Mike Bell: It is early to give definitive guidance in terms of 2009 but what I can tell you is that for cases where we have had to do early quotes for insured cases for 2009 we have been assuming 50 basis points of higher medical cost trend in 2009 then what we have been seeing in 2008. That would suggest 7% to 8% in 2009 as opposed to the 6.5% to 7.5% we are experiencing thus far in 2008. I would point out on the reported basis Great-West is going to add some noise to the trend numbers we are still sorting out how they end up reporting medical cost trend. The numbers I just described are on a CIGNA basis ‘x’ Great-West but at least would be apples to apples with the 6.5% to 7.5%.
Scott Fidel (Deutsche Bank): Could you walk through the components of medical costs in second quarter and how that might have shifted from first quarter?
Marcia Dall: Our medical trend is expected to be 6.5% to 7.5% consistent with our prior guidance. When you look at the components they are essentially consistent with our prior guidance as well, with inpatient and outpatient in the high single digits and professional in the mid single digits. Related to pharmacy we are updating our trend expectations from the high single digits to the mid single digits reflecting improvements in the generic drug utilization and overall lower pharmacy utilization.
Mike Bell: In terms of 2009, at this point we have not seen any specific upward pressure on medical costs for 2009 for any of the categories. As an example, the hospital renewals that we have had to date have been in line with our targets which have been in line with our 2008 actuals.
Scott Fidel (Deutsche Bank): Is it fair to say then that the 50 bp assumed increase that would just be some more cushion around utilization for 2009?
Mike Bell: Essentially that is right.
Scott Fidel (Deutsche Bank): The focus on improving the medical costs in the stop loss business is a big part of the Cinergy target for Great-West. Can you update us on the progress so far around those initiatives and how those are tracking relative to your expectations?
David Cordani: Relative to the medical cost improvement, the nature of the product is such that you have an ASO relationship and stop loss relationship. As we are able to improve the total medical costs the beauty of it is a meaningful amount of that total medical cost accretes to the full year and ultimately to the employer individual relationship. A portion of that accretes to us through the stop loss relationship etc. The progress we are seeing thus far is that we are stepping through 2008 into 2009 as we sit here today we expect to be able to achieve our total medical costs improvement by the end of 2009 and we expect to have a meaningful amount of that total medical costs improvements secured by the first quarter 2009.
Justin Lake (UBS): On GW you mentioned that you expect to see another 100,000 members attrition for the end of the year. How many members are renewing over that period July 1 through the end of the year, what percentage of the book actually renews?
Mike Bell: Thirty percent of the book renews the second half of the year and 70% of the book renewed the first half of the year.
Justin Lake (UBS): Out of 500,000 members you are talking about 100,000 treading?
Mike Bell: It is fair to say. I would point out though that the mix of business is particularly important. We expect a higher rate of lapse in the membership that is part of these PPA arrangements which tend to be lower margin. At least year to date on an actual basis the persistency on the select segment which is the small group Great-West full service business has been higher than the overall average. That is where the bulk of the earnings power is for 2009. If you are building your own earnings model for 2009 I would not try to spread that proportionally.
Justin Lake (UBS): What has been the attrition in that select membership?
Mike Bell: The overall persistency has been in the mid 80’s for the select segment. In terms of percentages, the overall Great-West book is down 3.5% year to date. The select is a small decrease than that.
Justin Lake (UBS): On the experience rated book you mentioned that you are seeing higher deficit dollars in total. Can you run through some of the numbers you did on last quarter as far as the percentage of accounts in deficit and new business versus existing business and what those deficits were?
Mike Bell: This is a great product for us, remember this is our highest earning product per member and we believe there is no real win. In second quarter we did see an improvement in the medical loss ratio, it improved sequentially approximately 150 basis points. If you take 150 basis points times the $493 million of medical premiums you conclude that it improved $4 to $5 million after tax. In fairness, it did not improve as much as we expected it to and that is the reason for the lower full year outlook for experience rated. In terms of some of the specific numbers that you are interested in we did in fact experience an increase in deficit recoveries in second quarter versus first. We also saw an increase in the new and existing deficits. The $132 million that you recalled is right in terms of the end of first quarter that increased to $151 million at the end of second quarter. Remember that increase that $19 million was fully charged to earnings and in fact all $151 million has been charged over time fully to earnings. Remember, today’s deficit balances are tomorrow’s opportunity for deficit recovery which is potentially a good thing. It is fair to say now that for the full year 2008 we do expect additional deficit recoveries in the second half of the year in the pricing and underwriting actions that we are taking. We now expect deficits in the second half of the year on the first half of the case renewals to increase based on what we saw here in terms of second quarter actual. The net impact, the net, net impact now on second half the year earnings is that we expect second half of the year experience rated earnings to be $5 to $10 million after tax higher than the first half which is therefore modestly lower than the second quarter run rate.
The real interesting opportunity here of course is the first half of the year 2009 renewals. We have an opportunity for additional deficit recovery even greater than what we had expected before. We expect to be in a position to quantify those expectations at the end of October.
Justin Lake (UBS): What percentage of the accounts are in deficit and how does that compare to first quarter?
Mike Bell: We are currently at June 30, at 34% and that compares to 35% at the end of first quarter.
Justin Lake (UBS): You have always said this business runs at an attractive margin. How far away are you right now if you think about your 2008 results include the higher deficit what basis point difference are you from that target margin that you think you should historically run in this business ‘x’ the recoveries or increased deficit?
Mike Bell: A portion of our lower earnings expectation for 2008 a third of it is driven by lower revenue expectations. We now expect membership to be down 2% for the full year for experience rated than what we had versus previous growth that we originally expected in terms of earnings for 2008 we expected growth. We are now saying down 2% which means revenue we expect to be up 4% to 5% for the full year. In terms of your specific question in terms of margins we expect to end 2008 with margins on this book that ball park are in $30 to $40 million after tax lower than what we historically targeted, $30 to $40 million after tax on approximately $3 billion of overall revenue you could conclude a percentage point or a shade worse than that in terms of after tax margins full year 2008 versus what we have historically run longer term. We have got some real important decisions to make here in terms of 2009 how much of that do we try to recover and that when we will give additional quantification in the third quarter call.
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