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Good day, Ladies and gentleman. Thank you for standing by for Cigna Corporation's first quarter 2001 results review. At this time, all callers are in a listen only mode. We will conduct a question and answer session later during the conference. In review of procedures you will have to enter the queue to ask questions. If you should require assistance during the call, please press the * followed by the 0 on your touchtone telephone. If you disconnect from the conference please dial 1-888-221-7319 to be reconnected. As remainder ladies and gentleman this conference including the Q&A session is being recorded. We will begin by turning the conference over Mr. Ted Legerick. Please go ahead Mr. Legerick.
Ted Legerick
Good morning everyone and welcome to Cigna Corporations financial results review meeting for the first quarter of 2001. I am Ted Legerick Vice President of Investor Relations. With me this morning is H. Edward Hanway Cigna Chairman and CEO, and James G. Stewart Chief Financial officer. H. Edward Hanway will began the call by providing an overview of the quarter and will also make some observations about the Health Care business. Following H. Edward Hanway remarks James G. Stewart will discuss the consolidated and segment financial results for the quarter and cover our full year 2001 outlook. H. Edward Hanway will then make some closing remarks before we take the questions. As a courtesy to others in the call we will prefer that any detail questions on the specific supplement be deferred until after the meeting with my associates Thomas Gerald will address those individually. These questions may not be of the interest to lower the conference participants. Our remarks today as in general we will making some forward-looking comments regarding segment and company outlooks. We would again remind you that there are risk factors that could cause actual results to differ materially from our current expectations. Those risk factors are discussed in form 8K filed today with the Securities and Exchange Commission as well as in our most recent form 10Q and 10K filings. With that I will turn it over to H. Edward Hanway.
H. Edward Hanway
Thanks Ted Legerick and good morning everyone. As Ted Legerick suggested that I am going to provide you with some highlights of the first quarter and James G Stewart is going to walk through the financial results and discuss the outlook. I am going to come back and make some concluding remarks and then we will take your questions. Regarding the quarter there are several points to highlight. First, the consolidated operating earnings per share of the $1.76 was 12% increase over the prior year quarter. And with the good result that was in line with expectations both yours and ours. The results were driven by continued good growth in earnings from our employee Health Care lines and Disability Benefits segment and regarding our indemnity results we saw strong earnings growth in our medical book business. We began to see improvement in our disability book, which contributed to the earnings growth in the quarter. Our HMO results also shows earnings growth although somewhat less than expected and I am going to make a few comments on that in a minute. Earnings for retirement business were understandably below our expectations, the direct result of the stock market downturn. The quarterly earnings also reflected stronger than expected performance from our international business driven by earnings growth in both our Japanese life and our ongoing business operation. And the remaining pieces of the businesses were in line with expectations. That is the overview and now I would like to make some observations about our healthcare result.
Adjusting from medicare market expense, which reduced membership by about 120,000 members. Our total medical rise grew by about 3% over the last year, slightly above overall market growth rate. Although the growth in the quarter was less than expected and it is a disappointing results in view of the strong growth that we had over the last few years. Clearly, we had higher expectations to member growth than we deliver. Member growth is a result of two dynamics, sales of new accounts and retention of existing customers. First quarter sales issue were good and actually above last years results reenforcing the strength of our value proposition. However, our HMO account retention in the quarter was below our historically high levels. This is caused by some pricing related actions and by the loss of the few large self-funded account with no particular commenting. And in addition, I think we underestimated the degree of customer preference for a more open access among our existing broker business. Going forward we expect our sales momentum to remain strong fact that is concerned by mostly sales activity and commitments we have for the remainder of 2001. In regarding the retention we have reviewed our broke of existing accounts very carefully and expect our persistency rate to return to their normally high levels. On contrast to HMO growth our indemnity, PPO brokers continuing to deliver 6% growth, in line with the expectation. We are continuing to take market share and we expect this trend to continue. With the two years of 5-7% in overall medical membership growth, we currently expect total medical membership growth in the 3-4% range for the full year 2001 reflecting the dynamics that I just discussed.
I am going to related area in roaming gains for our specially healthcare offerings continued to be strong. Our behavioral care membership grew 12% in the last year and now total 13.1 million alive. And further more our dental broker business grew at a 4% rate versus last year and now covers 13.5 million members. Clearly, the continued strong growth of our medical PPO, dental and behavioral care businesses reflects ongoing success of our account penetration strategy. As we have discussed previously, we are constantly working to improve our value proposition and are making substantial investments in technology, e commerce, service improvement, including member internet, self-service which will significantly improve our capability at both the consumer and the employer level. Disinvestment in business process in infrastructure will support our next generation of products, which will include options features and further enhance our already strong growth in product offerings. We are very excited about this initiative, which we call transformation. In fact, we have already previewed our next generation product on this new platform and we are pleased if these do drastic response from both new and current customers. Now, let me comment on earnings for our full year HMO business, which as you know accounts only about 10% of our consolidated earnings. We are continuing to see outward pressure on medical cost here and based on first quarter results, we now expect medical cost trend to be in the 10-11% range. Our first quarter medical logic ratio for our full year HMO business was higher than expected, but the quarter over quarter increase is modified to look as James G. Stewart will elaborate last years first quarter benefited from some favorable items.
And similarly we are seeing good progress on the pricing side of our risk business. And now expect full year pricing to be in the 10-11% range. Overall, I view the quarter's consolidated earnings to be in line with the expectations and to be of good quality and certainly they represent a solid start of the year despite a challenging economic and stock market environment and with that I am going to turn it over to James G. Stewart.
James G. Stewart
Good morning everybody. My remarks, I am going to describe our first quarter results in some detail including the segment results along with providing you with an outlook of both the segment consolidated results for both the second quarter and the full year 2001. Just a bit on house keeping to start with, as we mentioned last quarter reported operating earnings include and after tax gain of $8 million from the sale of 21% ownership interest in our Japan life business to our joint venture partner ______ 08:21. My comments on operating income will exclude the effects of that sale. As an overview for the quarter consolidated operating earnings were $272 million on a pre-shared basis, which is a $1.76, which compares with $1.57 in the first quarter of last year. As H. Edward Hanway said we would care to raise the first quarter result as a solid start with the strong performance in our indemnity operations partially offset by stock markets driven weakness in our retirement business. Overall, results are in line with our expectation with some shift in the components. Now, moving on to the segments we will start with employee health care life and disability. The segment operating income was up 13% to $198 million and within the numbers, I am going to comment separately on indemnity and HMOs and my comments will be excluding Goodwill.
The indemnity results were $85 million operating income this quarter versus 66 year ago it is a strong increase. The results were better than expected driven by strong member growth for the medical indemnity book as well as earnings improvement for our group insurance businesses both in life and disability lines. In terms of growth premium and premium equivalents were up year over year, quarter over quarter 16% and that compares to 14% growth rate for the full year of 2000. Medical indemnity members are now at 7.4 million lives and is that we feel good about the indemnity results given that start in the HMO area results were 128 million versus 124 last year. I will remind you that we said a year ago that the major in all numbers included in the first quarter 2000 above $5 million of favorable research development. Adjusted for the favorable research development last year the HMO earnings gain of 8% reflects growth in our specialty healthcare businesses partially offset by a higher commercial HMO medical loss ratio. Medical costs for Cigna in the industry remain a challenge with pharmacy and professional or physician services the current pressure point. As to the medical cost trend outlook we entered the year expecting results in the 8-9% range in the first quarter of this year. The trend was around 11 and we expect full year trend to be in the 10-11% range, may be just a little color on that subject. In the first quarter, as I said we did say that we expected 8-9, we actually said we preferred the higher end of it the 9 number and in fact the results did develop at 9% in the fourth quarter. We also said that we expected the trends would rise further and in the first quarter of this year, we did build some anticipation of rise in trend into our accruals.
Also, quickly note that the earliest, the most recent quarter that being the first quarter of this year is not particularly well developed as about half of us experiences have paid and the other half is in reserves, so it is little early to make final judgment about what the first quarter looks like in terms of medical trend. I will also remind you that our total healthcare membership is about 80% experienced rated are non risk which help healthcare earnings from the effects of the medical cost inflation. As said differently our commercial HMO earnings were less than 10% of our total consolidated earnings and we will make up little less than 20% of our HMO segment earnings that we will report. I would note that the in the non-commercial HMO area of our HMO result produced good results and if you look at the medical indemnity pieces, they were also fine. We achieved price increases and yield increases relative to our expectations and we are getting in the 10-11% range. In terms of the medical loss ratio for the commercial HMO in the first quarter this year is 85.9 that compares to a year ago quarter of 84 and in the fourth quarter 2000 is 84.3. I would note that the change from the first quarter of this year to a year ago which is about 190 basis points about half a good changes due to the favorable research development that we had last year. The full time earning on the revenue and membership I would note that these statistics that I am going to site are on an ex-medicare basis given our exit from this business.
On this basis HMO revenues including premium equivalents were up a 11% in the first quarter reflecting the effect of higher medical cost for ASO businesses as well as commercial HMO rate increases. The current HMO medical membership is 6.9 million lives, which is essentially leveled with the first quarter of last year. In terms of the outlook for this segment of growth began in the two pieces first regarding HMO, we need to acknowledge that membership is off to a slow start and medical trend is up, hence there is some earnings pressure here. However, we continued to expect positive earnings momentum from our specialty businesses. The net result is that we now expect earnings estimates in the HMO pieces of this segment to be in the $550-560 million range that is about 10 million lower than our previous guidance. Consequently the analyst's earnings estimates are on the high side. Regarding indemnity we expect full year earnings in $380-390 million that is a $10 million increase from prior guidance and above street estimates. So out total segment basis what we are suggesting here is no change in the operating income outlook for the segment and in part reflects our products responding the customers shares through their preferences and also their earnings of between the two phases. In the employee retirement benefits and investment services earnings were $60 million versus 65 in the first quarter of last year. Earnings were below expectations to reduce these spending from the stock market decline with now about 40% on our pension asset in the stock market, which compares to about 50% a year ago.
The segments assets were down year over year about 9%. Earnings the numbers that I said are off 8%. There are a lot of moving parts within the pension earnings, but asset growth is the most important factor. In terms of the outlook the stock market direction is obviously the important variable for the earnings year if you would make no assumption about direction of the market. We would expect average assets in 2001 to be about 10-12% lower than they were in 2000. This would suggest a similar reduction in full year retirement earnings to a level of $220-230 million that is below our previous guidance but the analyst estimates here are high in the international life health and employee benefit operating income of 13 million versus 8 in the first quarter of last year. The results were above the analyst's expectations as well as our own. The improved results reflect primarily business growth in our life insurance operation and expiatory healthcare business. As we highlighted last quarter the partial sale of our Japanese life operation dropped our equity position below 50% requiring us to consolidate or de-consolidated the information sake although I have been told that de-consolidated were not aware, but we are still are de-consolidating asset liabilities, revenues, and expenses from our income and balance sheet. So year over year basis this de-consolidation press us the affects the comparison in our income statement, and balance sheet, and we will provide you with the occasional details of what those differences are separately. We also indicated last quarter that we were reviewing our options with regard to our remaining 40% interest in the Japanese life operations and for modelling purposes.
We suggested that we would recognize earnings in this operation for only half a year. We are still evaluating our options, but will now expect that we will recognize earnings in this operation in that business for the full year 2001. On this basis we would now expect 2001 full year earnings to be in the $45-59 range, which is above current analyst estimates by about $15 million. In terms of the other operating incomes 20 versus 28 a year ago as the remainder of this segment include several components, the individual insurance and reinsurance amortize gaining, the remaining run off although reinsurance business and leverage corporate on life insurance. The operating income of 20 million was in line with expectations. For 2001 our earnings guidance remains the same that is we expect earnings in the $65-70 million, which is in line in with current analyst estimates. In terms of the corporate, these are the results, the last was $19 million versus a 11 in the first quarter a year ago primarily due to lower net investment income resulting from share repurchase. For the outlook for corporate no change in our outlook other than to reflect the impact of the repurchase activities that we had in the first quarter this year specifically repurchase about $380 million of our stock. For the full year 2001, we would expect that components of corporate to generate a lots between 75 and $80 million, that is an increase from $10 million from our previous guidance and the $10 million reduction is simply the full year effect of lost after tax investment in terms of the $380 million of repurchase.
I would remind you that the amount of losses in corporate could continue to be affected by the amount and timing of share repurchase going forward. To recap the full year outlook and we will make one comment about couple of comments of what we expect in the second quarter starting with the full year. If you total that to be estimated segment ranges that I talked about, you would get an overall range of operating income in the one billion 120 to one billion $165 million that translate into a range for earnings per share of 725-745 which is above 10 cents lower than our previous guidance. I would note it more than all the decline is related to the stock market impact on our retirement business. Relative to the outlook for the second quarter this is a new thing for us. We expect to see sequentially higher earnings in the employee health and life segment reflecting increases in both the HMO and indemnity components. Although, I would point out that given the strength of the first quarter indemnity results the sequential increase in indemnity in the second quarter would be somewhat lower that you might have estimated based on prior years patterns. In the retirement segment of the pension segment the results would be lower than the first quarter due to the impact of declining average assets and we will also see modestly low earnings from the Japan life operations due to our reduced ownership, they commented it on earlier as well as reduced earnings in the other operations due to expected behavior of our run off businesses. All in preliminary analysis, which suggest expected earnings per share in the $70-80 range. With that I will turn it back to H Edward Hanway.
H. Edward Hanway
Thanks James G. Steward. In summary, we believe that our first quarter results were solid in what we described at the tough environment earnings per share was at good quality and consistent with average analyst expectations. Although the pieces differed a bit from a higher international results in a little bit lower retirement, earnings in our largest segment is including healthcare life and disability benefits continued to be strong overall growing in the mid teens rate as expected. Our overall membership growth was disappointing, but we feel confident that we understand the issues and were addressing them appropriately. We expect our sales momentum to remain strong and customer attention to return to historically high level. As a result we expect overall member growth to 3-4% range for the full year. Within the overall member growth I just mentioned we feel good about the strong growth in medical indemnity and also the improvement in our disability business. We also continued to experience strong business growth in our specialty healthcare businesses particularly behavior and dental. And I would just note as James G. Stewart said that our earnings expectations for this segment reflect net underlying earnings growth in the 16-18% range. Now in the retirement area the emerging benefits rather from our strategy work are currently being more than offset by the decline in equity market, which will depress the retirement earnings for the full year. And relative to the full year expectations, while environmental challenges exist, we are actively addressing them and expected to deliver a solid increase in earnings per share for the year and with that James G. Stewart and I will be glad to take your questions.
Thank you. Ladies and gentlemen at this time, if you have a question you might press the #1 key on your touchtone telephone and you will hear a tone acknowledging your request. Your questions will be taken in the order there are received. If someone answers your question ahead of you, you can remove yourself from queue by pressing the pound key. Also, if you are using a speakerphone we ask you to please pick up your handset before pressing the buttons. One moment please for the first question. Our first question comes from Paul Doricus of Bronwing and Company. Please go ahead with your question sir.
Paul Doricus
Good morning. My first question is can you update where you are on your previous guidance on improvement disability. If I recall in the last conference call you had stated that your disability results for the year 2000 were 40 million lower than plan and roughly half of that would be improved this year and the other half next year. Can you give us a sense of where you are in terms of that.
James G. Stewart
I would say we are on track to achieve the prior guidance and we feel good about the progress that we have made in improvement of this disability results so far this year.
Paul Doricus
Okay great. My second question is your earning guidance include any further share repurchase after the first quarter.
James G. Stewart
Earnings guidance does not include further share repurchase. We do not work at share repurchase and the forecast specifically that I talked about relative to the corporate segment assumes no further repurchase.
Paul Doricus
Okay. Last question is would you take a little bit further into your risk medical trends in terms of utilization where you have seen a little bit higher cost understand that you only have half of the quarter in face, but in what you saw can you give us some sense of the areas whether they are driving that with a higher trend.
James G. Stewart
Ya, I would say that may be to reiterate the point that you just made, may be more for emphasis in anything. Did you still for the yearly relative to what is included in the number and the components that have come in on I would put in the directional category as apposed to any position given a relative use of the quarter use in development of the quarter. We said we expect trend in the 10-11 range in terms of the pieces, the inpatient looks like turning in the low double digits and that is up a little bit than what we have seen in previously. The outpatient is also in the low double-digit range and may dull a little bit from what we saw previously or what we indicated previously. Physicians professional services are running in the high single digits and are up from the trends we have seen over the past few quarters and pharmacies about the same running in the mid teens.
Paul Doricus
Thank you very much.
Our next question comes from Mr. John Rex of Bear Stearns. Please go ahead with your question sir.
John Rex
Good morning I wanted you to just comment a little further in terms of the enrollment on and the loss of self funded accounting that you experienced this quarter in terms of any specific reasons for the retention issues on those accounts, can you give a color on that point and any things you are doing to address those issues.
James G. Stewart
First, let me repeat we were not happy with the first quarter HMO growth as I said we feel good about sales they were in good shape and not only in the first quarter, but I think we feel good about sales for the balance of the year. We have a strong pipeline and what we actually had good strong commitments for the balance of the year. Relative to retention our first quarter was fairly not at the historical levels at we normally generate I mentioned they were a few large areas of bill account losses. I did also mention that we had a few pricing related issues here and I think we did underestimate a little bit the customer movement open access. So, bottom line we did not do well as well as expected. We have been through the accounts in detail, I think we have a good sense as to where we need to pay more attention and that is reflected in our focus for the balance of the year. There is nothing that I would say is particular indicative trends here and we expect the retention rates to improve back to our historical levels for the balance of the year.
John Rex
So, you have more preference for the open access products more so than any service issues the customers may have been experiencing in terms of retention.
Yes John Rex. We did not see service as a broad-based or consistent issue at all in our reviews. As I said that the three elements that I noted were the ones that appeared to have the biggest impact.
John Rex
You do have products; a kind of PPO is going forward. You would be move these kind of accounts into that were probably said those needs. Is that correct. Do you see some additional modification to get those products?
James G. Stewart
Yes john that is correct. We do have good products that responded at movement and in fact later this year will be introducing a new sweeter product that even enhance the product capability that we do have. So, we have good capability to deal with the trend as it increases.
John Rex
Al right. Thank you.
Operator
Thank you. Our next question comes from Charles Boorady of Goldman Sachs. Please go ahead with your question.
Charles Boorady
Thanks good morning. A couple of questions. First on the retirement business. Can you comment on the monthly trends that you are seeing in deposits, whether you have seen a reversal of the slowdown and also in the account sales and retention information on the retirement business and that I have a followup on that?
Jim Lane
This is Jim Lane. In terms of the patterns of contributions of deposits, If you look in the statistics on the year-over-year that the deposits are down. I would say that is mostly a timing question. A fair amount of deposits in any particular year are new sales and the timing in new sales this year is different than it was last year and I would expect full year deposits to be relatively consistent with what they were in full year 2000. So, I don't think there is any particular pattern there. Our existing customers are moving their money around a little bit; we are seeing some actually less than I would have expected. Some modest movement toward fixed income out of equities but still pretty early to tell what is going to happen to that. But in terms of the outlook for new deposits and asset growth not a lot of change from what we are seeing recently.
Charles Boorady
And new customers growth information in terms of the number of accounts.
James G. Stewart
Yes Charles. I would add to Jim Lane's point that what we do see in terms of sales activity is encouraging. I think the progress for making on strategy in a couple of areas both in the employer service area as well as in the product area is having an impact and we see good opportunities being presented. I feel good about the progress we are making there. Obviously, the equity markets are a kind of overwhelming results at the moment, but the progress on the strategy implementation is good.
Charles Boorady
And I had noticed just on Ken Montgomery and you just got a federally charted list that have been doing few other things in that segment that, I was worried perhaps if you could just highlight any new product or distribution plans that you have and when one might start to see traction in terms of new account growth from them.
Jim Lane
Yes Charles. First of all, the hiring ahead of sales is a good addition for us. It is one of the things that we have targeted for a while and we have been able to attract a very solid professional with good experience. I think that is indicative of the strength of the value proposition we are putting in the market. I think we have made some good progress as I said, we have made good progress in our e-commerce capability and I think we have been recognized for that in a couple of places in terms of the strength of the self-service capability we are creating for people. We have also in our investment value proposition, we are attempting to provide the best suite of products some manufactured by ourselves and some manufactured by others. We have a charted fund concept and we have added, I think 12 new funds in the last quarter there. High percentage of those are ranked very highly top quartiles from the investment performance standpoint that is being received very very well and we have gotten morning star reading that are quite good and we have also added some proprietary capability and times for our capital management which is our in-house investment management capability in the small cap equity area. So, we continue to march down the course that we have laid for ourselves in terms of enhancing both employer capabilities and products as well as features for employees and as I suggested the activity levels are high our pipelines are high but sale cycles in this business are long and clearly the disruption in the equity market are making people think very carefully before making a change. But I think there is no question that we are making some progress and gaining some attraction in the market.
Charles Boorady
Thanks. And could I just ask a question on transformation. Just what the spending was in the quarter and your full year estimates and also if you could highlight the next generation product that you said you recently previewed and when you expect that to go into production.
Jim Lane
Yes Charles. Let me take that one. Relative to the transformation, I don't think we have historically given spending levels for the quarter; I am not even sure if I have it in my fingertips. So, I will defer that one. Relative to the new product portfolio that we have been previewing, what we have done is expose customers to both the new product and also the delivery platform for those products; how they and their employees will see a change in the level of service and the ability to self-transact through e-commerce and so forth. That has gotten very strong reception. We will also be able at this new suite of products to provide more dual option, more specific tailoring of ___ and deductibles and a very modular approach to adding benefits that will be very administratively simple for employers and provided employees with a lot more choice and the reaction has been quite positive. If anything with our existing customers they would like to move quicker in terms of getting on this platform with some of these new products as suppose is lower.
Charles Boorady
Just to the nearest 15 million, I recall the range being something like 250 to 300 million in total systems R&D which propagates as it was for transformation. Is that consistent with the thoughts on 2001?
Jim Lane
That is right. And we have not changed our view that particularly those including variety things including e-commerce activities and things like that. So, it is meant to be broadly development and not just the transformation number. I did want to make, just go back to retirement business for a minute. It is strange for me to make a comment on my own comments but I would say that relative to the deposit outlook, I would put one a kind of what I said that is since the fair amount of the deposits in any particular year are new sales because of money gets transferred. This is takeover business. So, when you get the assets from moving from previous to provider to us those kind of deposits, the point I want to make and wanted to add on is given that but most of our 1k accounts are now smaller in 2001 than they were in 2000, simply because of the stock market movement, I mean the stocks are up and the stock market are up to 20% year-over-year. So, a takeover account of which all of ___. Both of our 1k accounts would be on an average depending on its equity mix smaller then they were in 2000 and that will have an effect on what we anticipate the deposits and the comments were more account activity as opposed to the deposits. So, I think we need to think about that in thinking about this full year.
Charles Boorady
Thanks for that clarification. Can you give total number of accounts so that we could track that?
Jim Lane
I don't have. I don't have those in my fingertips.
Charles Boorady
Okay. Thanks.
Operator
Thank you. Our next question comes from Mr. Jim Lane of Salomon Smith Barney. Please go ahead with your question sir.
Jim Lane
I was wondering, if you could maybe elaborate as follow on to John Rex's question, maybe clarify your comments on not anticipating customer preferences for products. What exactly is the flow of information for CIGNA in not anticipating customers preferences on membership product selection and can we read anything into the fact that CIGNA which historically has been an excellent underwriter in reporting weaker than expected ___ 00:39:56 growth. I am wondering if competitive environment has changed somewhat and as usual, you may be sticking to your guns on margin and therefore not getting the growth there. I am wondering if you could comment on that, a sort of speculation on my part. Thanks.
Jim
Jim, it is that relative to sticking to our guns, we have had a very consistent posture of wanting to get adequate pricing and we have not severed from that commitment. I don't know that I would read a significant trend into our statements around the quarter, but clearly we have not changed our posture and I think in some of the counter views that we look sad. As I said there was a pricing issue. Relative to the trend of open access, I think rather than not responding quickly with our own products, it was an interest in our part in maintaining current structures and maybe not anticipating that customers were adamant about their desire to move. But again, I noted two or three things Jim and I think there are issues for different particular accounts within the book and that is why I would say there was not one overriding reason for the shortfall. It was a combination of the two or three things I mentioned.
Jim Lane
Okay. That is incredibly helpful. Just one follow on. I was just wondering Jim in the first quarter and fourth quarter results conference call, you made some comments on significant conditioning, these would be the young economic environment. I was wondering; maybe could you just update and clarify your outlook on the business and why economic trends when you are giving us the new range of guidance, what sort of an economic outlook are you factoring into that guidance?
Jim
I will respond to that. Before I respond, just may be one followup on your previous question. Having to do with some of the pricing issues and as well as the customer preference, I just want to comment that when you think about the pricing issues there are two kinds of things to think about. One is on the guaranteed cost commercially to move business, what your pricing business is going to be and we think our pricing business looks good because there you are taking the full risk and when you said pricing, I just wonder I think you are referring to that particular aspect of the book which is about 20% of our total. The other part of the pricing issue is the experience grade is ___01:42:49 business and that comes down to if you will service these or what is known as the business retention of the premium with retention which would take off the path. And that also occasionally gets into "price-related issues" as to what you are willing to do for various accounts, ASO accounts, or experience-graded accounts. On the other comments, there are those two aspects relative to price. The other comments that I would make on the customers preference is I would keep separate the customer preferences between new sales and existing, to add on to what Ed said. I think we responded very well to customer preferences in the new sales area, demonstrated by an improvement in sale ___ 00:43:48 good base of comment relative to customers preferences that relates mainly to whether we were appropriately attempting to our existing customers' needs relative to their movement in open access. That is where I think we need to improve and we are in fact doing so. Now to your question, sorry about that. Your question about the economy, basically our forecasts show nothing unusual in the economic environment. We expected soft landing, few of our financial forecasts are premised on that. The other aspect of our forecast has to do with the stock markets and what the pension business will produce and basically we were swimming with the market swings and we have a neutral assumption about the market on a going forward basis.
Jim Lane
Thank you.
Operator
Our next question comes from Ms. Christine Arnold of Morgan Stanley. Please go ahead with your question.
Christine Arnold
Good morning. I have a couple of questions. You said the cost around 9% in the fourth quarter. Did the MLR this quarter include some adverse fourth quarter development?
A
It did not, Christine.
Christine Arnold
Okay. And could you update us on your consolidation of your systems. We have 67 client processing systems at the beginning of the year and 14 with ___ systems. Where are you in bringing those together?
Jim
Christine, the comments I made relative to the transformation I think, cover some of those. We continue to make what I would describe as good progress. This is an effort we have been into now for probably pass that two years into that and we have got as we talked before several years ahead of it. We continue to move and consolidate those systems. We are right on our internal tracking, our internal timeframes to get that done and we have some new business currently operating on the new platforms and that migration will accelerate as we go through the balance of this year and for the next couple.
Christine Arnold
Right. One followup. You suggested that the international earnings might decline sequentially, but yet you are not selling anymore of the Japanese operation. Could you help us understand that?
Jim
Just as a service technicality, we do have I think one month's earning in the first quarter at a high level and because of the timing of the sale. So, instead of two months of the lower percentage which we had in the first quarter and at three months in the second quarter, this is as straightforward as that.
Christine Arnold
Got it. Thank you.
Operator
Thank you. Our next question comes from Ed Kroll of SG Cowen. Please go ahead with your question.
Ed Kroll
Two questions. The first one is on the followup to previous questions on the membership retention being over. Is one of the reason your confidence that you can show better growth for the rest of the year, the fact that if you are going to lose large self funded accounts that would typically happen on January 1st, they typically renew on a calendar basis?
Jim
Yes that is part of it certainly. As I said, there were two or three reasons we felt account retention was lower than it should have been and we did lose a couple of large ___00:47:36. That is right.
Ed Kroll
Okay thanks to that. And then, on the retirement services business, I mean it is underperforming and I am just wondering if you still believe that it is strategically important to you and if you still believe that there is at least achievable at some point synergy between this business and your other core business, the health business.
Jim
The quick answer to the question is, yes we do continue to believe that retirement is important to the total value proposition for CIGNA as we go forward. This is a business that continues to have very competitive, in fact some of the highest margins in the business and I think it will over time provide us with a rather unique capability to provide a total benefit solution to both employers and employees and so this thus continues to be a very improvement part of our business. Now acknowledging we are in the midst of instituting a reinvigorated strategy for this business, the focus is on a couple of things. One is product service enhancement and the other is the broadening of our investment value proposition. Both of those elements are important for leveraging what we think is good future potential in this business and as I said earlier, I am very comfortable with where we are in the progress. This is a difficult market environment for everybody in this business, not simply for CIGNA and we will need to manage our way through that. But it is an important part of the business. I feel good about the strategy and do believe it will add meaningful value in the future to both our customers and our shareholders.
Ed Kroll
Okay thank you.
Operator
Thank you. Our next question comes from Mr. John Szabo of CIBC World Markets. Please go ahead with your question sir.
John Szabo
Good morning. Just a question on the self-funded business. I know some of your competitors have mentioned fairly significant gains at the lower end of the market. Could you just remind us a sort of what you strategy is, sort of your cutoff in terms of self-funded versus risk and whether you are evaluating any change in there and whether that they have impacted your growth at all and then I have a followup.
Jim
Yes John. I do not think I would suggest that there is any change in our approach to business or segmentation nor do I think any of that impacted retention in the first quarter. We continue to have very strong capability for multisite employers and that can be for employers from 500 to 1000 and above and aggressive product and our service delivery capabilities respond very well to that employer who has multiple locations and one consistent approach and at times multiple products delivered consistently for their employees across those location. So, that has not changed. We continue to feel very good about both our capabilities but also about our future ability to grow that business. So, I would not say there is any significant change in the first quarter.
John Szabo
Okay thanks. And then, I just wanted a followup on your earlier comment on the retirement services business. Jim, I guess you said that you thought there was less movement in the fixed income than may be you would have expected. Could you just describe for us the relative profitability from the gross margin prospective on fixed income product versus equity product. Has that changed at all in the last year or two?
Jim
The answer is that it has not changed much. The relative profitability depends on what measure you are using. If you are using margins, in economy known as your profits divided by assets, then the fixed income business is, I guess, I would say measurably more profitable on a margin basis then the equity business. If you are measuring profitability as return on equity, I guess, I would say may be close and the difference being between fixed income equity and the reason that I say that is that the capital at either rating agency or on our own bottom required for the fixed income business is measurably higher than it is on equities where the customers is taking essentially all of the investment risk and reward and we benchmark that from our capital point of view differently for the fixed income then we do for the equity business. So, margins and dollars in earnings are higher on fixed income and they are similar.
John Szabo
Okay. Just one last question. Can you give us an estimate of free cash flow available to moving company for this year, and then, should we infer from looking at the debt line that you primarily borrowed for the share repurchase.
A
In terms of free cash flow, which was currently sitting at the end of the first quarter was about $700 million and free cash with the parent company level and we generate moderate magnitude about a half a billion dollars. When I say half a billion dollars that does not include any acquisition or any sort of big major new activity and that is just a sort of a run rate. In terms of the question about increasing our debt to fund repurchases, I would never say that. Always under this area that money is ___. And that you can never track exactly where the money goes in debt rising. So, I would not associate those two things directly.
John Szabo
Okay. Thank you very much.
Operator
Thank you. Our next question comes from Peter Costa of ABN Amro. Please go ahead with your question sir.
Peter Costa
Good morning. You made a statement that you believe cost turned in the first quarter was somewhere around 11%, that is up from the 9%. You are still on the fourth quarter. You expect the year's cost turned to be somewhere between 10-11%. Why you expect cost turn to decline over the course of the year? Is there some particular reason for that or is that just a function of the fact that perhaps you over reserved in this quarter knowing that cost turn has moved up a little bit.
Jim
I guess, I would say that our ability to forecast with grand precision the medical cost trend is I guess debatable. I think our industry track record in predicting trends precisely is not very good. It is not similar from ___ 00:55:32 sciences they call economics. I think there is a lot moving part in here and we try to take the best to guess that we can make as what the trend is, try to respond appropriately with our pricing initiatives and be flexible on responses to trends that we see to what we talked about. What I talked about was relative to the trends and sort of the best as we see it currently.
A
And peter, I would add to Jim's points too that Jim went through the areas where we see pressure and as is our normal practice, we have very detailed plans that deal with those areas of pressure and I think we feel that our ability to impact improvement there is real and we will continue to work hard on those areas. I think in terms of our confidence in our medical action planing that we discussed in the past, we continue to feel we can influence those areas that are causing the greatest pressure on medical planning.
Peter Costa
Second question, you thought that underestimating the preference for open access products and primarily talk about that in relation to those who lost membership on the retail store 01:01:23 business and what not, has that helped your performance in the indemnity side __ 01:01:23 so it is really an adjustment of where the growth is coming from or is that misperception on your part that, it is actually a costly business that you are not going to reclaim in some other areas?
A
I don't think it passes and we will not reclaim. I think, obviously, we have been taking advantage of the movement to greater open access for the last several years. The PPO growth we have had demonstrates that and continues to. I think the best way to think of it, Peter, is to reflect back on points that Jim made, which was we continued to see good response for the market in our new business sales. There were simply some renewed business that we arguably did not pay sufficient attention to it in terms of that movement and lost the opportunity to convert them to more open access product. So, It is not fundamental issue. It is an issue of execution and ensuring that we are doing enough to understand what customers are looking for which is one of the reasons we believe retention rates are going to return to normal levels with greater retention.
Peter Costa
And how long do you think you look at the pension business underperforming before you do something little more dramatic than we got today to fetch the performance of that?
A
Peter, I think we have done quite a bit in the last year or so to deal with the new strategy. I think I would repeat what I said before, which is we do feel good about the potential for this business to contribute in a very meaningful way and to differentiate us from others who do not have similar capabilities. Obviously, we want the business to perform and if we were not making sufficient progress in implementing the strategy, I would not feel nearly good about it. But at this point in time, I am quite confident that we can make sufficient improvement here for that to sail off. I don't want to start discussing about this Peter, but I probably will participate to answer everybody. If you look at our performance in 2000 in terms of asset growth and compare it to the industry, you would find that our asset growth outperformed the industry in the year 2000. The underperformance that you referenced relative to 2001 is very much influenced by, or at least the visuals are very much influenced by, the stock market and whether it in fact represents underperformance against the industry or slack in ___01:01:23. I don't think we know that yet. And I guess with the potential __ I think we are probably still a little bit better than we think we are.
A
I would add a followon to Jim's sentence here, I think another good measure of the value we are creating for customers is in fact that we do maintain very strong margins in this business. So we saw reasonably good growth last year, particularly versus some others, and we maintained margins while we did that. So, there is enough evidence here that this is a positive business for us.
Peter Costa
Thanks.
Operator
Thank you. Our next question comes from Ira Zuckerman of ___ Security. Please go ahead with your question.
Zuckerman
Very good early morning to you gentlemen. In your forecast of membership growth, have you taken into account and/or have you seen any impact from what seems to be fairly substantial layoff across the board in major corporations?
A
Ira, I would say yeah, we have and looked at our growth carefully and we do not see a major impact from that, but yet that incorporates that.
Ira Zuckerman
And you have not see any impact as yet in terms of overall membership growth?
A
I would say we have not seen any significant impact at this point from that.
Ira Zuckerman
Okay. Thank you.
Operator
Pardon me Mr. ___01:01:07. I would now like to turn the call back over to you for any closing remarks.
Unknown Speaker
At this point, we will bring the meeting to a close. I want to thank everybody for the participation in the call this morning and ___01:01:22 and I will be back shortly to take any additional question. Thanks again.