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Operator
Ladies and gentlemen, thank you for standing by for CIGNA's second quarter 2005 results review. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference including the question and answer session is being recorded.
We will begin by turning the call over to Mr. Ted Detrick.
Please go ahead, sir.
Ted Detrick - VP, IR
Good morning, everyone.
And thank you for joining today's call.
I am Ted Detrick, Vice President of Investor Relations.
With me this morning are Ed Hanway, CIGNA's Chairman and CEO;
Mike Bell, CIGNA's Chief Financial Officer;
David Cordani, President of our HealthCare business and Jon Rubin, CIGNA's HealthCare's Financial Officer.
In our remarks today Ed Hanway will begin by discussing highlights of the quarter.
Mike Bell will then discuss CIGNA's second quarter financial results and provide the financial outlook for the full year and third quarter of 2005.
David Cordani will discuss our medical memberships results, CIGNA healthcare's value proposition and our thoughts on the Medicare Part D opportunity.
Ed will conclude with a brief discussion of market trends and CIGNA's strategy for growth.
We will then open the lines for your questions.
Now as noted in our earnings release, CIGNA uses certain financial measures which are not determined in accordance with generally accepted accounting principles or GAAP when describing its financial results.
Specifically, we use the term labeled adjusted income from operations, which is income from continuing operations before realized investment results and special items with special items being unusual charges or gains as the principal measure of performance for CIGNA and our operating segments.
This measure is most directly comparable to the GAAP measure income from continuing operations.
A reconciliation of these two measures and additional information is contained in today's earnings release which is posted in the investor relations section of CIGNA.com.
Before turning the call over to Ed, there are a few items that I would like to cover pertaining to the second quarter results.
I would note that the earnings release details two special items which are excluded from adjusted income from operations.
The first item is an after tax gain of $81 million primarily related to a federal tax audit.
The second item is an after tax gain of $29 million related to the accelerated recognition of a portion of the deferred gain on the sale of CIGNA's retirement benefits business.
In addition, we also reported income from discontinued operations of $349 million which represents an after tax benefit associated with the disposition of certain businesses in recent years.
This is also a result of the tax audit.
Specifically, $287 million of the benefit relates to a capital loss realized in connection with the divestiture of our property and casualty operations in 1999.
The remaining benefit of $62 million relates to the divestiture of our Brazilian healthcare business in 2003.
These items will be discussed in further detail in CIGNA's report on Form 10-Q which we plan to file with the SEC later today.
I would also note that earlier this week we announced the acquisition of Choice Link's a privately held consumer focused benefits technology company and -- technology and services company.
The acquisition further strengthens CIGNA's capabilities as a leader in consumerism and health advocacy.
I would also note that the acquisition of Managed Care Consultants of Nevada which we announced on July 20, has now closed.
This transaction strengthens our presence in Nevada by enhancing our provider network and has the potential to add up to 100,000 members.
This transaction will be included as part of our third quarter results therefore the additional members are not included in the membership results reported today in our second quarter statistical supplement.
Now in our remarks today we will be making some forward-looking comments.
We would remind you that there are risk factors that could cause actual results to differ materially from our current expectations.
Those risk factors are discussed in a Form 8-K filed this morning with the Securities and Exchange Commission.
With that I will turn it over to Ed.
Ed Hanway - Chairman, CEO, President
Thanks, Ted.
Good morning, everyone.
I'm going to start today's call with comments about our second quarter results and recent progress on our initiatives to strengthen our health care business.
Second quarter adjusted income from operations was $260 million, or $1.98 a share, which is an 18% increase in per share earnings versus a year ago.
The underlying results were driven by strong fundamentals in all of our ongoing businesses.
Our health care operations reported solid earnings and importantly had stable membership as we had forecasted.
Our disability and life and international businesses continued to report strong earnings growth, and these operations are truly a competitive advantage for us and they present solid ongoing profitable growth opportunities.
Now, let me spend a few moments discussing with you the significant progress we have made in strengthening our health care business.
First, as I've stated on prior calls, our top priority for 2005 is to stabilize our medical membership.
And we are making good progress in achieving that result.
Membership has been stable since January.
And we expect that it will remain stable for the balance of the year.
Middle market results have been strong resulting in net growth in middle market since January.
Now, in achieving this goal we have effectively executed our business fundamentals on a consistent basis.
For some time now we have been fully competitive in the fundamental areas of customer service, medical cost management, and pricing, and underwriting.
In addition, we have reduced our overall operating expenses while at the same time continuing to make important investments in critical customer facing areas that are positioning us for growth.
These include making significant investments in distribution, innovative products, and customer service capabilities to enhance the experience for our members in our consumer directed offerings.
Our current product portfolio is fully competitive and we are increasingly being recognized as providing good value to our customers.
As we look forward to 2006, our value proposition is resonating very well in the market.
And we continue to be encouraged by several leading indicators.
Very importantly, we have less business out to bid than we had a year ago, and we have received significantly higher RFP activity from prospects in both the regional and national accounts market segments.
All of this is evidence that the market perception of our capabilities is improving.
In addition to these areas of focus for 2005, we are also becoming recognized in the market for our leadership position in consumerism, our emphasis on health advocacy, and our strategic use of information.
As it relates to consumerism, our leadership position is validated by the industry award recognition and favorable broker and customer feedback that we've received and an example of this is our consumer directed support tools.
Regarding health advocacy, we are utilizing our superior clinical quality and medical management capabilities to successfully deliver cost effective care and quality outcomes for our customers.
And this is evidenced by our industry leading NCQA and HEDIS effectiveness of care scores.
And finally regarding information, we are leveraging our database of information to enable individuals to achieve their health care goals and for employers to improve the productivity and health of their work force.
One example of this is our Hi Score tool that David will comment on later.
In a moment, we will further elaborate on our value proposition and how we were differentiating ourselves in the marketplace.
My closing comments I will make some observations about market trends and then briefly discuss our growth strategy.
But in the meantime, let me now turn it over to Mike for the specifics of the second quarter results in our 2005 outlook.
Mike Bell - CFO, EVP
Thanks, Ed.
Good morning, everyone.
In my remarks today I will review CIGNA's second quarter results and discuss our outlook for the full year and for third quarter of 2005.
As Ted noted, our second quarter results include special times.
These matters are discussed in our earnings release and will also be addressed in our Form 10-Q which we expect to file later today.
In my review of consolidated and segment results, I will comment on adjusted income from operations.
This is income from continuing operations before realized investment results and special items.
This is also the basis on which I will provide our earnings outlook.
Overall, our consolidated earnings for the quarter were higher than we had previously estimated, reflecting strong results in each of our health and related benefits businesses.
Our second quarter earnings were 260 million or $1.98 a share compared to 235 million or $1.68 a share in second quarter of last year.
Now review each of the segment results beginning with HealthCare.
HealthCare earnings in the second quarter of 2005 were 173 million, compared to 175 million in the second quarter of last year.
Both quarters benefited from favorable prior year claim development.
The second quarter of 2005 included favorable prior year development of $34 million after tax.
Of which 17 million was in commercial HMO.
The favorable development reflected continued strong medical management and underwriting results.
Excluding the prior year development, health care earnings were in line with our expectations.
An increase versus second quarter 2004 mainly due to strong underwriting fundamentals, forward operating expenses, and solid specialty health care results partially offset by the effects of lower membership.
Second quarter membership was stable relative to first quarter and approximately 7% below year end 2004 levels.
This result reflects good progress relative to our full year goal of stabilizing membership.
Premiums and fees for the segment declined 5% relative to last year, reflecting lower membership partly offset by price increases.
Year to date operating expenses were 3% below 2004 and our second quarter expenses include some favorable items which we do not expect to recur in the second half of the year.
Relative to medical cost trend, the year to date trend for our total book of business was in the 8 to 8.5% range and we continue to expect the full year result to be in the range of 7.5 to 8.5.
In our commercial HMO business which represents 9% of our total membership, our year to date medical loss ratio excluding the prior year claim development was 85.5%.
We expect the medical loss ratio for this business on an operating basis to improve modestly over the remainder of the year.
To recap, our second quarter health care results excluding the favorable prior year development were in line with our previous estimates.
Now I'll review the results for other segments.
Second quarter earnings for the disability and life segment were 59 million compared with 48 million in the second quarter of last year.
This quarter's results benefited from better than expected mortality and group life.
Our underlying results in disability and life continue to be very strong competitively.
And in light of the favorable mortality in the first half of the year, year to date earnings for the disability and life segment are higher than the run rate we expect to see in the balance of the year.
Turning to our international segment, second quarter 2005 earnings were 25 million compared to 20 million in second quarter of 2004.
Results reflected strong performance in our life, accident, and health business.
In aggregate, the remaining operations including runoff retirement, runoff reinsurance, other operations and corporate generated 3 million of earnings in the second quarter which is slightly better than last year's results.
Before providing our outlook for 2005, I will comment briefly on our capital position.
Our parent company capital position continues to be strong.
And our subsidiaries remain well capitalized.
At the end of the second quarter, cash and short-term investments at the parent company were approximately $1.4 billion.
We ended the quarter with a leverage ratio of less than 20% which is slightly below our target range.
During second quarter, we continued our share repurchase program and repurchased approximately 3.5 million shares of our stock for $350 million.
Through July 15, we repurchased an additional 590,000 shares for 64 million.
We have approximately 727 million of remaining repurchase authority at this time which includes an additional 500 million authorized by our Board of Directors last week.
Relative to our full year expectations for parent company liquidity, our outlook is materially stronger than we had previously projected.
We now expect to receive subsidiary dividends of $1.2 billion for the full year.
This is 400 million higher than our previous expectation of 800 million.
The increase reflects our improved financial results and our subsidiaries’ strong capital position.
In addition, we expect the favorable 2005 cash impact of the tax benefits reported in the quarter to be approximately $200 million.
And a third update relative to our previous projections is that we plan to make an additional voluntary contribution to our defined benefit pension plan.
This contribution will have a net impact on 2005 cash of approximately $300 million.
It is an acceleration of contributions that we would otherwise make in 2006 and 2007.
Our decision to do this was based upon the favorable economic impact the contribution will have on the funding status of our pension plan, including the fact that it will result in lower PBGC premiums.
I will now review the specifics of the parent company outlook.
We expect our net cash position at year end to be approximately $1.85 billion excluding any additional stock repurchase in the balance of the year.
As I noted, we had approximately $1.4 billion at the parent company on June 30.
We now expect to receive 700 million in subsidiary dividends in the remainder of the year.
We also expect to realize 200 million in cash related to the second quarter tax benefits.
And relative to uses of cash in the second half of the year, we expect there will be 300 million related to the pension contribution and about 150 million in net other uses including July's stock repurchase.
Overall, we now expect the parent to end the year with cash and short-term investments of approximately $1.85 billion excluding any further repurchase activity.
In summary, our capital position remains very strong.
Now I'll review the earnings outlook for the full year and for third quarter of 2005, consistent with our novo practice the estimates I provide will be for adjusted income from operations.
Our second quarter earnings were 65 million higher than the midpoint of our previous estimates ,mainly reflecting the favorable prior year development in health care and favorable mortality in disability and life.
Also as I noted earlier, there was some nonrecurring expense favorability in the quarter.
We are increasing our full year estimates to reflect the strong second quarter results.
Specifically our updated estimate is that full year 2005 consolidated earnings will be in the range of 920 to $980 million compared to our previous estimate of 845 to 915 million.
Our current estimate for full year health care earnings is in the range of 625 to $675 million.
Our view has not changed relative to the underlying expectations for our health care business.
The increase in our estimate primarily reflects the impact of prior claim development in the second quarter.
Based on recent results we expect membership to be stable over the balance of the year.
With respect to health care operating expenses based on our current thinking and taking into account our investments in market facing capabilities we expect full year operating expenses in 2005 to be approximately 2 to 3% lower than full year 2004.
I'd also note that we are developing plans for participation in the Medicare Part D prescription drug program.
At this point our earnings and expense outlook does not reflect costs associated with our pursuit of Part D related opportunities.
Our current expectation is that our 2005 spending on this initiative will not exceed $40 million.
We plan to refine our estimate as additional data becomes available and we evaluate our competitive position.
With respect to the balance of our operating segments we now expect our other businesses to contribute approximately 295 to 305 million of earnings for the full year.
This is an increase relative to our previous range of 260 to 270 million primarily reflecting our strong second quarter results.
To summarize, we are raising our consolidated outlook for full year 2005 to a range of 920 to $980 million.
Our full year earnings per share will be affected by the amount and pace of share repurchase during the year.
As we've stated in the past, we do not predict the amount or pace of repurchase and our EPS estimates do not reflect the impact of any further repurchase activity.
On this basis, our estimate of full year 2005 EPS is a range of $7 to $7.40 a share compared to our previous range of 6.40 to 6.90 a share.
Turning to the third quarter 2005 outlook we currently expect consolidated adjusted income from operations of 185 to 215 million.
We estimate third quarter 2005 health care earnings to be in the range of 125 to 145 million.
We expect the balance of our reporting segments to contribute approximately 60 to 70 million of earnings.
So putting together the pieces, we estimate that our consolidated third quarter adjusted income from operations will be in the range of 185 to $215 million with EPS in the range of $1.40 to $1.60 a share.
So to recap, our second quarter results were strong.
Our year-over-year earnings increase reflected strong execution in health care and continued strong results in our other businesses.
With that I will turn it to David who is going to discuss the membership outlook, our value proposition, and our plans for Medicare Part D. David.
David Cordani - President, CIGNA Healthcare
Thanks, Mike, and good morning, everyone.
As you've heard from Ed and Mike, our results for the second quarter reflect the continued strong performance of our health care operations including our success in stabilizing membership.
My comments will focus on our health care membership results, the drivers underlying these results specifically the strength of our value proposition as the marketplace increasingly embraces consumerism, and I'll discuss our Medicare Part D strategy and our prospects for profitably growing in this business.
Relative to membership, the headline is that we have made good progress in stabilizing our health care membership and we are well positioned to continue to improve on these results.
As of June 30, we had 9 million total members split equally between the national and regional segments.
This is consistent with both the membership totals we reported last quarter and with our expectations.
The progress we've made to this point in stabilizing our membership reflects consistent strong performance of the fundamentals of our business which are medical management, competitive unit medical costs, and customer service.
Our improved membership reflects improvement in customer retention levels, most notably in the regional segment where retention rates are up by 1000 basis points year-over-year, our pipeline and close ratios have also improved nicely in the regional segment.
As a result, the regional segment membership has grown by over 2% from January 1, of this year.
Additionally this pattern has continued through the July 1, renewal and sales cycle.
Turning to national accounts, membership declines year to date are consistent with expectations.
Given that about 85% of this book of business renews in January, we have been fully focused on customer retention as well as new business sales for the January 2006 selling season.
Now while it's still too early at this point to provide a specific estimate on where we will stand on January 1, 2006, we can say that case retention outlook is improved over prior year and that the RFP pipeline is up substantially versus the same time last year.
So to sum up membership through the first half of 2005, our membership was down by 7% which is slightly better than we projected earlier this year and we anticipate being stable for the remainder of the year.
Now I will turn my comments to the trends unfolding in the marketplace and how our strategy and value proposition addresses these trends in a unique and compelling way.
There are three major trends -- consumerism, health advocacy, and the use of actionable information.
We know that consumerism has the potential once fully embraced to fundamentally change the health care system.
Our view of health care consumerism is a marketplace where a continuum of services are deployed to engage, educate, and enable consumers to achieve their own personal health goals.
Simply stated, when consumers have the motivation and ability to improve their own health, they lead healthier lives, cost is removed from the system, it's not simply shifted elsewhere.
It's actually removed.
And the quality of health care improves.
The second trend and one is that occurring in conjunction with consumerism is health advocacy.
Where I will be speaking, health advocacy is our approach to building knowledge and skills, aligning incentives, and creating opportunities that motivate consumers to attain their health goals.
For example, we are seeing more and more employers adopting wellness, health coaching, behavior modification, and health navigation aids to facilitate improved results for their employees.
We believe that the most effective health care is delivered through the union of consumerism and health advocacy.
To be fully effective, however, each must be supported by actionable information and insight which brings me to the third trend, actionable information.
Increasingly the value of actionable, personalized information for employers and members alike is being recognized and embraced.
From employers that want to assess the health of their employee population, the efficacy of their benefits programs, and the impact of targeted actions.
For members they want to understand tradeoffs, make informed choices and obtain trusted advice about courses of action.
The CIGNA value proposition which we believe is on the leading edge in our industry emphasizes the union of consumerism, health advocacy powered by actionable information.
And as the leader in consumerism CIGNA is uniquely qualified to deliver a continuum of services from coaching through health advisory services and targeted behavior modification programs, each of which are designed to engage, educate and enable consumers to take control of their own health care.
To serve as a trusted adviser and help consumers make decisions about their benefits and how to pursue medical services and to power our solutions with the right actionable information about both cost and quality.
Now relative to the market's reaction, first CIGNA is increasingly earning accolades in the industry for the capabilities I have just discussed.
For example, we recently won two consumer directed health care conference awards taking top honors for best health plan initiative for consumer directed health care and the prize for best technology introduced by health plan for consumer choice.
Second, our January 2006 national accounts pipeline is up 50% year-over-year.
And our health adviser program while only 18 months since its initial introduction is our fastest growing product with over 1.2 million members and counting.
Third, the employer, consultant, and broker community is bullish on our employer reporting and member support tools such as our health index score or Hi Score for employers and our first to market pharmacy pricing tool for our members.
Fourth, today we have over 125,000 members in our HSA and HRA offerings and well over 600,000 members in high deductible and consumer directed programs.
Last but certainly not least, our industry leading capabilities, vision, and commitment to consumerism, health advocacy, and actionable information has enabled us to recruit some of the finest talent the industry has to offer.
Consumerism, health advocacy, and actual information clearly position us well for growth over several new and existing segments which Ed will expand on more in a moment.
One aspect of our growth strategy is Medicare Part D which I will comment on briefly before turning it back to Ed.
As you know, CIGNA expects to be a national Medicare prescription drug plan provider for employers and individuals.
Part D represents a growth opportunity for us, potentially a significant one.
There are approximately 45 million Americans who currently access a wide range of health benefits and services through Medicare.
About 12 million of those are via the workplace.
For employees enrolled in Medicare, we will provide fully integrated employer based Part D benefits solutions.
We will leverage the clinical programs in our pharmacy benefit management business with our medical and behavioral health clinical programs.
We will deliver our Part D pharmacy benefits and integrated clinical programs through our current national, middle, and small segment distribution networks.
We will also capitalize on the individual sales and distribution capabilities implicit in our new strategic alliance with Nation's Health.
CIGNA's market position as a premier national health benefits company combined with Nation's Health expertise in enrolling and servicing individual seniors clearly positions the alliance for success.
So to recap my comments, our membership is stable showing slight improvements since January 2005.
The market is clearly shifting toward consumerism and health advocacy, a shift that we are not only embracing, but one in which we intend to lead.
We have gained recognition as a leader and innovator in health benefits consumerism and we have built a broad range of capabilities relating to consumerism, health advocacy, and actionable information.
The higher retention rates and sales thus far in 2005 for the regional segment and those emerging for January 2006 for the national segment are a clear indication that the marketplace is increasingly recognizing the depth and breadth of our new value proposition.
And as I previously indicated we intend to be an active participant in the Medicare Part D marketplace and we see good growth potential for CIGNA in this segment in the years to come.
With that I will hand it back to Ed.
Ed Hanway - Chairman, CEO, President
Thanks, David.
Now before we respond to your questions, I want to cover two topics -- first, the rapidly emerging health insurance market trend to consumerism and then within this environment, CIGNA's growth plans and how we are strategically well positioned.
Historically this industry has been viewed as one in which the level and method of care was largely determined by the managed care providers with employers defining the needs of the ultimate consumers.
The consumer had little if any say in the plan design and decision-making process.
But now we are in an environment where consumers will be engaged in virtually every facet of the health care experience.
Employers are increasingly embracing the shift to consumerism through the use of consumer directed products and services.
This shift in our view represents an emerging see change for our industry and is driven by four key forces.
First, rising health care costs because of increased utilization, fueled by open access products and consumer choices as well, and a lack of transparency to the consumer regarding the true cost of health care.
Second, increasing availability of information that address other personal needs.
For example in financial services, have really prompted consumers to expect similar information regarding their health care services.
Third, consumer frustration with a business model that's focused on managing costs versus improving health outcomes.
And finally, increasing demand by consumers for more accountability and better quality service from the actual provider of health care.
CIGNA’s suite of products on both the core medical and specialty side uniquely positions us to serve customers with integrated health care solutions as the market moves from a fairly narrowly focused cost based business model, to an all inclusive value based model.
In addition, our industry leading disease management programs offer a unique opportunity for us to differentiate ourselves in the marketplace.
With over 20 programs in place, we can offer consumers many options to improve their quality of life.
As David indicated, we recognize that health advocacy and actionable information will play a key role in the consumerism equation.
Specifically, the industry leaders will enable consumers to obtain knowledge about their health, and develop incentives that will create the opportunities to motivate individuals to attain their health goals.
We are well positioned in this regard as we leverage our 3000 plus expert clinicians to coach and guide consumers and help them understand their health conditions and choices.
So to summarize our approach to winning in this new age of consumer choice will be to form a union between consumerism and health advocacy powered by the strategic use of information.
Now let me spend a few moments discussing our growth strategy.
The breadth of our capabilities positions us to be a very successful competitor in this new consumer driven marketplace.
While our strategy calls for us to leverage our capabilities in consumerism, health advocacy and the strategic use of information across all market segments, we are focusing our efforts in markets where we have significant existing capabilities and a select number of segments where we are building new capabilities.
Our growth strategy focuses on the three major areas.
First, expanding our reach in several market segments of the employer sponsored health care arena.
Second, developing health care solutions to address the rapidly growing senior segment.
And third, developing new capability to address the emerging needs for voluntary health coverages.
Let me briefly comment on each area.
In the employer sponsored market, our strong multi-site employer capabilities which include our broad specialty products position us very well in the national account and middle market segments.
In middle market, where as David mentioned we were seeing reasonable growth today, we are targeting market share gains particularly from third party administrators and local and regional payors who lack the ability to effectively compete in a consumer driven market.
Within the middle market, the government and Taft-Hartley segment we established a year ago is experiencing strong marketplace interest in products and services we have built specifically to meet their unique needs.
The small employer segment, those employers with less than 200 employees, which we historically had not focused on is also a good growth market for us.
We established a specific segment organization and strategy separate and distinct from the middle market to focus on this business about a year ago.
We have targeted a series of geographic markets and rolled out new streamlined products which are being well received.
The seniors market will also be an important growth area for us.
We recently announced the formation of a senior segment that is dedicated to developing products and services to address the needs of seniors 55 years of age and older.
The reason for our focus on this market segment is simple.
The demographics are quite compelling and our value proposition works very well in this space.
Currently, this market segment represents about 20% of the U.S. population.
And the 55 to 64 age cohort is growing 10 times as fast as the under 55 population fueled by the aging of the baby boomer generation.
Given these dynamics, addressing the needs of this population is an important opportunity for us.
Group Health products and services have and will continue to be a cornerstone of CIGNA's business.
However, there are two phenomena changing the senior's landscape.
First, as health care costs continue to spiral upwards, employer sponsored health insurance for actives and retirees will continue to contract.
At the same time, the workforce is aging with many employees continuing their careers or establishing second careers thereby delaying the point at which they will be covered by Medicare.
The net effect of these forces is a creation of a market for flexible insurance arrangements that meets the needs of a consumer population not defined by age or work status, but by their health care and financial needs.
This is an opportunity for CIGNA to develop products that meet the needs of the aging workers while at the same time continuing to maintain our established relationships with our planned sponsor customers.
As the population ages and life spans extend, the need for health advocacy, chronic care programs and quality of life improvement initiatives will grow.
These types of offerings are central to CIGNA's value proposition for the Group Health market and we strongly believe we can leverage these services to better the lives of retirees and create new revenue streams for our organization.
We are also actively reviewing participation in government funded programs where we believe we will have the capabilities to succeed.
Our national participation in the Medicare Part D program that David outlined is a good example and important first step.
Finally, we are also currently reviewing potential opportunities in the individual and voluntary markets.
It would both compliment our strong employer group position and provide attractive revenue growth from expanded market coverage.
These opportunities include but are not limited to areas such as scheduled benefit covers, supplemental gap coverages and part time benefits.
In summary, we see solid profitable growth opportunities in both existing markets, and several new areas that we are pursuing.
Now to recap for the quarter, we achieved strong earnings across each of our businesses.
And our strong results have further strengthened our capital position.
We stabilized health care membership and are now focused on profitably growing our market position.
This concludes our prepared remarks and we would now be happy to take your questions.
Operator
Thank you. [OPERATOR INSTRUCTIONS] And we will go first to Josh Raskin with Lehman Brothers.
Josh Raskin - Analyst
Good morning.
Wondering if you could just review sort of an M&A strategy.
You guys have been back in the market admittedly in modest side at this point, but wondering if you could just review what you guys are looking for in terms of new tools or if it's geographic focus and how that impacts the parent cash calculation that Mike went through.
Then just, second question is you mentioned some one time favorable costs in the health care segment.
I was wondering if you could just elaborate on that and maybe size those?
Ed Hanway - Chairman, CEO, President
Sure, Josh.
Let me take the M&A activity.
And I will turn the cost question over to Mike.
I'll start by saying we believe we have a very solid organic growth plan and growth opportunities as we discussed today.
And we feel good about our overall competitive position.
We continue at the same time to look for opportunities to strengthen our capabilities and our positions in some key markets.
Examples of that which we've noted most recently are the purchase of Choice Links, there we look to strengthen the consumer directive capabilities that we have, particularly around some technology elements.
The NCC acquisition in Nevada, that's relatively small but it certainly better positions us in an important market.
And Josh, I would also remind you about the Tufts and Happs alliances that we've talked about before that provide I think some important unit cost advantage in some concentrated markets that are important to us.
So we feel good about that activity.
I think it's fair to say over time we will likely evaluate various opportunities to strengthen our local market share and some of our additional capabilities.
But our number one priority as we've said today is to demonstrate completion of the health care turnaround and we will do that by stabilizing and then growing membership organically.
Overall, I think we feel good about our position.
We have made some acquisitions that we think help capabilities and strengthen us in particular markets.
And we will continue to look at that.
But job one for us is to get the membership stabilized and growing organically.
Josh Raskin - Analyst
Okay.
Mike Bell - CFO, EVP
Josh, it's Mike.
Regarding your question on the operating expenses in health care.
I'd refer you to the set supplement.
You can see that our health care operating expenses in second quarter were 738 million that was down 40 million sequentially.
And including -- included in second quarter as we do every quarter we've reviewed our -- all of our reserves including our expense reserves and included in second quarter was approximately a $10 million after tax benefit as we trued up some compensation accruals, particularly management compensation accruals and also adjusted the bad debt allowance on some receivables.
So the point is I wouldn't expect those adjustments to recur in the balance of the year.
Josh Raskin - Analyst
Take those out of a run rate for health care and that gets us back into your range for 3Q?
Is that fair?
Mike Bell - CFO, EVP
That's basically fair.
In every quarter there are always moving parts.
Again, underlying run rate is always a judgment, but I think it's fair to say that if you take the year to date numbers, you back out the prior year claim development, and back out the nonrecurring expense item that I just mentioned that we continue to be in approximately the same place.
Josh Raskin - Analyst
And then just back on the M&A, the Choice Links in the Nevada acquisitions, are those included in your 1.85 billion of expected cash at the parent at the end of the year?
Mike Bell - CFO, EVP
Josh, they are.
I would point out that the those two acquisitions were not huge.
The Choice Links was less than 25 million and the MCC was less than 10 million.
We're not talking about gargantuan numbers.
Operator
Thank you, Mr. Raskin.
We will go next to Scott Fidel with JP Morgan.
Scott Fidel - Analyst
First question just has to do with your plans for expanding in the small group market.
And Ed, if you can review some of the markets that you are focusing on currently, also what your expansion criteria is in those markets, for example, maybe product preferences or blue penetration.
Then the second question just has to it with if you can update us on your SG&A opportunity going forward and where you see your benchmarks for SG&A currently relative to the opportunity given competitor comparisons?
Ed Hanway - Chairman, CEO, President
Sure, Scott.
It's Ed.
I will take the small market comment and then I'm going to ask David to pile on.
First of all, as I said, we did establish a segment about a year ago.
We looked hard at the products that would be particularly attractive to the under 200 employee segment.
They tend to be simpler products.
They tend to have somewhat thinner benefits.
It’s a very price sensitive marketplace.
We configured our products appropriately.
We looked at those markets where we had very strong local positions and also good distribution opportunity and focused on a number of those.
And as I said have seen pretty good response.
I would also say as we go forward our emphasis on consumerism and the benefits of consumerism we expect will play very well in that particular segment.
And, David, I will let you add to that.
David Cordani - President, CIGNA Healthcare
Scott, David.
To re-enforce a couple points we'll look at the overall competitive position in the market including the respective share for the competitors and look at the concentration, determine whether it's diffused, as Ed referenced our competitive cost position and the prospects for remaining competitive and growing.
As well as the growth profile for the small employers, specifically in those markets.
I would note that we view that our new product portfolio presents a great opportunity because as we've talked before the signature suite gives us modularity so we could use the risk funding mechanism over HMO, point of service, open access, and now obviously CDHP coverages as well.
Mike Bell - CFO, EVP
Scott, it's Mike, I will take the second part of your question which is the longer term outlook for SG&A.
The short answer is that it's not changed from what we've talked about previously.
The -- as we complete the migration of the two in state platforms we get, number one, stronger market facing capabilities than what we had in the past.
It will also enable us to get additional productivity improvements, order of magnitude 200 to 250 million a year pre-tax versus the 2005 baseline, and we'll get a piece of that in 2006, obviously not the entire amount, but we'll get a piece of that in 2006 and I'd expect to give you some additional detail on the third quarter call.
Scott Fidel - Analyst
And then just in terms of the expected systems updates and the cost saves there, no change from your prior outlook?
Mike Bell - CFO, EVP
That's correct.
Scott Fidel - Analyst
Thank you.
Operator
Thank you.
We will go next to Charles Boorady with Smith Barney.
Charles Boorady - Analyst
I wanted to get a little more detail on the 50% increase in the RFP activity just to better understand roughly what the absolute number of RFPs or covered lives that they represent are, and also how that compares being that the last few years were clearly not the best for CIGNAs.
How this absolute level of RFP activity compares with the years where you had very strong enrollment growth like in the late 1990s.
David Cordani - President, CIGNA Healthcare
Charles, David.
I will give you a few comments relative to that.
First off, 50% year-over-year uptick is, to your assertion, off of a lower base as we've referenced previously.
I would point out though, that the absolute number gets us within the range of -- the lower end of the range where we've historically been when we were running on all cylinders.
We feel good about both the quality of the proposals coming in as well as the absolute number of proposals that are coming in the door for us.
Secondly, we feel very good about the breadth of product offerings that the proposals are exploring.
Explicitly, they are exploring a significant amount of our consumerism capabilities which plays rather nicely for us.
For example, up to 80% of the RFPs we have in hand today are actively exploring some major dimension of consumerism and we think that plays very nicely for us.
Ed Hanway - Chairman, CEO, President
Charles, the only thing, it's Ed, the only thing I would add to that is that these are a combination of both responding to requests as well as fairly proactive outreach within the customer community on our own.
We have been very aggressive in targeting employers that we believe have a similar view to the emerging consumerism trends that we do where our capabilities are a good fit and so this is a fairly proactive approach as well to include -- increasing the number of people who are considering us.
Charles Boorady - Analyst
Is that a new approach, Ed, in terms of this rifle shot approach to specific customers that seem better aligned with where you are directing CIGNA?
Ed Hanway - Chairman, CEO, President
Well, I think we have always done it Charles.
I would tell you we are far more aggressive with it today than we have been in the past and I think have far better market intelligence and market data today.
We've also been far more proactive I would say in dealing with our own customers in terms of expanding our relationships with them because as you know in this space oftentimes there are multiple insurance companies involved and we have been very targeted in terms of those relationships where we think we have good opportunity to grow and maybe displace some of our competitors.
David Cordani - President, CIGNA Healthcare
Charles it is David.
I would just add to that and that is not limited to the national segment.
So that approach, the rifle shot terminology you use is being used in our middle market segment as well pretty successful and we expect to continue to hone that approach.
Charles Boorady - Analyst
That's great.
My follow-up question is on the cost trends.
I'm curious what the individual components are doing and which components specifically would drive the trend to the lower end of the range of guidance that you gave for the full year.
John Rubin - SVP, Chief Underwriting Officer
Charles, it's John.
As Mike mentioned earlier for our total book we are currently expecting full year medical cost trends to be between 7.5% and 8.5%.
Turning to the components, our estimate is unchanged from prior quarter specifically inpatient 5 to 7%, outpatient 9 to 11%, professional 5 to 7%, and pharmacy 6 to 8%.
We are continuing to project strong and stable medical cost results to the benefit of both CIGNA and our customers.
In terms of your question in terms of which elements could get us to a better result, it's a little tricky to answer.
We are expecting based on activities we've got underway for inpatient utilization to improve over the balance of the year and clearly our success there could drive results to the better end of the range.
But as usual, there's a number of medical costs initiatives we've got underway that we are hoping to continue to drive improved results.
Charles Boorady - Analyst
Do you have a way of assessing what this number would be, what the range this year would be without the improvements that you've made in medical management and other initiatives that are in place?
So in other words you get an underlying trend were you not to do anything new next year to rein in the costs.
Mike Bell - CFO, EVP
Charles, it's Mike, I don't think I would try to single out the medical management actions that we have taken and as Jon Rubin mentioned, every single year we have additional initiatives underway.
So I don't think it's terribly useful to try to break it out and calculate a gross number.
Charles Boorady - Analyst
Well, as you were coming off of a year where things were unusually disrupted because of changes in some of your case management initiatives, et cetera.
I don't know if this year's trend was reflecting a reversion back to a more normal absolute level and the underlying cost pressures were higher than what's reflected in this year's range or if this year's range reflects a normal operating environment.
Mike Bell - CFO, EVP
I would characterize it more as the latter.
Our medical costs overall are within our competitive benchmarks in most of the local markets and therefore I would not characterize it as a change off an inflated base.
Charles Boorady - Analyst
Thank you.
Operator
We will go next to John Rex with Bear Stearns.
John Rex - Analyst
Good morning, thank you.
First, could you just on the experience rate of premiums, can you tell us what drove the increase there as our membership was down so I'm sure it just had something to do with how you recognize revenues on that book and then what kind of impact that would have had in the quarter?
Mike Bell - CFO, EVP
Sure, John.
It's Mike.
First, in terms of the overall experience rated book, we are getting overall average yields on that book of 9% as compared to 2004.
Now, you are absolutely right.
GAAP revenue tends to bounce around quarter to quarter because of our accounting for rate credits.
When there's favorable medical costs experience we record less GAAP revenue because it's an offset to premium and therefore I wouldn't get overly focused on the quarterly patterns of GAAP revenue. 9% yield is the more meaningful number.
John Rex - Analyst
I'm just trying to think, so if you said if there's a favorable experience you report less GAAP revenue?
Mike Bell - CFO, EVP
That's correct.
John Rex - Analyst
So if revenues increased sequentially, what should we read into that given there is a pretty good increase on lower membership?
Mike Bell - CFO, EVP
Again, with all of the moving parts in experience rated, John, between cases being in surplus and deficit and the prior year development, I would suggest that you not read anything into that and instead understand that the underlying experience rated results continue to be very strong.
Not quite as strong as last year but continue to be very strong.
John Rex - Analyst
If you were to show a medical cost ratio on the experience rated business, would it have been stable sequentially?
Mike Bell - CFO, EVP
It likely would have bounced around a little bit.
Again, the medical loss ratio is not really the key metric to think about in terms of evaluating the experience rated results.
The more meaningful number is the overall margins and the overall margins on the experience rated book continue to be in line with our expectations.
John Rex - Analyst
So maybe take it down to if I were to see operating earnings for just experienced rated book, would that have been essentially the same sequentially or did it benefit sequentially from the higher revenue recognition?
Mike Bell - CFO, EVP
It would not have been materially different sequentially.
John Rex - Analyst
From 1Q?
That's helpful.
You went into -- about also a lot of details about your plans for the senior market and such, though not talking to MA really.
And I wonder if you could update us on your view of the Medicare Advantage market and your appetite for increased participation there.
Ed Hanway - Chairman, CEO, President
Yes, I will start.
It's Ed, John.
First of all, I want to restate something that we said -- that I said in my formal remarks which is the senior segment is a very important part of our growth plans.
I think we are focused on both the group side of this market.
We are very focused on ensuring that we have solutions for our employer customers as the nature of this population changes.
I made a point that it's extremely important in our view to understand that we're going to build flexible arrangements that meet the needs of consumers based on their health care and financial need, not necessarily their work status or their age and that's a bit of a change in here.
Specific to your question around Medicare Advantage, I did say we are looking and we will actively look at government funded programs.
The Medicare Part D where we tend to be a serious competitor is the first example of that.
And we will look at Advantage in various markets and make a definitive decision at some point in time whether we're going to play there.
You know historically we have not and we are taking a pretty orderly approach to evaluating which markets and how we might want to compete there.
That's a decision that's ahead of us but it's on the list.
John Rex - Analyst
Do you -- I mean, in the past you kind of haven't viewed that market too favorably it seems.
Is that kind of consistent with your view now just so we can get a sense of your appetite for it?
Ed Hanway - Chairman, CEO, President
You are right.
Historically we said the government is a tough partner and a very unpredictable one.
I think the reality today is that that situation has changed somewhat and as I mentioned earlier, the demographics argue that you need to be serious about considering opportunities there.
And we will be.
John Rex - Analyst
Sorry, so '06, given what you have done so far for '06 in terms of filings, we wouldn't expect though to see anything meaningful in terms of change of your Medicare Advantage enrollment?
Is that correct?
Ed Hanway - Chairman, CEO, President
That's absolutely right.
In fact, I think I said maybe on the last quarter's call this was not an '06 activity for us, meaning we wouldn't be any more active in '06, but it's an area we are taking a serious look at.
David Cordani - President, CIGNA Healthcare
John, it's David.
I just also want to paint in terms of for the senior space broadly we talked before about this, there are six major opportunities here for us that we continue to look at.
One, our clinical programs for the government, two, administrative services, three, pharmacy Part D, four Medicare risk where you're asking, and as you know we play in Arizona only today and to your point and Ed's point do not expect to be a major change to that in '06.
Then you have Medicare supplemental programs and then the evolving suite for 55 plus-year-old non-Medicare eligible whether they're work based or nonwork based.
And we have plays in each one of those opportunities and as Ed said in his prepared remarks as well, we expect to expand but on the Medicare Advantage not explicitly in 2006.
Operator
Thank you. [OPERATOR INSTRUCTIONS] We will move on to Christine Arnold with Morgan Stanley.
Christine Arnold - Analyst
Good morning.
You said that about $17 million of the prior period favorable development in the quarter was related to HMO.
Was the remainder in experience rated or specialty or some combination?
Mike Bell - CFO, EVP
Christine, it's Mike.
Experience rated prior development was 12 million after tax in the quarter and the remaining 5 was all other including specialty.
Christine Arnold - Analyst
Okay.
And then the $10 million in prior -- or in favorable SG&A development, was that all in that HMO, SG&A ratio or was it spread all over?
Mike Bell - CFO, EVP
It was spread all over.
Christine Arnold - Analyst
And then finally, could you help us without quantifying to think about the runoff businesses.
How will retirement and reinsurance look going forward?
Will those dip into negative positions?
Or will they just go to zero and go away in terms of the earnings contribution further out?
I just don't have much experience with those kinds of books.
Mike Bell - CFO, EVP
Sure.
First on runoff retirement, I would expect that over time that will decline to zero as we amortize the remaining gain.
I do not expect it would take a -- some sort of unexpected result for that to dip negative.
In terms of runoff reinsurance, as we've discussed before, there is still uncertainty in that book.
On the other hand, as you know we've strengthened reserve balances over the last couple of years and we do believe our current reserve balances and assumptions are appropriate.
In runoff reinsurance in any given quarter we have operating expenses that reflect servicing that business and managing the run-out process.
I would expect a small loss over the next couple of years per quarter.
Christine Arnold - Analyst
Great.
Thank you.
Operator
Thank you.
We will go next to Peter Costa with FTN Midwest Securities.
Peter Costa - Analyst
Hi, guys.
I just wanted to be sure I clearly understand your expectations for membership going forward.
You talked about January being up I believe year-over-year.
Is that inclusive of NCC membership that you pick up and is that year-over-year up or up sequentially?
David Cordani - President, CIGNA Healthcare
Peter, it's David.
What we've said is that our June year to date membership is down 7% which is an improvement from the outlook previously and that we expect -- consistently we expect to remain stable throughout the remainder of this year.
Being 2005.
We do not have anything explicit out relative to 2006.
And those comments exclude, as Ted said in his opening remarks the opportunity to add membership from the NCC acquisition.
So again, slight improvement from January 1, through June 30, sitting at minus 7 today and expectation to be stable for the remainder portion of 2005.
Peter Costa - Analyst
But at this point you aren't giving guidance for January 1, 2006?
Ed Hanway - Chairman, CEO, President
That's right.
David Cordani - President, CIGNA Healthcare
We intend to do that next quarter.
Thank you.
Operator
Thank you.
We will go next to Patrick Hojlo with Credit Suisse First Boston.
Patrick Hojlo - Analyst
Could you break out for me what your premium yield is looking like right now on new accounts versus renewals?
Ed Hanway - Chairman, CEO, President
Could you repeat that, Patrick, please.
Patrick Hojlo - Analyst
Can you break out for us what your premium yield is looking like right now on your new accounts versus your renewals?
Mike Bell - CFO, EVP
Patrick, it's Mike.
As I'm sure you know, our overall yields are different for our different product lines so let me give you an overall and then I will comment on your specific break down.
Overall our ASO yields continue to be in the low single digit, 3% kind of range.
Our experience rated yields are averaging approximately 9% and the commercial HMO yields we expect for the full year will average about 5.5%.
Now, as we've talked about on releases we retalked about last call, the renewal increases on the commercial HMO block for those accounts that renewed continue to average approximately 9%.
The new business yields are lower because of the more favorable demographics and leaner benefit plans that we are selling out in the market and overall we view that as a positive trend.
Patrick Hojlo - Analyst
Now why when I look at your income statement is your fee, your fee line looking down per member per month on a year-over-year basis?
I know there are other products in there besides just the traditional medical nonrisk business.
But are you expecting, in other words better pricing going forward than you have been getting over the last couple of quarters on the nonrisk fee based business.
Mike Bell - CFO, EVP
Patrick, the main issue with the year-over-year comparison in the ASO fees in our set supplement is that the first half of 2004 we hit an unusually high level of run-out fees.
So if you look at, for example the first half of 2005, our fees were 872 million versus the second half of 2004.
If you do that comparison, the numbers will get into a better focus for you.
Now, just to take the other part of your question, though, it is the case that given that we have got proportionately more middle market business renewing in the second half of the year, we do expect that the yields in the second half of the year will be modestly better than the first half.
Patrick Hojlo - Analyst
One quick last question.
Your pharmacy membership down sequentially while your ASO membership is up sequentially on the medical side.
I would expect those to track a little more closely.
What's going on there?
Mike Bell - CFO, EVP
There is nothing material impacting the specialty membership for the quarter as I'm sure you recall, the first quarter specialty results were a little better than we had expected and again things are really normalized.
There's no underlying trend that I would point to there.
Patrick Hojlo - Analyst
Great.
Thanks a lot.
Operator
Thank you.
We will go next to Matthew Borsch with Goldman Sachs.
Matthew Borsch - Analyst
Question on the national account selling process, and I know you guys aren't prepared to give guidance, but it does seem like you are on track to doing a lot better for next year.
My question is sort of on the intensity of competition, given that you have made a real resurgence in the marketplace.
How do you think that is impacting the competitive dynamics vis-a-vis United, Aetna, Wellpoint your major competitors that are backing off and on what dimensions do you think the competition has accelerated?
David Cordani - President, CIGNA Healthcare
Matthew, it's David.
I will start and Ed will add to my comments.
First, when you think about the national space, there's four major players there.
And to your assertion, each of the four major players are at some point of stability plus right now.
So that increases the competitive landscape.
Secondly, as we've talked before, through our prepared comments, the marketplace is evolving very rapidly down to pace of better understanding consumerism, health advocacy, how employers could use information to get their employees better and more rapidly engaged.
I would say that is the largest change in the dialogue with the national account employers and really the buying process has changed furthermore with having more scrutiny around the overall total cost equation, not just components of the cost equation, over a multi-year period.
For example, looking at the return on investments of specific targeted programs whether they are advisory programs, health advisory programs, disease management programs, et cetera.
You have four strong competitors.
You have a marketplace ramping up very actively in the consumerism space.
And the purchasing process has a heightened degree of intensity around the ability to really demonstrate what the value delivery of these new programs are and we feel great about that because it positions our value proposition and our capabilities quite well there.
But it's a very competitive landscape.
Ed.
Ed Hanway - Chairman, CEO, President
The only thing I would add and it just piles on what David already said and that is, Matthew, that our value proposition is very much built around quality, quality outcomes as well as effective cost management and total cost management and I think we feel very well positioned to be able to demonstrate our results there with hard data.
So proof points are very important in today's marketplace across the board, certainly in national accounts.
If people are going to invest in a disease management program if they are going to invest in a health advisor program.
They want to see what the returns are going to be for them.
And we feel very well positioned to be able to demonstrate that which is why, to David's point earlier one of our fastest growing products is Health Adviser with well over a million members and we believe we can demonstrate very effective outcomes and returns for people who choose to purchase that product.
Matthew Borsch - Analyst
And as a follow-up, staying on this topic, can you just comment on whether you are seeing any shift in terms of -- on three dimensions for the national accounts for 2006, is the sales cycle lengthening, number one?
Number two, is there any shift in the funding bias risk versus experience; rated versus self-funding.
And is the consolidation of carriers that's been a trend for a while continuing?
David Cordani - President, CIGNA Healthcare
Matthew, David.
Relative to the sales cycle lengthening, the overall procurement cycle is a long one to start with.
As you expect, the larger the employer and the more complex their benefit strategy, the longer the cycle.
I would say in general the sales cycle is not lengthening.
I would tag on to, it is intensifying.
So the depth and level of scrutiny relative to proof points that Ed raised is clearly there.
Relative to funding, broadly speaking, not changing.
This is a predominantly ASO space and we see the ASO funding mechanism moving down in average size broadly speaking.
And then relative to consolidation, we see the consolidation trend picking up pace in consolidation broadly.
Not just consolidation as it relates to multiple medical vendors down to a finite group of medical vendors but also the carve in phenomenon of what we've historically called specialty services because there's more proof points around integration and value delivery.
So on your three dimensions, that's how I would characterize the trends.
Matthew Borsch - Analyst
Thank you.
Operator
Thank you.
We will go next to Doug Simpson with Merrill Lynch.
Doug Simpson - Analyst
Could you just remind us the seasonality of your membership, just in terms of how much renews each quarter?
Mike Bell - CFO, EVP
Sure, Doug, it's Mike.
Overall I will give you any other split you are looking for.
But overall as we've discussed before, approximately 75% of our membership renews in first quarter.
Approximately 7% renews in second quarter.
July is 9 to 10% of our overall membership and the remainder is spread pretty close to evenly third and fourth quarter, the remainder of third and fourth quarter.
Doug Simpson - Analyst
9 to 10% owed just in July and then the balance will be in the residuals for third quarter and fourth quarter.
Could you just talk -- I know you've mentioned in the past your efforts to reach out to the distribution channel in the various markets, maybe just give us a little bit more specifics as to how that process is going and some of the specific things you guys are doing?
David Cordani - President, CIGNA Healthcare
Doug, it's David.
Are you referring specifically to the producer community?
Doug Simpson - Analyst
Yes.
David Cordani - President, CIGNA Healthcare
Sure.
Relative to the producer community rolling back the clock we highlighted that as a very important initiative for us and the way we teed up that initiative was we needed to get in front of the producer community both the consultants as well as broker community and truly demonstrate, important word there, demonstrate our capabilities, our value proposition and work closely with the producers to really demonstrate, differentiate, and enable some level of intimacy of understanding relative to our capabilities and in doing so we've even modified tremendously the way we communicate by bringing multimedia demos to really be able to bring the producer or their office essentially on a virtual basis into our shop, whether it's our care facilitation centers or other aspects of our operation if we are doing it in their territory.
Broadly speaking, I would categorize the ongoing initiatives there as successful.
But I would categorize them as ongoing.
Because the producer community is so broad, there are so many people to touch from the national practice through the regional practice on down through the local line broker or line consultant.
It's an ongoing body of work that we are focused on.
We feel good about the progress.
There's more work to do and I would again accentuate the notion of demonstrating our capabilities through a multiple dimension approaches is what we are all about right now.
Doug Simpson - Analyst
And this might put too fine a point on it, but could you just give us a sense as to when you really got going with the heavy lifting there?
How long that would take, recognizing you always have to maintain these relationships but just in terms of this process just maybe some sense for the broad time line.
Ed Hanway - Chairman, CEO, President
Doug, it's Ed.
I would say a couple of things on the time line.
We began this process a while ago.
Let's say 18 months or more ago in terms of understanding what we needed to do and beginning to have the outreach.
I would say in addition to kind of convincing them of our capabilities and demonstrating the improved service delivery we were providing, we also engaged the producers very proactively in helping us design our next generation of product.
So we took a lot of time to understand what the producer community was suggesting people were looking for in addition to the customer research work that we did.
The signature suite that we rolled out a year ago was very much reflective of what the marketplace believed was required, not only a year ago, but as we went forward and that process continues.
So there is a formal producer advisory process that we have in place that looks at all the elements of the value proposition that we are offering in the marketplace.
I would say what has really accelerated now in the last 12 months particularly under David's leadership has been the individual trench warfare, if you will, at the local producer level, whether that's the national consulting houses or more local regional brokers in terms of really identifying for them what our greatest strengths are, what our potentials are and getting them to give us more consideration in the marketplace.
And both in middle market and now as David reported today, in national accounts, the way we see that is, yes, retention rates are better but we also seeing much more opportunity in terms of new business.
Doesn't mean we right it you but it does indicate that the marketplace and the brokers are much more confident in our ability to meet their needs.
David Cordani - President, CIGNA Healthcare
Doug, to close it out, the cyclicality you're looking for is -- fall of '04 spending time with the national consulting houses for the 1/1/06 selling cycle.
Hence fall of '05 we'll be doing the same thing for the 1/1/07 selling cycle.
As you move down through the segments, middle market you'd be spending much more intimacy mid a given year for 1/1 of a following year and that centers numerous cycles is ongoing.
For the small segment you really have an ongoing process throughout the course of a year.
Doug Simpson - Analyst
Thanks.
Operator
We will go next to Joe France with Banc of America Securities.
Joe France - Analyst
Ed, following up on your comments referring to the consultants and the brokers and selling to them and this trench warfare, what are the advantages -- that CIGNA would have versus say other national players like Aetna, United and Wellpoint.
Ed Hanway - Chairman, CEO, President
I think a couple of things.
One, we highlighted an approach to consumerism broadly that I think is distinctive in the marketplace.
We have been very consistent that consumerism for us is not about HSAs and HRAs solely but rather a holistic approach to the individual and preparing them and facilitating their ability to make the right choices around their care and to have confidence when they make those choices they are doing so with the best information and the best health coaching that they can receive.
So the emphasis that I think you've heard from us this morning relative to consumerism, health advocacy, both facilitated by information.
It's something we feel very passionately about and is differentiated in the marketplace from some of those national competitors that you mentioned.
Our commitment to medical management, for example, our clinical community is clearly a differentiating factor and a competitive advantage for us.
And we've now made that a much more proactive tool in terms how individuals can access it and have it benefit them in their decision making.
David Cordani - President, CIGNA Healthcare
Joe, it's David.
And to add to Ed's point, when you think about the capabilities some of which Ed described and I described in my prepared remarks what it does is it enables the consultant as a broker to expand their portfolio of solutions as they work in a real consultative way with their employers to help put a solution suite together, so whether that's incentive programs, whether it's communication tools, whether it's advocacy tools, et cetera.
Secondly, our informatics, our information suite, et cetera, the producer has the opportunity to deleverage those rather greatly and we work in partnership with a broker consultant in the way we communicate to a employer there.
Said otherwise, we acknowledge that we have a value proposition from us to the employer as well as from us to the producer and we have an opportunity to make the producer even more effective as we jointly service our employer customers.
That's resonating well.
Joe France - Analyst
Thank you both if I could just quickly follow-up.
Mike, mentioned on the last conference call that you were cutting 1700 jobs is that done?
Or if not, what is the affect on the third and fourth quarter?
Mike Bell - CFO, EVP
Joe, it's Mike.
The 1700 planned job eliminations are not finished.
They will take place throughout the remainder of this calendar year.
We are on track in terms of our overall expense reduction initiatives.
I would expect to get some additional benefit in third quarter and then sequentially some additional benefit in fourth quarter.
On an all in basis, I would expect our operating expenses in health care to be reasonably flat the second half of the year versus first half of the year since we've increased our investments in market facing capabilities, we also have, for example, salary increases effective on July 1.
So overall it will be pretty close to flat but we will get the sequential benefit from the job eliminations.
Joe France - Analyst
Thank you very much.
Operator
Thank you Mr. France.
We will take our last question from Carl McDonald with CIBC.
Carl McDonald - Analyst
Thanks.
It sounds like you've seen a significant increase in the number of RFPs exploring consumer directed options.
Do you have any sense at this point what percentage you'll actually choose to implement to consumer directed plan and how you overcome a cost transparency issue.
Second question is if you could just walk through what looked like a seven day drop in days claims payable in the quarter.
David Cordani - President, CIGNA Healthcare
Carl, it's David.
I will start with the first component of your question.
As we are in the deep throes of the selling season right now, we will obviously have a much better view in the course of the next 90 days.
A couple dimensions, we see a fair number of employers beginning to adopt CDHP.
Specifically defined as an HSA or HRA more and more employers are absolutely adopting consumerism incentives et cetera.
But on the CDHP specifically, we see a fair number of the employers expecting to adopt that product as an alternative that they will put side by side in the '06 time frame with express objectives to dramatically increase the penetration of that product either in year 2, '07 or fully by year 3, '08.
And as you might expect, as an employer lays it up side by side all that's going to be dictated by the contribution strategy, their commitment to communications et cetera.
In terms of how much there is there.
To recap, 80% plus of the RPs we are seeing today have some dimension of consumerism.
About 50% and these are 1/1/06 national account reference points.
About 50% have heavy looks at the fundamental CDHP product itself, HSA or HRA.
We expect to see a good amount of adoption of that product but not full case replacement.
There will be some full case replacement but step one going into '06 will be even more side by side adoption for the national players.
As your cycle way down the size segment, we're seeing a lot begin to heat up in the small segment and I think that will play through through the '06 time frame with more and more players adopting full case replacement CDHP.
Relative to the cost transparency, it's a key initiative from our point of view.
That we are seeking to differentiate ourselves on, in the prepared comments I made reference to just one item which is our first to market pharmacy pricing tool which enables a member to go out and see full cost transparency relative to drugs at a variety of pharmacy alternatives.
Additionally, we have a first phase of cost transparency relative to a variety of hospital services both broken down in detail as well as a user friendly Zagat's guide type approach for the one star, two star, three star and we will continue to evolve that as we believe it's an important part of success in the consumerism play.
Mike Bell - CFO, EVP
Carl, it's Mike.
As I've said on the prior calls related to your days payable question, we don't believe that's a terribly meaningful metric given the mix of business changes that drive that.
To look at the reserves though, if you take our press release numbers you will see the net medical reserves did decline from a 1.1 billion at year end '04 to 900 million at the end of second quarter.
Specifically that was $196 million decline versus year end of 2004.
If you think about the prior year development pieces that we have weighed out for you each quarter, on a year-to-date basis we've had 101 million of after tax prior year claim development so on a be fit basis that would be 155 million.
So excluding the prior year claim development reserves are down 41 million or about 4% versus year end 2004 and that really winds up with the 7% drop in membership.
Where there are a lot of moving pieces we'd expect that you'd conclude that there is no material fundamental change.
Carl McDonald - Analyst
Thank you.
Operator
Thank you.
Ladies and gentlemen, this concludes CIGNA's second quarter 2005 results review.
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