- Through the balance of the year the company expects subsidiary dividends to be approximately $200 to $250 million. As a result full year estimate for subsidiary dividends is now $500 to $550 million. The upper end of this range is higher than previous estimate. At this point, excluding any additional M&A activity or any additional share repurchase the company expects other sources and uses of parent company cash in the balance of the year and net to approximately zero.
- Over the balance of the year the company expects to continue to increase parent company cash balance at a modest pace, with the expectation that it would be at long term target of $250 million by the end of 2009.
- The company currently expects consolidated adjusted income from operations of $1.135 to $1.185 billion. While the company continues to expect earnings improvement in the second half of the year this updated full year range is lower than the estimates provided in May.
- The company expects medical membership excluding Great-West to end the year approximately 1% higher than year end 2007. This outlook is lower than previous estimate and takes into account current assessment of the weaker economic outlook and of the competitive pricing environment. In addition, the company currently expects Great-West membership to decrease by approximately 100,000 over the balance of the year.
- The company continues to expect medical cost trend for total book of business to be in the range of 6.5% to 7.5% for the full year. The company expects guaranteed cost pricing yields to exceed trend in the balance of the year. The company estimates the full year guaranteed cost MLR excluding the voluntary business will be approximately 83% to 83.5%. For the full year the company expects guaranteed cost pricing yields to be in the range of 8% to 8.5% and expects medical trend for this book to be approximately 7% to 7.5%.
- Estimate for full year 2008 Health Care earnings is a range of $700 to $730 million. This range includes approximately $50 million of earnings contribution from the Great-West book. Updated range is approximately $40 million lower than the full year range the company had communicated in May, mainly reflecting lower expectations to guaranteed cost and experience rated businesses.
- Guaranteed cost outlook reflects a higher estimated MLR and lower membership expectations. The updated outlook for experience rated earnings reflects lower full year margin expectations as a result of the lower than expected second quarter results.
The company expects Health Care earnings to increase in the second half of the year relative to the first half as it executes additional pricing and on driving actions. The company expects to generate increased earnings from the Great-West book. Updated outlook reflects approximately a $60 to $90 million after tax earnings increase in the second half of the year compared to the first half.
- The company expects Great-West to contribute approximately $50 million of earnings for the full year. This implies second half earnings of approximately $38 million compared to $12 million in the first half. These amounts exclude financing costs of approximately $5 million per quarter which are included in the corporate segment.
- The company estimates that guaranteed cost earnings will be approximately $30 million higher in the second half of the year relative to the first half. This increase is due to an improvement in the MLR as a result of strong renewal pricing and underwriting actions partly offset by lower membership. Specifically the company expects the guaranteed cost MLR to be approximately 82% for the second half of the year.
- The company estimates that ASO earnings will essentially be flat in the second half of the year as increased specialty earnings are approximately offset by higher operating expenses. The company expects experienced rated earnings to be $5 to $10 million higher in the second half of the year excluding the first quarter charge of $7 million after tax related to the non-medical account.
- The company expects Medicare Part D to move from a break even position for six months to positive earnings of $10 million for the full year. With respect to operating expenses the company expects to increase investments in information technology capabilities in the second half of the year.
- The company expects increased investments in the second half of the year to support segment expansions particularly the individual and small group segments. At the same time the company intends to identify additional expense reductions in other areas which it expects to benefit second half results and have a larger favorable impact on 2009. All in, current estimate is that operating expenses will be higher in the second half of the year compared to the first. In total the company estimates that Health Care earnings will improve in the second half of the year yielding full year earnings at a range of $700 to $730 million.
- The company expects remaining operations to contribute approximately $435 to $455 million of earnings for the full year. The company expects group disability and life and International businesses to continue to grow revenue while maintaining strong margins. Specifically, the company expects mid-single digit earnings growth in Group and double digit earnings growth in International for the full year 2008.
- Earnings for the balance of operations which include run-off businesses and the parent are expected to be lower in the second half of the year than in the first, mainly reflecting higher debt financing costs and the impact of lower cash balances on parent company investment income.
- Consolidated adjusted income from operations will be in a range of $1.135 to $1.185 billion and that EPS will be in a range of $4.05 to $4.25 a share. Estimated range of EPS is equal to previous range. This reflects the benefit of stock repurchase completed to date which the company expects to offset lower Health Care earnings.
Fiscal 2009 Outlook
- The company expects to achieve attractive earnings growth despite pressure on several fronts. The company expects that the economy will remain weak and that the pricing environment will continue to be competitive. The company anticipates upward pressure on operating expenses as it continues to invest more in enhancing information technology capabilities.
- The company expects Great-West 2009 earnings to be in a range of $150 to $175 million after tax excluding financing costs. This would represent meaningful earnings growth relative to the expect $50 million contribution in 2008. This updated range for 2009 is lower than May estimates primarily reflecting higher IT related integration expenses and greater uncertainty around market pricing conditions previously forecast.
- The company expects to improve experience related margins in 2009 as it continues to execute stronger pricing and underwriting actions. In addition, the company expects the operating expense reduction opportunities that it identifies in the balance of this year to have a greater impact in 2009.
Key questions from the second quarter earnings call conducted by CIGNA Corporation on August 1, 2008.
Matthew Borsch (Goldman Sachs): Could you talk about the rate increases into this year and into the second quarter?
Mike Bell: Regarding the guaranteed cost book I would not characterize our renewal rate increase thus far in 2008 as inadequate. In fact, to put some numbers around it our pricing yields on a year to date basis for 2008 in the guaranteed cost book are 7.4% that compares to medical cost trend for the guaranteed cost book in the first half of the year of 7.1%. Admittedly we did not expand margins as much as we had targeted mainly reflecting the higher level of catastrophes in terms of claims as well as the higher medical costs from the flu. The main point here is that we will get additional leverage in the second half of the year through even stronger pricing and underwriting actions we are expecting full year pricing yields to be 8% to 8.5% which includes pricing increases net pricing yields for the second half of 9% to 10% which is higher than first half and even higher than medical costs. I would not characterize it as inadequate rate increases but I would characterize it as we expect better pricing and underwriting actions in the second half of the year which will improve the MLR.
Matthew Borsch (Goldman Sachs): What do you expect from the guaranteed cost business in terms of enrollment in light of those rate increases that you are putting through?
Mike Bell: We are down 11% on a year to date basis and we now expect full year membership to be down approximately 15% as compared to we were approximately at minus 10% at first quarter, an additional five points of membership loss.
Matthew Borsch (Goldman Sachs): What are you seeing in terms of the stop loss pricing?
Mike Bell: Our stop loss results continue to be strong. Our loss ratios have been stable over the last 18 months and significantly improved from the 2005, 2006 timeframe.
Matthew Borsch (Goldman Sachs): One of your competitors talked to a pricing cycle in that segment coming from of the non-managed care re-insurance companies. How do you think that may impact your ability to do some of the re-pricing that you are looking to do on the Great-West business?
Mike Bell: In terms of competitive pricing conditions it is fair to say it is a competitive market. There are a number of specialty players, people that we think of as the second tier in the industry working hard to compete on the basis of price to maintain their membership. It is a competitive market. As it relates to the Great-West earnings expansion the vast bulk of the earnings expansion in Great-West stems from delivering lower medical costs for this book as opposed to trying to somehow price higher than the medical cost trend, it is more lowering the medical costs to take advantage of our more favorable total medical cost position and what Great-West has had historically.
David Cordani: Relative to the CIGNA team we have had a good track record there we have a dedicated business unit and it has been a well run book of business for our shop loss for some time. The specific piece of Great-West is in the select segment, for employers 250 and below it is not like our go to market strategy now is offering it as stop loss is optional. It is an integrated sale so you are not coming up against the same specialty carve out vendors and we are increasing value by adding the additional medical costs on improvement and specialty solutions. We still feel good about that strategy in market conditions.
Joshua Raskin (Lehman Brothers): On Great-West membership, you reported 1.76 million and you were suggesting 1.4 million last quarter. The medical payables were up $50 million. How much of that was Great-West?
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