信諾集團 (CI) 2002 Q1 法說會逐字稿

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  • Unidentified

  • Ladies and gentlemen, thank you for standing by for CIGNA's Corporation first quarter 2002 results review.

  • At this time all callers are in listen only mode. We'll conduct a question-and-answer session during the conference and review procedures on how to ask questions at that time.

  • If you require assistance during the call, please press the star followed by the zero on the phone.

  • If you disconnect call 1-88-747-3446 to be reconnected.

  • As a reminder, Ladies and Gentlemen, this conference including the q and a sessions being recorded. It'll begin by turning the

  • conference over to Mr. Greg Devons.

  • GREG DEVONS

  • Good morning, everyone and welcome to CIGNA Corporation's for the first quarter 2002.

  • I'm Greg Devons and with me are Ed Hanway, Chairman and Chief Executive Officer and Jim Stewart our Chief Financial Officer. Jim will begin the call with the review of the consolidated and segment financial results for the quarter.

  • Ed will then provide some observations relative to our first quarter performance, progress on key initiatives and our 2002 financial outlook.

  • Following Ed's remarks, we will respond to questions. As a courtesy to others on the call, we would prefer that any detailed questions on the statistical supplement be deferred till after the meeting when we can address them individually as these questions may not be of interest to all of the conference participants. In our remarks today we will be making some forward-looking comments regarding segment and company outlook.

  • We will 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 a form 8 K filed today with the securities and

  • exchange commission as well as our most recent 10 K filing. With that I'll turn it over to Jim.

  • Jim Stewart

  • Good morning, and my remarks as Greg said, I'm going to talk about the CIGNA's first quarter results on a consolidated basis and then in terms of the segment pieces. In terms of the headline operating income per share for the quarter was $1.92, that's in line with our expectations and a bit above the consistent [INAUDIBLE] of 1.88.

  • Before going into some of the details I'll start with housekeeping items.

  • First comparisons to the 2001 results will be stated as if required good, which will accounting change applied during the 2001 period. That is we will exclude the good will amortization when citing 2001 results.

  • This will provide an apples to apples view. Second, in the first quarter of 02 we had a $8 million gain from the partial sale of our Japanese Life Operations.

  • This gain will be excluded from the numbers I will discuss. There were no non-recurring items in the first quarter of 02.

  • We spiked out these items on page 1a, of our statistical supplement so you can see the underlying trends in our results. The remarks that I'm going to make on operating income and operating income per share will exclude the items that I just mentioned as well as realized investment results. These items are included in gap net income but not in the operating income numbers that I will discuss. As an overview as I said, per share numbers were $1.92 versus 1.84. That translates into $275 million of operating income. I would note that excluding the Japanese Life earnings from the first quarter of 01, earnings per share were up about 8%. Moving on to the segment results starting with employee health care, life and disability, the total results for this segment were $216 million, versus $210 million a year ago. And within the totals as we always do I'm going to talk about the indemnity results as well as HMO. Indemnity results from the quarter, operating income, were $95 million, versus $85 million a year ago. The earnings growth in the quarter was driven by improvement in the long-term disability business, fee increases in the medical indemnity business and higher results in our experience-related the health business. From a revenue perspective, indemnity premium, and premium equivalents were up 8%.

  • Covered medical [lives] in I know, TIM, dropped 1% versus a year ago reflecting declines in traditional indemnity plans. The HMO piece of the segment, earnings were $124 million this year versus $128 million last year. On a year-over-year basis the earnings were down slightly reflecting higher operating expenses, lower medicare results, and lower investment income. These factors were partially offset by growth in specialty earnings as well as the effect of commercial HMO price increases.

  • Medical trend for the full risk bookings in the 14% range consistent with our expectations.

  • The commercial medical loss ratio declined year-over-year from 85.9 in the first quarter of 01 to 84.8.

  • It was also down 84.8, was down sequentially from the 85.8 in the first quarter -- in the fourth quarter of 01.

  • Total HMO medical membership was up about 1% from a year ago and 1% from the fourth quarter.

  • And totals approximately 7 million lives. HMO revenue again premium equivalents were up 10% reflecting fee increases, higher medical expenses for the ASO business as well as HMO increases.

  • Before moving on to retirement I would like to highlight a matter that will be disclosed in our 10 K filing this quarter. We're discussing it here to avoid any overreaction and misinterpretation in our disclosures, specifically the disclosure will state that the department of justice is investigating the pharmaceutical industry, marketing practices and their impact on prices paid by the government for pharmaceutical products under Federal Health programs.

  • We are in the process of responding to subpoenas from the U.S. Attorney's office, concerning contractual relationship between certain pharmaceutical companies and our health care operations. Moving on to the retirement business results in the first quarter in terms of operating income were $57 million, that compares to $60 million a year ago and in line with our expectations. The quarter-over-quarter decrease in earnings primarily reflects flat fee revenues from essentially flat average assets and modestly higher expenses.

  • The overall assets under management at the end of the first quarter this year were 6% higher than last year while our average daily assets, which is the basis of our fees, were flat, as I mentioned. International, in the international segment, we reported results of $8 million versus 13 a year ago, $13 million a year ago, if you take out the earnings from the Japanese Life business, which was fully divested in 2001, operating income was $2 million in the first quarter of 01 rising to $8 million in the second quarter of this year -- I mean, in the first quarter of this year. Moving on to other operations, the segment includes several components.

  • The individual insurance and re-insurance amortized gains, results from runoff reinsurance and corporate life insurance businesses and certain business operations. The results were $18 million of operating income versus 20 a year ago with the decline primarily due to the reinsurance runoff business. For the corporate segment which includes unallocated investment income in parent company expenses, the loss for the quarter was $24 million versus $19 million a year ago. The change was driven by a decline in net investment income at the parent company level from lower short term interest rates and lower invested assets. As a recap of the quarter operating income was $1.92, that's 4% increase when you remove good will amortization from the first quarter of 01.

  • We were active in share repurchase buying 1.4 million shares in the quarter for $130 million and our return on equity on an overall basis remains strong at 21%.

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

  • Ed Hanway

  • Thanks, Jim.

  • The first quarter results that Jim just discussed, I think represent a reasonable start to 2002. And as Greg said earlier, I'm going to share my thoughts on the segment results.

  • The I had a few observations on some of our key initiatives and then review our information for the balance of the year. In the health care life and disability segment. Our results were consistent with our expectations, in addition we were believed with the price increases achieved in commercial HMO book and the earnings growth in our specialty health care businesses. Medical membership was about where we expect, although it is not as strong as we would have liked particularly in light of our broad and competitive product and service offering. Nevertheless I feel good about the actions we are taking to stimulate growth including strengthening our sales and client management teams, expanding marketing capabilities and continuing to invest in service cap abundance. We continue to work on expanding our product portfolio. A few examples of product initiatives include our announced plans to introduce a health savings account product which will allow employers to make defined contribution type official available to their employees. And sharper focus on specialty health care products including expanded vision benefits. And vision is one of the fastest growing employee benefits in the U.S. And it's a good growth opportunity for us.

  • Our health care management team is also making good progress on our transformation initiative. We remain confident in our ability to achieve the goals of transformation which include enhanced customer service capabilities, [redived] operating cost and expanded product flexibility. Customer demand for our enhanced product, service and technology capabilities remains high, and is a reminder we are using a phase multi-year approach to develop, to development of these capabilities and migration of customers in order to ensure an oral transition for employers and consumers.

  • We are making some adjustment to the phasing of customer migration as our emphasis is on assure the quality and effectiveness of our service to migrated and new customers.

  • Now as we stated on our February conference call, we had 3.5 million members on the new platforms in January and we expect that number to grow to over six million members by the end of January 2003.

  • That would bring us to nearly half of our members on the new platform.

  • One additional item of note, CIGNA Health Care has launched its new medical management model which they're called personal health solutions which is designed to meet employer and employee cost control.

  • The approach focuses on integrated activity in three key areas. Product and network benefits, political management practices, and information. And the models being well received by customers and consultants, and it will contribute to improved growth over time. Now I'm going to turn to the retirement segment. Retirement segment earnings were consistent with our [INAUDIBLE.] Overall asset growth is not as yet as we would like, however, I'm confident in the initiatives underway in this business to improve asset growth.

  • These initiatives include expansion of investment options and service enhance it's for both employers and consumers.

  • Our retirement and investment services business also introduced the college bound fund.

  • This tuition savings plan offers a tax advantaged, way for customers to save for future educational expenses. We remain a leader in the service -- in service in the retirement marketplace, particularly with the web-based tools we provide to participants including a significantly-enhanced CIGNA portal we're developing with Yahoo.

  • In international, our operations exceeded expectations in the first quarter.

  • We experienced good results in our expatriate benefits business and our life, accident and health operations and we continue to see growth opportunity here. To strengthen our product official in the expatriate business we have established in partnership with International SOS, a proprietary physician led health care network for employees on global assignment. Now our top corporate priority is to increase revenue growth and overall, I am encouraged by the progress each of our businesses is making on key strategic initiatives and operating priorities which position is well for future profitable growth.

  • Now let me provide our outlook for the remainder of 2002. For full year 2002 we expect consolidated income of between $7.85 and $8.15 a share and this is consistent with our guidance provided in February, with movement in some of the segment components. And now for the segments let me start with the employee health life and disability area and I'll cover this in two pieces.

  • First in HMO we anticipate HMO results in the $540 to $555 million range and that compares to a current street estimate of $532 million.

  • This represents an increase from our prior guidance and reflects strong results in our specialty health care businesses and higher non-risk HMO enrollment. For indemnity, we expect earnings to be in the $400 to $415 million range, that's below our estimates, and the current street estimate of $436 million. The reduction in indemnity reflects a mix shift in our medical business and lower investment income. Specifically here we are writing more experience rated business than expected and less ASO. We like the low term economics of the experience rated business, however, the business is unprofitable in the year of inception because the customer are not charged for the first reserving in the first year, but we do charge for it in the ensuing years, plus earnings are depressed in the short term as a result of higher levels of new business. Over time we capture the [INAUDIBLE] earnings from the customer and we generate very attractive returns in this business and we expect this mix of business to contribute favorably to earnings in 2003 and beyond. Thus the total earnings for the segment including amortization of non-good will intangibles are expected to be in the range of $925 million to $955 million and this compares to a street estimate of about $960.

  • Consistent with our previous guidance we continue to expect full-year medical membership growth in the one to 2% range, an improvement from a flat first quarter here reflects the impact of actions to increase growth that I mentioned previously. Now, relative to our retirement business, we continue to expect earnings of $225 to $235 million versus the current street estimate of $230. Since 40% of our customers's assets are in the SFKT. Earnings here will be somewhat correlated with market fluctuations. We expect the international segment earnings to be in the $20 to $25 million range versus the street estimate of $17 and this estimate has increased from our prior guidance. We expect other operate operations to generate operating income of $50 to $55 million from the continued run off of businesses that we have sold or exited and this is also higher than previous estimates.

  • And as for corporate the losses expect to be in the $90 to $100 million range which is consistent with street expectations.

  • So to recap consolidated [INAUDIBLE] income is expected to be in the range of a [INAUDIBLE] $120 million or 7.8 an or $8.15 share and this compares to the street estimate of 8.056789.

  • Now for our outlook for the second quarter. We expect operating income in the range of $1.85 to $2.05 per share and details are as follow for the employee life and disability segment HMO income is expected to be in the 125 to $130 million range. Indemnity is expected to be in the hundred to $105 million range after the amortization of the remaining nongood will intangibles this segment is expected to generate earnings in the $222 to $232 range million, relative to our retirement we expect any of the five to $60 million. We expect the international segment to generate $7 to $8 million in earnings and the other operation segments is expected to generate operating income of $10 to $12 million while the loss in corporate is expected to be somewhere between $23 and $26 million.

  • Adding you want pieces gives us total AM of $268 to $289 million for the second quarter of 2002 or a $1.85 to $2.05 a share, in summary then the first quarter was consistent with expectations. And I think a reasonable start to the year, and while the pieces change, we are comfortable with our full-year guidance of $7.05 to $8.15 a share, profitable revenue growth remains a key, and we have actions underway to increase.

  • With that Jim and I will be happy to take your questions.

  • Unidentified

  • Ladies and gentlemen, if you do have a question you must press the one key on your touch-tone phone and you'll hear a tone acknowledge being your question.

  • If someone asks a question ahead of you, you can remove yourself from queue by removing a pound key.

  • Pick up your handset before pressing the buttons. One moment please for our first question.

  • Our first comes from William [Makkooefer] from Warburg. WILLIAM [MAKKOOEFER]: I'm wondering, if you could explain again the mix and how that works to depress earnings. I'm not quite clear how that whole process works.

  • Ed Hanway

  • Bill, it's Ed, I'd be glad to.

  • As we've talked about I think in the past in the experience-rated business, this is where we contract with an insured basically to have a experience rating process here whereby in the first year of the contract we're not charging them with full first-year reserves.

  • It allows them to go to the benefit of their own rating or their own case experience with having a bit more predictable funding methodology across that first year.

  • So, in the first year of the account, the profitability for us is not as strong as it is in the later years.

  • So we don't charge full gap

  • [reservor] one and we recover them in a years two and three, and out.WILLIAM [MAKKOOEFER]: Then just in terms of your yields, what are you getting on the HMO side in the first quarter, what do you expect for the year please?

  • Ed Hanway

  • Okay.

  • On the HMO yield and again this is for the fully insured HMO which is about the 20% of full risk lives that we have, we saw a net yield in the 15, around 15% range and that reflects growth rate increases somewhere in the high teens and then benefit [buy down] to mix shift to get to net yield of somewhere around 15%.WILLIAM [MAKKOOEFER]: [INAUDIBLE].

  • And 14 [INAUDIBLE] cost trend looks like that would be a good number for the rest of the year?

  • Ed Hanway

  • Yeah, we've been consistent for this year being in the 14 to 15% range for medical cost.WILLIAM [MAKKOOEFER]: Great, thank you.

  • Unidentified

  • Yes.

  • Ed Hanway

  • Thank you.

  • Unidentified

  • Our next question comes from Josh Raskin of Lehman Brothers.

  • Josh Raskin

  • Good morning.

  • On the medical cost trend, the 14% is consistent with expectations and it sounds like pretty steady for the full year, but it sounds a little bit higher than last quarter obviously.

  • So, again not surprised to see the increases, that was within expectations, but are there particular components that you could tell us that are sort of driving the increase above

  • last year's trend?

  • Unidentified

  • Josh, actually, if you look at the three or four largest buckets of cost, in patient, outpatient, [INAUDIBLE] pharmacy, they're in around that 14 to 15% range.

  • Pharmacy is a little bit lower, so there isn't a huge divergence that would call rate increase within the major buckets of cost that we're seeing.

  • They're very consistent with what we expected and obviously what we price for.

  • Josh Raskin

  • Okay, that's a help if you will.

  • Just a quick follow-up on the membership growth. It sounds like you guys feel comfortable with the year end guidance of a couple percent

  • growth here. Please] talk a little bit about where the major issues with the first quarter, was it retention or new sales, and then any connects [INAUDIBLE] actions that you're taking?

  • Unidentified

  • Yes.

  • And I think it's pretty consistent with what we talked about after the last quarter, Josh, as a practical matter. We suggested that we expected to see national account retention a little bit stronger as opposed to a year ago.

  • That is what we saw. We did see some softness relative to both sales, I think, and retention in the middle market which is where we have a lot of our growth initiatives and our account management initiatives focused.

  • And we also saw some ongoing impact from what I will call the economy and layoff.

  • Certainly in some of our larger programs we didn't see the in-group growth that we have expected. In fact, we saw some declines and in those areas they were companies that we knew had specific work-force reduction.

  • Those are the things that [contributed] again pretty much as

  • we had suggested. No real surprises there, and the areas where we see weakness from a sales standpoint, that's where we're directing most of our attention.

  • Josh Raskin

  • Unidentified

  • MSA type account is one, another is the open access HMO capability that we discussed towards the end of last year, beginning in this year, those are two specific product areas. We're also very active in looking at benefit redesign with a number of customers and how we handle co-pays and tiring of networks in a few areas, so I would say there's a lot of work underway on the product side. As important the sales and account management activity we have talked about is also something we have a lot of focus on.

  • We've seen almost a 50% upgrade in our client management capabilities and national accounts, but we're taking the same approach in the middle market area to ensure that not only are the resources adequate but that we are appropriately handling existing accounts that we are being as consulted with [INAUDIBLE] them as possible.

  • So I would say our emphasis on account management across-the-board is very strong.

  • Josh Raskin

  • That's helpful. I'll get back in queue, thanks.

  • Unidentified

  • Thank you. Our next question comes from Roberta Goodman of Merrill Lynch.

  • Roberta Goodman

  • Hi, I was wondering if you could comment on the components of the medical cost, is there any changes that you might see.

  • I have a follow-up.

  • Ed Hanway

  • Roberta, it's Ed. It was a little hard to hear you, I think you asked if we could comment on the components of member cost.

  • Roberta Goodman

  • Yes.

  • Ed Hanway

  • I think the one comment I would make, is, I think as I said earlier, relative to in-patient, outpatient as well as pharmacy, those unlike prior years when there was some divergence in terms of what was moving at a faster rate, they're all clumped around that 14, 15% range in terms of year-over-year increase and the drivers are pretty consistent with what we've talked about before.

  • Pharmacy -- excuse me, physician is a bit lower than that, in the low teens, low double-digit, but, again, everything is [INAUDIBLE] pretty close to that 14 to 15% range.

  • And in terms of expectation that's pretty consistent with what we expect for the balance of the year.

  • Roberta Goodman

  • Could you comment on whether you're seeing the cost increases coming more from unit prices or volume trends or shifts in intensity?

  • Jim Stewart

  • Hi, Roberta, it's Jim.

  • Various pieces the in-patient, outpatient, physician and pharmacy. They do differ relative to utilization and unit cost. I would say broadly that the utilization numbers in outpatient and pharmacy tend to be the sort of like two-thirds of the drivers of the numbers that Ed talked about where as physician costs are about split evenly between utilization and unit cost.

  • And the in-patient numbers are sort of the reverse of outpatient and pharmacy, that being that the bigger driver of the roughly 14 or 15% trends that Ed mentioned in in-patient is unit cost.

  • Roberta Goodman

  • Okay. I'm sorry.

  • Jim Stewart

  • Go ahead.

  • Roberta Goodman

  • Are you seeing any geographical differences here or is this pretty uniform across your markets?

  • Jim Stewart

  • I would say it's pretty uniform, Roberta, but there's no specific spike that we're seeing one way or another in different geographics, it's pretty uniform.

  • Roberta Goodman

  • One last question on separate topic.

  • When you were talking about the benefit [buydowns,] that looked like you were in the

  • 300 to 400 basis point range. Would that be a correct assumption?

  • Jim Stewart

  • That's a little high.

  • We're in about a 150 basis point, I think the other difference is mix shift in terms of geography or some customer groupings so that the

  • benefit buy down is somewhere around 150 basis points.

  • Unidentified

  • Robert, Jim, just as a follow-up to that.

  • When we talked about the growth rate and the yield, there's two things at work. Well, actually three things. That's the mixture thing.

  • But beyond that there are two principal reasons, one is the benefit buy downs, and the other thing is that rates take their time to, -- what I mean by that we do not renew 100% of our book effective January 1st, but rather it's renewed over the year.

  • And therefore, the yield numbers that we are quoting are the -- if you will, the effective rates taking into account the timing of the renewals.

  • That's the other cause between the yield numbers of 15 and the very high teens rate increases.

  • Roberta Goodman

  • So should we expect to see the yield increase over the balance of the year?

  • Unidentified

  • Yeah, you'll see -- as we renew more business at the higher rates you should see the yields creep up in terms of dollars.

  • Now the same phenomenon was going on last year so the

  • year-over-year percentages won't change a lot but the absolute dollars yields will creep up if that's clear.

  • Roberta Goodman

  • Yes, it is. Thank you.

  • Unidentified

  • Thank you. Our next question comes from Kristine Arnold of Morgan Stanley.

  • KRISTINE ARNOLD

  • Good morning.

  • Two quick questions. On the experience rating, I was under the impression that if we have a new experience rated account you reserve real, real conservatively and then if they choose to renew for the following year it creates a very positive [INAUDIBLE] second half the year, so I guess your guidance doesn't incorporate that traditional pattern.

  • Can you help me understand why.

  • Jim Stewart

  • Maybe I'll take it, Kristine, this is Jim.

  • I'll take another cut at it. Just to go back to the earlier question, then I'll come back to your question. What we do here, is we charge the customer, the full gap reserves over a two to three-year period.

  • Yet for financial reporting purposes, we are required to charge the full gap reserve in the first year.

  • So given that there's a difference, given we charge them over two to three years, then, there is a so-called new business drain associated with the new experience rated business.

  • Now one of the questions that you might ask is, does that not create some percent [INAUDIBLE] risk.

  • And the answer to that question is not particularly.

  • Because gap reserves that we hold are significantly higher than the runout liability that one would need if the case terminated.

  • Now to your question. The phenomenon that we were discussing has to do with the effect on full-year earnings. Your point about the [INAUDIBLE] is accurate for a particular case, whether it be a new case or whether an existing case in that we consistently hold conservative gap reserves throughout the year.

  • We see seasonally high medical claims in the first quarter and, therefore, experience rated indemnity results tend to be lower in the first quarter.

  • That phenomenon exist as I said for both first and first-year business as well as existing business.

  • I'm not sure whether that

  • helped or not.

  • KRISTINE ARNOLD

  • Yeah, it does, but if you're [guiding] down a bit, the indemnity, and yet we've already experienced full impact of the mix shift to experienced rating and the first quarter you didn't miss your prior guidance, then where's the change?

  • Jim Stewart

  • Well, the change I think is, you get the full year impact if the -- just take the guidance, for example.

  • The guidance came down roughly $30 or $35 million.

  • What you would expect is that we would have seen some of that effect in the first quarter and we saw some of it. And we will see the remainder of it because of the increased experience rated sales throughout the balance of the year. Thereby affecting the full year results.

  • KRISTINE ARNOLD

  • We haven't seen the full impact of the experience rated sales?

  • Jim Stewart

  • That's correct.

  • KRISTINE ARNOLD

  • Got it. The follow up question is how much was life and disability earnings up, on a combined basis year-over-year with the indemnity zing, then this year and what are your expectations for that for the full year?

  • Jim Stewart

  • The as you know, we report that -- or we manage the businesses between the health care division and the group division. The piece you were asking about was the group division. In the first quarter, the

  • group results, the life and disability, were essentially flat year-over-year, and our expectation for the full year that they would be up in the order of 15 some odd million, something like that.

  • KRISTINE ARNOLD

  • And the improvement driven by the rate increases?

  • Jim Stewart

  • Yeah.

  • The improvements year-over-year in the group area would be predominantly driven by the disability component of that business,

  • and that will be a combination of the improvements will be a combination of two things: One, the rate increases and two, our claim execution, claim-paying execution.

  • KRISTINE ARNOLD

  • Great. Thank you very much.

  • Unidentified

  • Thank you. Our next question comes from Charles Berrudei at Goldman Sachs.

  • CHARLES BERRUDEI

  • Two questions, one [INAUDIBLE] labor racial on transformation and the other on the group business, maybe on group just to complete the most recent thought with life and disability flat year year-over-year, does that reflect improvements in disability offset by a decline in life or were they both flat year-over-year?

  • And can you elaborate on our present release that was put out I think a couple of months ago related to your move in down market into smaller groups for, you know, for that business and what the longer-term plans are and why that decision was made?

  • Jim Stewart

  • We'll split the answers here.

  • On your first question as to the components of the life and disability. The disability is up and the

  • life was down so the answer to your question about whether that was right was yes. On the moving-down market, I'll let Ed take that one.

  • Ed Hanway

  • Charles, on the -- we've had historically a very strong position in the national account market in group life and disability.

  • We have not been as successful or consistent in the middle market yet we have good capability and the disability claims capability that Jim mentioned a minute ago is very sound and a good capability that we believe we can take down market. So we are in the process of both enhancing our sales capabilities, our sales resources, as well as our product designs to deal more effectively with the middle market.

  • We don't think -- we do think there's good opportunity there. We don't think there's necessarily a predominant competitor there and we think it's a good pregnant opportunity for us.

  • CHARLES BERRUDEI

  • Were you in that down market before, and did you get out and getting back in or is this the first time you're moving into that market?

  • Ed Hanway

  • No, Charles.

  • I think probably one of our points in time we were in that market and we've always about it in it, if you will. We've always been a market for people if they had a relationship with us for some of the larger business but we just hadn't been focused on it as a practice [INAUDIBLE] and our conclusion is to take best advantage we need to be specifically focused on what those customers needed because it's different than the larger guy.

  • So I would say while we may have been in it in the past we've not been in it with this degree of focus and intensity.

  • CHARLES BERRUDEI

  • On transformation, just for more color there, if you will,.

  • Ed Hanway

  • Yeah.

  • CHARLES BERRUDEI

  • A couple things.

  • One the higher cost in the quarter, whether that was transformation related, and if

  • you can also [INAUDIBLE] of how we could think about that change in asked with customers conversions and when you would expect the customers to be fully converted as far as transformation?

  • Ed Hanway

  • Let me start seconds part of the question.

  • The -- in terms of thinking about customer migration, first of all, we said all along that this is a phased approach and we've learned a great deal in terms of the migration we've seen to date so what we're doing now is [INAUDIBLE] that learning to new customers and existing customers. We're not expecting there's going to be a significant change in the amount of business we have on the transformed product.

  • As I said, Charles, we're going to have six million members by the independent of January of next year.

  • We said all along this is a multi-year process that extends into 03-04. So I wouldn't suggest that

  • this is a major shift here at all and, in fact, we're continuing to be quite confident that we can see the benefits of this both in terms of improved service and the efficiency gains that we should get over time.

  • CHARLES BERRUDEI

  • Is it a change customer driven in terms of customers asking to wait or as it driven by CIGNA -- I remember you mentioned in a prior call that you had more customers wanting to switch.

  • Ed Hanway

  • Yeah.

  • CHARLES BERRUDEI

  • Than your capacity would comfortably allow you too.

  • Ed Hanway

  • Yeah, and that's still the case Charles.

  • This is not customers becoming TIM relative to wants the benefits at all.

  • CHARLES BERRUDEI

  • And is that the cost reflected in the higher [ADMON] cost in the quarter?

  • Was the cost you encountered one of the inputs in your

  • decision to delay the conversion of the customer base?

  • Ed Hanway

  • I'm not sure I understood that completely, Charles. Do you want to give me that again.

  • CHARLES BERRUDEI

  • The higher [admon] cost in the quarter and you encountered some disruptions related to moving the customers on to the new systems as part of transformation.

  • I'm wondering if the higher cost that you encountered were reflected in the higher admon ratio and if so if that played a role, or if any customer disruptions you encountered played a role in your decision to elongate the conversion process.

  • Jim Stewart

  • Charles, let me touch on this.

  • I think it depends on what your point of comparison is. If you are point of comparison is the first quarter of 01, yeah, the suspensions, the expense ratio admon ratio is up a little bit. And if you're basis of comparison is, for example, the third and fourth quarter of 01 the numbers are down so I'm not sure where you were coming from on the question and I would also say that as we said in February, when we talked about this, that -- I mean, we're talking about a massive system here, and we also acknowledge that we had a bump in the road or two relative to the conversions and customers and making sure that there is a little bit of money in the quarterly results for that expense. But when you look at the overall picture, I think the expense ratios are behaving themselves.

  • Ed Hanway

  • Yeah, and, Charles, I would just add one additional thought which is, I don't know if you were inferring this or not.

  • I took it and it may have been incorrect. None of the decisions we have made relative to the pacing of either putting new business on the system, all of which is going on, or migration of existing customers, is driven by expense issues.

  • What's driving is here is insuring that the quality and effectiveness of the service for both the new customers and the [pie grated] customers is as strong as possible.

  • And so -- as a practical matter I feel very good about the current state of transformation and the quality of the service that can be derived from it.

  • We just want to make sure that we continue that condition as we bring the rest of these customers on, and we've learned as Jim said, from some of the my grazing this past year.

  • So we're going to reflect that

  • learning now on how we stage the balance.

  • CHARLES BERRUDEI

  • Presumably what the experiences this year and being that that you're converting a slightly smaller book over or about the same size next year could we expect fewer bumps in the road or were the bumps really unavoidable in the scope of a project?

  • Ed Hanway

  • I think we would be remiss if we didn't try to improve upon our experience of January given what we've learned.

  • Having said that, as Jim note noted, this is a pretty complicated process and these are complex programs that we are moving for some of these customers.

  • So while we expect to always get better I wouldn't be naive enough to suggest that there isn't the opportunity for bumps in the road from time to time.

  • I do think we've also demonstrated when we do find those for whatever

  • reason we can respond effectively and that's been acted on by our customers. So I think we've gotten the migration process now, I won't say down to a science but engineered pretty well.

  • CHARLES BERRUDEI

  • And the total cost will be about $1 billion for the entire project?

  • Ed Hanway

  • Yeah.

  • CHARLES BERRUDEI

  • Great.

  • Ed Hanway

  • No change there.

  • CHARLES BERRUDEI

  • Thanks a lot.

  • Unidentified

  • Thank you. Our next question comes from Terry Shu of J.P. Morgan.

  • Terry Shu

  • A couple of questions. First on just success of your marketing initiatives and your new products, both the increase and the number of people you're devoting to your initiatives as well as the product roll out when can we start seeing some signs? Here we are moving into mid-year and you've been rolling out these products, talking to consultants.

  • Are there very positive signs, when will we will be able to start seeing some signs for 2003, that's the first

  • question.

  • Unidentified

  • Well, I guess, Terry, the way I would answer this when we see some positive signs, and as a practical matter, we are expecting that membership is going to improve for the balance of the year.

  • Terry Shu

  • Right.

  • Unidentified

  • So that's I think a good early indicator.

  • And as we get into the, you know, the large account cycle here in the summer, early fall, we'll continue to get reinforcement if the direction we're going is right. We're focused on two things, one, is continuing to improve retention, particularly now and permits market and other is new sales and we think we can improve in both areas.

  • Terry Shu

  • There is no particular time, like mid-year when you have more renewals and such that we would get a better sign or is it just progressively through the remainder of the year?

  • Unidentified

  • Yeah, Terry, I think it's more progress through the year. I wouldn't expect a big bang at July 1st.

  • Terry Shu

  • But encouraging signs is it fair to say?

  • Unidentified

  • Yeah, I think that's well put.

  • Terry Shu

  • Now on shift toward experience rated type policy, just having visited your offices recently, is it for a middle market thing, and also there were some discussion about with your insurance background as opposed to other HMO type players, you're particularly well suited in offering -- to offer these products and is the market now more receptive to it, and also the middle market more receptive to these experience-rated products and, therefore, gives you some competitive edge?

  • Can one read it that way?

  • Unidentified

  • We'd like to read it that way. I think particularly in the middle market when someone makes a decision to come off of a fully en insured product, Terry.

  • Terry Shu

  • Right.

  • Unidentified

  • And they're looking to do that so they can get the best fit of their own experience which they always think is better, the experience-rated product gives them a way to do it with a little more certainty in terms of the actual funding, and we are one of the fewer people if not the only people that provide this.

  • We do think it is an advantage and we think that's what's reflective in the mix change here.

  • Terry Shu

  • You see some customer pull then.

  • Unidentified

  • We do.

  • Terry Shu

  • And then also with regard to just the specialty health care lines which you talk about as being very profitable and has really feel-good profits for you, can you comment on the decline in the dental membership?

  • You had a very strong growths for behavioral care, but a drop in dental membership. I forget whether you commented about it in the past. Why is that?

  • Unidentified

  • I didn't comment on it in the past, Terry, I don't think.

  • I guess a couple of things. First, we would prefer to reverse that trend, but we have two blocks of business.

  • We have the dental HMO where we have seen membership decline as well. That's a pretty mature market and growth there is challenging.

  • So we are actively attempting to reverse that. And that's where we've seen probably the greatest pressure. The indemnity has been down a bit, and again, we've been converting a lot of traditional indemnity members into a more PPO-based product there.

  • We've had good success with that but in the last quarter or so we haven't seen as much growth there as we would like.

  • So I would say that we're focused there as well. We have good products. We probably have the second largest or second

  • largest PPO - network in dental so we believe we can grow those businesses but the HMO is tougher than the indemnity.

  • Terry Shu

  • Is it fair what you're describing is more of an industry phenomenon much less CIGNA competitive. It's I guess the consumer demand for PPO's instead of HMO's so you'd have to work harder to transition customers and products, et cetera is that more it?

  • Unidentified

  • I would say it's an industry issue in the dental HMO. I would say that's a challenge across the industry.

  • I would say in the indemnity

  • block or the PPO block, we're trailing a little bit some of the larger competitors there. We can do better than we have in the recent past in indemnity.

  • Terry Shu

  • Just back quickly on the experience rate of business.

  • The overall profitability I would assume, is as strong as the ASO, no difference. Just the timing.

  • And if you have good momentum there, it's just fuel and acceleration of earning contribution theoretically is that a fair comment?

  • Unidentified

  • Yes, that would be fair.

  • I would say given a choice between a good experienced rated case and the HMO case we take the experienced-rated case because we make more money on it. One of the things we've said even though it has a growth and experienced-rated sales have negative consequences from a reported-earnings perspective in the short term from more money in terms of margin I would assume.

  • Unidentified

  • That's right.

  • Terry Shu

  • Okay because it has some element of an insurance product to it?

  • Unidentified

  • That's right.

  • Terry Shu

  • Okay. Thank you.

  • Unidentified

  • Thank you.

  • John Rex

  • Good morning, I want to follow up a little more on the end [result] as you said today.

  • I think we're kind of in the midst of [RSP] season for a large case ASO business.

  • Wondering what you are ready in terms of the level of this year versus last year and your expectations in terms of that

  • piece of business in terms of your 03 enrollment outlook?

  • Unidentified

  • As I said it's a little early to speculate even on the large stuff.

  • RSP's are out there. I wouldn't say there is a significant difference in what we've seen in prior years.

  • There's -- I'm not sensing there's more out there than there has been in the past. We're very active in the marketplace as you might expect.

  • But I think premature on what that mean for January 1 2003.

  • John Rex

  • One follow up on your comments on cost and components particularly on the in-patient hospital. I guess you're putting it in the 14 to 15% range as most of it on the unit pricing.

  • Is there any impact on that unit price that you're computing that you would be derived via more members pushing through your preset

  • hospital stop loss ratios this year than last? Has there been any kind of impact from that?

  • Unidentified

  • I think the answer to the question, generally, is no.

  • John, just to make sure one thing that we didn't mislead you or I didn't mislead you. The order of magnitude in patient trend in the mid double digits is a combination of both utilization and unit.

  • The way you said it, you may

  • have concluded that it's all unit growth and that's not what I meant to say.

  • John Rex

  • I meant kind of unit pricing actually because, you said it was two-thirds pricing.

  • Unidentified

  • Yeah.

  • John Rex

  • Unidentified

  • Not in that number, John, no.

  • John Rex

  • Where do you expect that to stabilize since that's a fairly high unit pricing number?

  • John Rex

  • Well, John, I don't think it's necessarily at odds with what the rest of the industry is seeing, at least not from our research.

  • And, you know, I think it's reflective of a lot of pressure from the hospital side. If you look at the public hospital companies, for example, and what they're reporting in revenue growth, it's fairly significant and they've been very aggressive from a contracting standpoint.

  • John Rex

  • And in the issues that you had noted, kind of last year impact that number in terms of the greater number of patients pushing through the stop loss, the preset stop loss ratios in your contracts, has that been resolved in the sense that you've gone back and you've reset those stop loss ratios?

  • Unidentified

  • Yeah, I would say, John, that the stop loss things that you're mentioning I don't have lots and lots of detail on it, but it goes sort of hospital at a time.

  • And to the extent that we have relationships with hospitals that have stop loss problems, it is our escort of practice to continue to fix those in a way that makes it come out right for both parties.

  • I don't think -- there's nothing in the numbers that is unusual relative to that issue.

  • There's always some stop loss

  • stuff in there but I wouldn't attribute any of the recent trends to changes in stop loss.

  • John Rex

  • Great, thank you very much.

  • Unidentified

  • Thank you. Our final question comes from Ed Crawl of SP Cowen?

  • ED CRAWL

  • Good morning.

  • If I can go back to the transformation project, two quick things. Is it safe to say that it would be completed by January 1, 2005, by the time you would move people over for that January 1, 2005 period?

  • And if you could just give us some color or a couple of examples, maybe, what kind of feedback you're getting from existing customers that you've moved over to the new system?

  • Jim Stewart

  • Yeah, Ed.

  • First of all, 1-1-05, ah, that would consistent with our target date to get the vast majority of this done. INAUDIBLE] [INAUDIBLE] CONNECT to BD-X Transcript Server at Thu May 2 09:26:28 2002OK - Ticker is CIOK - Call name is Cigna Q1 2002Relative, I would start it this way, relative to color, we've pleased with what we've seen in the improvement for what we call first-call resolution rate.

  • That's where you call in and you don't get bounced around to three or four different people or you don't have to wait for a return call, but we have all the information available to give you an answer quickly.

  • So at an aggregate or macro level, what we're seeing in those areas is consistent with what we had expected.

  • Specific to customers, I would say we have tracked very closely the satisfaction levels of a large group of customers.

  • And I would say those satisfaction levels have been consistently improving.

  • So we are to the point now we have customers who are clearly willing to recommend this particular capability as being an advantage.

  • So that to me as good measure of the progress we're making both in getting the migration done effectively but also in delivering some of the promise of transformation.

  • ED CRAWL

  • Okay.

  • Great. Then a quick follow-up. Jim, thanks for the heads up on that [DJO] request for information.

  • Is this part of that -- this has been an existing issue for the pharmaceutical industry,

  • so are you more of, just a -- I don't know -- an innocent bystander as far as this goes, you're just being asked to provide information?

  • Jim Stewart

  • Two things, Ed. One is the -- you're right about the government's interest in drug cost and pharmaceutical companies. This has been going on for some time, and given where we are in the -- through the investigation I don't even want to comment on what they want or what's going to happen here.

  • I just can't tell. We'll just have to see what happens here.

  • ED CRAWL

  • Thanks for the heads up on that.

  • Jim Stewart

  • We thought it was appropriate after the -- got out of line.

  • Unidentified

  • At this point we'll bring the meeting to a close. I want to thank everyone for participating on call this morning. We'll be back in our offices shortly to take additional questions. Thank you.

  • Conference Facilitator

  • Ladies and gentlemen, this concludes CIGNA corporation's first quarter 2002 results review.

  • A recording of this conference will be available for 10 business days following this calm. You may access the recorded conference by dialing 1-888-266-2081 or 1-703-925-2533.

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