergies. That's a net reduction?

Mike Bell

I think it is fair to say that in 2008 there are some modest synergies built in to the 110 to 115 that I just described, but it is fair to say that there are not sufficient synergies to offset the -- what will be ultimately non-recurring integration expenses in 2008.

Christine Arnolds - Morgan Stanley

I have two experience-rated follow-ups here. Could you help me understand how much you expect to be able to improve your MLR just with rate actions excluding deficit recoveries and everything else? Why did the voluntary loss ratio increase by about 10 percentage points?

Mike Bell

Again first on experience-rated, that we don't typically project things on a loss ratio basis because there are other components to earnings besides just the loss ratio. But it's fair to say that just like we saw last year, we saw an improvement last year from first quarter 2007 to the full year 2007 of approximately 190 basis points.

So lets call it 250 basis points lower Q2 through Q4 versus first quarter. When we'd expect to see a similar kind of pattern here in 2008, again I'm not trying to be precise with the loss ratio because I think there are other more important methods. But ballpark that kind of improvement over the balance of the year and again that's the combination of the low pricing actions that we've expect to get in the second half of the year, which will be higher than what we got in first quarter.

In addition, we expect the additional deficit recoveries and we'd also get some contribution in terms of earnings from higher revenue. This includes the benefit of higher net investment income or just with the higher revenue we have higher asset balances. In the case of the voluntary business overall we feel good about the voluntary growth that we saw in first quarter and in fact on an all in basis voluntary earnings were up relative to our expectations and relative to 2007. So while your comment is fair that the loss ratio was good about the first quarter results. David you want to add?

David Cordani

Christine, good morning. Just one item I would then we could follow-up with you with the detail of the loss ratio applying. But, as that voluntary business grows overtime, one of the things we found very interesting in that segment. Is the opportunity to bring new products to market so there are new products in addition to what the industry knows. We'll call them just traditional kind of weekly paid very lean benefits. And as those new products, which we're starting to see some sales, I hope that the voluntary portfolio comes through they'll have higher premium, higher medical cost the relationship to the premium. It's a very nice contribution as Mike noted to the bottom line as well.

Christine Arnold - Morgan Stanley

Okay. So, it will impact the mix. Okay, thank you.

David Cordani

Yes.

Operator

Thank you, Ms. Arnold. Scott Fidel at Deutsche Bank, your line is open.

Scott Fidel - Deutsche Bank

Thanks. First question is to walk through the expected impact relative to your initial guidance around investment income and help quantify that. Then spike it down into the three individual primary business segments HealthCare, Group Disability and International?

Mike Bell

Sure Scott, its Mike. First for HealthCare, we are now expecting an impact for HealthCare of $5 million to $10 million lower in net investment income for the full year 2008 versus our original expectations. So $5 million to $10 million after-tax lower in HealthCare. The only other business where it has a material impact on our earnings expectation is group insurance and it's reasonably manageable, so less than $5 million after-tax.

Scott Fidel - Deutsche Bank

Okay. Then a follow-up question just around part D and how claims are coming in relative to expectations in the first quarter, maybe sort of highlight relative to some competitor comments about higher than expected costs there. Then just a separate follow up if you can give us an early glimpse into how the sales pipeline in national accounts is looking at this point for '08 relative to '07.

David Cordani

Good morning, Scott its David. I will take the two comments. First on part D, your question is whets the pattern of claims costs looks like. As you know relative to some of the other competitors, our part D portfolio is meaningfully smaller, although I might add we are very pleased with the growth we saw from 2007 to 2008. As it relates to claims if you look at the very immature loss ratios, our loss ratio in the first quarter of 2008 is meaningfully better than 2007 and now 2007 pattern nicely then came to where we thought it would be. But 2008 starts in the low to mid-90s as opposed to an equivalent quarter of 2007 started just over 100%, before you start factoring in the risk [orders] from the government.

So the performance that we are seeing in Q1 is in line with our expectations. I mean the pattern as we see that right now we'd expect to see for the full year is in line with our expectations without MLR would improve throughout the course of the year coming into the 83% range or so. This question is specific to the national account pipeline, as we think about the national account pipeline for 2009. Currently the 2009 pipeline is in line with our '07 pipeline and bear with me for a second, which was a very strong and very attractive pipeline. In 2008, the pipeline spiked up even further and as we peel that apart. That was specific to a meaningful amount of business from one competitor in one geography specifically on the west coast. Most of that business which did not move. So I strip that unique circumstance out since it was tied to some integration disruption.

Current look at our '09 pipeline is consistent with ’07 and consistent with kind of a same store basis 2008 pipeline. The only additional new ones I would give you there is, we tend to look at our opportunities in terms of either new relationships. I'm speaking about entering into new relationships with employers versus kind of expanding growth opportunities with existing relationships. What’s interesting about the 2009 pipeline is it is a bit higher on the new relationship, which we view as attractive as well.

As you might recall over the past couple of years we have talked about really aggressively working to expand relationships where we have been successful and now we need to continue to do that, but introduce new relationships into the company.

Scott Fidel - Deutsche Bank

That's helpful and then so that helps with the new business sales visibility and then David maybe if you could help us think about sort of the other piece and maybe in terms of improved attrition, maybe as a percentage of the book or a percentage of particular accounts. How that's looking now relative to the past couple of years, so we can think about sort of a net number when combining new sales and then retention?

David Cordani

Sure and again I am going to speak for national accounts, because I think your question goes to 2009 and it's very early to speak to the regional segment there. By way a backdrop we are consistent and historically told you that, we feel as though the national account portfolio when its run healthy, runs in the low to mid-90's, 92% to 94% retention. So it’s this case level member weighted retention rates. As you recall a year ago we saw even a higher performance level relative to that, for 2008 we expect to see in the 92% to 94% and as we said today for 2009 we expect it to be in the same range. So in conclusion, consistent and healthy case level retention in a very competitive marketplace.

I will relate to the second part of your question regarding member disenrollment as we pattern from the second half of 2007 through ’08 and are really looking at 2009 based on prior patterns. You'll see we see member disenrollment to that with a little bit more pressure on it that we could attribute to the economy and you could point it to. You can even balance this in sectors specifically.

So the recap national accounts, the pipeline right now, well it’s still early relative to the close ratio for 2009 is healthy, consistent with the last couple of years. I am stripping out that unique point I made for 2008, retention ratio incase of retention inline with historical patterns in that 92% to 94% range and potentially a little softer disenrollment number, but consistent with what we are seeing right now.

Scott Fidel - Deutsche Bank

Got it, thank you.

Operator

Thank you Mr. Fidel. Next we'll hear from Justin Lake at UBS.

Justin Lake - UBS

Thanks, good morning. Couple questions first on Great-West. Just as far as the book for 2008, can you tell us how much is already renewed meaning as kind of behind us as far as attrition? And also give us an early read on what you are seeing in regards to providers if you try to move Great-West members over to your contracts?

Mike Bell

Justin I will start on the membership renewal piece, approximately a shade over 60% of the book at this point has renewed for 2008. So, it’s just a shade higher than 35%, is the remaining portion of book to renew over the balance of the year. David, do you want to talk about the providers?

David Cordani

Sure, good morning Justin. First of all, to the providers the way you asked your question, I just want to tilt it a little bit. We've been very consistent, our approach here is to improve total medical cost and the approach to improve total medical cost is three fundamental components. One is obviously the payment relationship with the hospital or the physician in terms of unit cost. Two, is the medical management programs that effect both utilization in mix and severity and three is the provider service model. So that’s the large body of work that's underway as we sit here today. We feel as though its very important to approach the medical cost improvement as a total medical cost improvement path.

To-date, we've been pleased with the interactions with the physician and hospital community, in general. Clearly, there is some cases where there is a little bit of concentration where there is an ongoing dialogue and negotiations, but we're building off an environment were both CIGNA and Great-West had a reputation for servicing the physician and hospital community pretty well such that as we approach the dialogue for the two entities coming together, I mean its being approached off a very good service proposition as we're looking to improve the results. So lot of work to do here in 2008, but the early indicators are positive in line with our expectations.

Justin Lake - UBS

Okay. Mike, can you just remind us for 2009, 2010, if you start off with that $40 million to $50 million base line, I guess, really $25 million to $35 million baseline extra financing. How that steps up in 2009, 2010 as far as cost, and also on the membership side are these projections given that only two-thirds of the book has renewed, and you're seeing about 100,000 members of attrition. Should we expect to see or say I guess, to say, have you already embedded another 50,000 members of attrition for the rest of the year?

Mike Bell

We are expecting at least, we've embedded in the financial model that we talked about. Approximately, another 50,000 it's actually a shade higher than that it’s approximately 5% of additional membership attrition over the remainder of 2008. So, we expect to end 2008 approximately in terms of full service members at about 1.35 million full service members.

In terms of the expectations for 2009, it's a little early to try to be specific in terms of membership outlook. Again there are a lot of moving parts and obviously as we get closer to 2009, we will update that. Certainly our goal at this point is to stabilize the membership in 2009 and then begin growing it in the second half of the year and certainly begin growing it into 2010.

In terms of how that relates to the earnings expectations, of course it's important to note that there are a number of moving parts here that I view is open switches. As I mentioned earlier to Christine's question, the purchase accounting is something that we are still working through. Right now we'd obviously expect to have that finalized in second quarter. But that is an estimate that's potentially moving around, the integration expenses.

So the expenses that we have related to the transition period, there is some upward pressure there and again we are still working through plans there. On the flip side the book of business coming into the year is actually stronger than what we had modeled and so that's obviously an area of upside the opportunity relative to our earlier expectations. And then very importantly we are still working through our strategies around pricing for 2009 on the operating expense and specialty synergies. So the point here is there are lot of moving parts.

Now back to your question, what are our expectations for 2009 and 2010. As we talked about on prior calls, we expect that before the financing cost, we expect to be in the range of 170 million to 180 million of after tax earnings in 2009. Again subject to the caveats I gave you earlier. What that would means in terms of our updated estimates. We would expect that the underlying earnings would be in ballpark of call a $215 million to $230 million of after-tax earnings and that reflects the better loss ratio capturing the benefit of the access to the stronger medical cost position, as well as some very modest expense synergies.

Again membership is really the main wild card there, but that 215 to 230 is a reasonable starting point. At this point we are modeling $25 million of after-tax cost from the amortization of the intangibles and we're modeling at this point for 2009 approximately [$20 billion to $25 billion] after-tax of integration expenses. So that would get you to approximately $170 million to $180 million before financing.

And the 170 to 180, the comparable number then for 2010 let say it would be was 200 to 250 on a net basis, so add 25 to that, so call that 225 to 275 on a gross basis before financing for 2010. That’s still our expectation again subject to the moving parts that I described earlier.

Justin Lake - UBS

Great, appreciate the update thanks.

Operator

Thank you, Mr. Lake. (Operator Instructions) Next we will hear from Bill Georges at JPMorgan.

Bill Georges - JPMorgan

Thanks good morning. I think last quarter you had talked about persistency in the 83% range and correct me if I am wrong about that. But I think that you said you were targeting 86% to 88% persistency in that book, so I am wondering do you think its reasonable to assume that you are going to get that by back half of the year and then could you specifically address within the deficit accounts, what is persistency look like there and how has that changed over the last couple of quarters?

Mike Bell

Bill. It's Mike. First, in terms of persistency, you're absolutely right, we had persistency in first quarter for the experience-rated book of approximately 83%. That is consistent with the full-year persistency that we had in the book in 2007. In terms of our expectation for the remainder of the year, on the persistency, we would expect a very modest decline.

So, I would expect, at this point, that we'll end the year with full-year persistency in the year of book of approximately 82%. In terms of the pieces, deficit versus surplus, I don't have the specific numbers committed to memory. I think it's fair to say that the persistency rate on the deficit cases is modestly lower than our expectation, and modestly lower than what it is a year ago.

Again, at this point, while we're still working to optimize the balance of membership and earnings over the course of the year, I think it's fair to say that we do intend to increase our intensity on these renewals, and [air] on the side of higher margins versus what we did in first quarter.

Bill Georges - JPMorgan

Okay. I think that answered that question already. No, I'm sorry. You talked about having maybe 30% of this book in deficit as a target. And again, correct me if I'm wrong on that, but I'm just wondering, has there been any change in the percentage of the experience-rated book that is in deficit?

Mike Bell

That has, Bill. It increased. Our longer term target is 30%. It was 32% at year end '07, and it's now increased to 35%.

Bill Georges - JPMorgan

Okay. Great. Thanks very much.

Operator

Thank you, Mr. Georges. Next, we'll hear from Douglas Simpson at Merrill Lynch.

Douglas Simpson - Merrill Lynch

Hi, Good morning, everyone. Just a quick question on the -- I understand the $0.46 impact from the mark on the GMIB piece of that business. What was the additional $0.23 loss from that business in the quarter? That was $0.23. Was that a normal event or was it driven in some respects by the change in accounting? The $0.23 loss from GMIB was a lot bigger than we've historically seen but now it's excluded from results.

Mike Bell

Sure, Doug. First, you're actually right in terms of the component parts. In addition to the one-time impact of implementing the 157 rolls on 1108, there is a $0.23 net income hit in first quarter of 2008. That was driven by a combination of the weak stock market and lower interest rates, which get exacerbated by the new 157 Standards.

As we talked about before we view the 157 Standard as being a very conservative accounting standard. It forces us to value these liabilities on an exit pricing standard. We have to hypothetically put ourselves in the shoes of a buyer of this business and try to say if there was a buyers out there for this book how would they likely evaluate. That's a much more conservative standard than what we have used historically, which has been to use historical averages as opposed to this hypothetical exit pricing standard. And that's a $0.23 in the quarter.

I think it's important to remember here that this is not the basis on which we're going to capitalize this business. So this is not the basis that determines how much capital that we have to have in CG Life. And by virtue of the fact that there is no change in our subsidiary dividend outlook for the remainder of the year, you can conclude that we do not believe this will have a material economic impact, of course, in 2008.

Just stance by the way, if in fact our estimates turned out to be right and this reverses overtime and becomes gains in future quarters, which we think over a long period of time it, in fact, will. That won't help us either. So the point is that it really doesn't drive the economics of CG Life in particular.

David Cordani

And it's exactly, Doug, that volatility that has motivated us to split it out and not included in the adjusted income from operations.

Douglas Simpson - Merrill Lynch

Okay. I we look back 2005 to 2008, the HealthCare segment profit has grown roughly -- it includes Great-West here on track for a CAGR of about 2% annually over that four-year period. Just as you look at over the next four years, do you think that accelerates? Because in '05 to '08 you had a lot of buyback activity and you had a relatively stable net income or Op inline in the HealthCare segment.

And as we look forward, I think you've intimated that you'll buyback stock probably not as aggressively. Do you see the HealthCare segment growth accelerating over the next three to four years?

Mike Bell

Doug, well, certainly we expect the HealthCare growth to accelerate over the next three to four years. And that would be the case even without the Great-West acquisition. We obviously think the Great-West acquisition adds to that growth rate. As we talked about at the Investor Day, we continue to expect that HealthCare revenue growth for the next several years will be in the high single-digit kind of range. And when we add to that expected margin improvement, we expect over a three to five-year period operating income growth for HealthCare of approximately 10%.

And then if you add to that our long-term share repurchase, yes, it's a pace that in 2008, We don't project repurchase, but based on our capacity, we would expect that the share repurchase in 2008 will be lower than the long-term expectation because in fact, we're rebuilding the capital in CG Life to support the Great-West business.

On a going forward basis whether it be share repurchase or additional acquisitions that makes sense economically and strategically, we would expect to get another, call it, three to five points of EPS growth from that combination. So I think it's not a good idea to try to look at your 2005 to 2008 piece and try to extrapolate that that's our expectation going forward.

Operator

Thank you, Mr. Simpson. Next, we'll hear from Carl McDonald at Oppenheimer.

Carl McDonald - Oppenheimer

Thank you I wanted to focus first on operating expenses in the HealthCare segment were higher than I expected. It looks like the core went up about 6%, clearly. The lower involvement taking commercial risk and facts. Is there are anything else in that core number that inflated in the first quarter?

Mike Bell

Sure, Carl. It's Mike. The main driver of our expense increase in first quarter in HealthCare, in other operating expense item was higher technology expenses. As we've talked about on prior calls, we do see this need for higher technology expenses in 2008 than what we had in 2007 in particular.

And it really is the strength in our market pacing, our capabilities particularly in this environment where more than ever service at the consumer level is increasingly important. And what that means is making sure that we're making the technology investments to support our capabilities being able to meet those needs over the long-term.

Carl McDonald - Oppenheimer

If you can quantify that it would be helpful. And just the follow-up was on the Great-West enrollment, anyway you can size for us what the loss. What was the Great-West enrollment last year relative to the expectations this year? I am just trying to get a sense for the enrollment that you're seeing in that book is sort of normal attrition or is it in someway related to the acquisition?

Mike Bell

First, I'm sorry. When you said the quantification, the quantification of the IT piece in particular?

Carl McDonald - Oppenheimer

Yeah, exactly. Just in sort of the incremental spending that you're doing this year?

Mike Bell

Okay. Well, again, there are a number of moving parts here obviously. But if you look at first quarter of 2008 versus fourth quarter of 2007, so if you look at a sequential pattern, you would see that IT expenses in HealthCare were up $15 million on a sequential basis. So, a little more than half of the sequential increase in the other operating expense line item that you're referencing in the supplement.

In the case of Great-West, I must admit, Carl, I don't have the '07 membership result for Great-West committed to memory. We didn't own the business then, and so I don't have it committed to memory. I think it's fair to say that we expect in 2008, approximately, what we're modeling right now is approximately a 10% membership decline for the full-year. And that would be 5% from here through the end of the year.

And I think it's fair to say that there is some pressure on that number. Not pressure on that number, I think the number is a reasonable estimate. But the point is, that number does reflect pressure on the book of business out in the marketplace. It's pretty normal in an acquisition like this. David, do you want to add to this?

David Cordani

Good morning, Carl. As you look at the 2008 results, as Mike said there is approximate 10% pressure on the membership, which is generally speaking inline with our expectations. As you peel it apart, retention levels generally speaking are strong. This is the important part of the qualities of book. It made reference. And that's a good reinforcement of the values they're supplying to the employers, the members and they producer partners.

What we're seeing is lowered new business sales as they carried into 2008. I think, some of that is market condition, some of that is, just Mike make reference to, just the general uncertainty of what transpires with a pending acquisition in transition. By way of a little bit of market color, having spent a lot of time with Great-West, very strong sales leadership around the country as well as a lot of their producers.

There is a lot of excitement and a lot of support for the two companies coming together because of our understanding of their product or our shared view of the value of their product (inaudible) stop loss . Also, our ability to improve the total medical cost and our ability to expand choice relative to Specialty own products as well as health improvement products.

So while our projection was the minus 10% in it for 2008, the marketplace is ranking very positively to the two companies coming together.

Carl McDonald - Oppenheimer

Great. Thank you

Operator

Thank you for your question, Mr. MacDonald. Next, we'll hear from Joshua Raskin at Lehman Brothers.

Joshua Raskin - Lehman Brothers

I just want to understand the deficit recovery actions that you take. My first question is how exactly do you go back to the accounts and try to get that? And, second if there is an embedded assumption that lapsed accounts are going to contribute to those recoveries?

David Cordani

Josh, good morning. It's David. So specific to your question on deficit recoveries, there is a normal course of business, and then I'll try to tease out a little bit of what we're intensifying. There is really two fundamental ways to go about recovering deficit as the book is managed overtime. One is just the ongoing management of prudent underwriting and rate execution in medical cost management. I'll just play out an example. If the account has the equivalent of 1% of medical cost in deficit upon renewal, if you see rate increase that's 1% greater than the underlying medical trend and performance is in accordance with that, you then work your way into recovery of the deficit.

The second fundamental way to recover the deficit is with targeted medical cost actions to the extent there is something unique happening in an account, if they have a more kind of acute consumption of care in a specific care category and a specific geography and a specific facility, et cetera. So that's kind of fundamental management of the book, day-in, day-out, underwriting execution and medical cost management.

Beyond that, especially if you have a longer term relationship with customers, there is the opportunity to facilitate deficit recoveries even inter-year. As an employer understands their experience and as an employer is committed to a longer term relationship in improving the health of their employees, in some cases employers will formally commit to funding their deficit overtime. So that kind of an ongoing negotiations happens between our sales leaders and our underwriting leaders with the accounts as the transparency of their experience is shared with them. We discuss why it's in deficit.

In some cases, even intra-contract year, the employer will make a commitment, a binding commitment to fund their deficit and that's an ongoing negotiation. So, the first category is fundamental underwriting and medical cost management. The second category is really working with the employer, employer by employer to secure commitments to fund that deficit either that year or the next year overtime for a binding relationship.

Joshua Raskin - Lehman Brothers

And in your guidance, and it sounds like none of the improvement in the experience-rated book the remaining three quarters of the year includes recoveries from lapsed accounts, is that right?

David Cordani

Josh, I think that's a fair comment.

Joshua Raskin - Lehman Brothers

Okay. And what's the dollar value of the deficit, I guess, just in terms of the size versus maybe some historical perspective?

David Cordani

Josh, it's a fair amount lower than what it was during the challenging period back in 2003-2004. I think it is fair to say that it is higher than what it was a year ago by approximately 12%. And that reflects the fact that 35% of the cases are now in deficit versus a year ago it was closer than the 30.

Joshua Raskin - Lehman Brothers

What's the dollar amount? I am just trying to figure out how much of that is contributing to the sort of degradation of the HealthCare earnings.

Mike Bell

Sure. Maybe the way to thing about it, Josh, is that at this point in time, at the end of first quarter, for those accounts that are active, we have approximately $132 million of deficits that, in fact, we have charged to earnings in the past that represents opportunity to recover in the future to the extent that obviously all of those cases persist, that would be the potential upside. David, do you want to add?

David Cordani

Josh, I'd just had one additional point. As you think about the number that Mike quoted, and because it's lower than it had been in the past, therefore you could also think about the average deficit per case or the average deficit per member within the case is lower. That's a very important point, because as Mike probably pointed out, it represents opportunity for us to recover in earnings improvement overtime. In an area we've been very consistent a key is to ensure that when a case does go into. This is a normal part of running the portfolio. It doesn't go into deficit for too long of a period of time or too severe of a deficit relative to the size of the case

Ed Hanway

And I think the other thing to remember as well is on a per member basis, the margins that we generate out of experience-rated are extremely strong, and in fact, some of our best margins. So as Mike pointed out, the number in aggregate is lower than it's been historically, and that's an opportunity for us to, if we manage it effectively, improve those margins even further.

Operator

Mr. Raskin, thank you for your question. Next, we'll hear from Greg Nersessian at Credit Suisse.

Gregory Nersessian - Credit Suisse

Hi, thanks. Good morning. Just a quick question on the membership drop in the guaranteed cost, I was wondering if you could just sort of break out the pressures there in terms of a couple of different sources, in terms of potentially losing some of that enrollment to other fully insured carriers, losing some fully insured business that's going to ASO that was in other carrier or switching internally, and then just breaking out the [end group] attrition.

David Cordani

Greg, it's David. First, a macro in terms of just relative to our expectations, the result we're seeing versus our expectation is predominantly driven by lowering new business sales. That's headline number one in terms of what we would have expected three, four months ago.

As it relates to some of the color that you're describing, as you think about the guaranteed cost product and you think about what's transpiring in the market conditions, we're seeing more movement of ASO and alternative funding mechanisms, the like of experience-rated coming down in average case size. So the guaranteed cost segment is predominantly hunting in the small employer segment and the lower end of middle market segment.

So as we look at the mix of our business, our retention rate was a tad lower than we would have liked it to been on 1/1/2008. We don't see that business going in pattern to any one competitor or competitor type. But generally speaking, you see that business moving to other guaranteed cost alternatives in a very competitive environment.

Operator

Thank you, Mr. Nersessian. Our last question comes from Peter Costa at FTN Midwest Securities.

Peter Costa - FTN Midwest Securities

Could you contrast for me what's going in the experience-rated book versus what's going on in the other guaranteed cost book? In the other guaranteed cost book, you've got membership down, but your MLR only deteriorated about 50 bps on experience-rated book. Membership is more flat but you had a 220 bps profit in MLR. Can you describe why those two different things have happened? These books have gotten more similar overtime, and I would think that is a function of what your actions are. Are there other businesses that you're selling to the experience-rated that makes that business worth keeping more?

Mike Bell

Peter, its Mike. First of all, in terms of the difference in membership between guaranteed cost and experience-rated, as David approximately called out, a big difference in the two books of business is the higher new business sales in experience-rated versus the new business sales that we've had in the guaranteed cost books. So, that's a primary driver of the difference in the membership fees.

In terms of your comment around the loss ratio, I think that's really mixing apples and oranges. First, the loss ratio is a very crude way to look at the experience-rated book. We think it's much more appropriate, for example, to include the specialty relationships and really look at the all-in profitability of those customers.

And in terms of our new business profitability, I think it's fair to say that new business tends to be lower margin than the new book, all things equal. I mean, for example, by definition, there is no deficit recovery on new business despite the nature of the product. But we do believe that while the new business is a lower margin book versus the renewing in experience-rated, all-in, this is contributing to earnings for 2008, and maybe, even more importantly, longer term we believe the economics are very attractive, as Ed reinforced. This is a book where we have very strong earnings on a permanent basis.

David, you want to add?

David Cordani

Yeah, Peter. I will add just two points. One is as we think of what transpired in the books by way of the volume versus our expectations for the first quarter, as I noted previously, the guaranteed cost, that somewhat lower membership in guaranteed cost was specifically driven by less sales. The contrast that was the point that Mike teased out in the experience-rated our sales were not lower.

Our retention drove about half of the lower membership than we saw and then convenience. And so, convergence of experience-rated business to ASO within the company drove the other half in terms of softness. To reinforce Mike's point, there were different levers. And then, finally, as we've always pointed out, it's important to note that the experience-rated portfolio is very highly penetrated with specialty products from stop loss, through behavioral, through pharmacy, disease management, dental programs, et cetera.

Operator

Mr. Costa, thank you for your question. Ladies and gentlemen, this concludes CIGNA's first 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 passcode for the replay is 4477714.

Thank you for participating. We will now disconnect.

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Source: CIGNA Corp. Q1 2008 Earnings Call Transcript
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