使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Ladies and gentlemen, thank you for standing by for CIGNA's third quarter 2005 results review.
At this time all callers are in a listen-only mode.
We will conduct a question-and-answer session later during the conference and review procedures on how to enter queue to ask questions at that time.
If you should require assistance during the call please press star zero on your touch-tone phone.
As a reminder, ladies and gentlemen, this conference, including the question-and-answer session, is being recorded.
We'll turn the conference over to Mr. Ted Detrick.
Please go ahead, Mr. Detrick.
Ted Detrick - VP Investor Relations
Good morning, everyone and thank you for joining today's call.
I am Ted Detrick, Vice President of Investor Relations.
And with me this morning are Ed Hanway, CIGNA's Chairman and CEO, Mike Bell, CIGNA's Chief Financial Officer, David Cordani, President of our Health Care Business, and Jon Rubin, CIGNA Health Care's Financial Officer.
In our remarks today Ed Hanway will begin by discussing highlights of the quarter.
He will also make some comments regarding strategy and our prospects for 2006.
Mike Bell will then discuss CIGNA's third quarter financial results and provide the financial outlook for both full-year 2005 and 2006.
David Cordani will discuss our medical membership results and outlook and provide an update on the Medicare Part D initiative.
He will also make some remarks about CIGNA Health Care's value proposition.
Ed will then conclude our prepared remarks by discussing CIGNA's strategic approach to consumerism.
We will then open the lines for your questions.
Now as noted in the 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 a 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 today's earnings release which is posted in the Investor Relations section of cigna.com.
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 today's earnings release which was filed this morning on Form 8-K with the Securities and Exchange Commission.
With that, I'll turn it over to Ed.
Ed Hanway - Chairman, CEO
Thanks, Ted.
Good morning, everyone.
As Ted noted, I'm going to start today's call with comments about our third quarter results and our continuing progress on initiatives to strengthen our Health Care business.
I will then discuss our strategy and our 2006 outlook.
Third quarter adjusted income from operations was 251 million, or $1.94 per share which is a 15% increase in per share earnings versus the same quarter a year ago.
Our third quarter results were strong and above our previous estimates.
The results were driven by strong fundamentals in all of our ongoing businesses.
Our Health Care operations reported strong earnings and continued to have stable membership.
Even after excluding prior year development and spending on Medicare Part D, Health Care's results were at the upper end of the range of our previous estimates.
Our Disability and Life and International businesses also continued to report strong earnings.
These operations represent competitive advantages for us and present solid ongoing profitable growth opportunities.
Let me provide a quick update on our continued progress in strengthening our Health Care business.
First, as I stated before, our top priority for 2005 was to stabilize our medical membership and we continue to make good progress in achieving that goal.
Membership has been stable since January, and we expect it will remain so for the balance of the year.
A key to our progress has been our success with middle market customers.
The regional market segment continues to perform well with net member growth of 4% since January.
We've made great progress on strengthening our fundamentals and for some time now have been fully competitive in the areas of customer service and medical cost management.
This progress has been key to stabilizing membership.
We're also doing a better job of effectively communicating our value proposition to brokers, consultants and customers, which is evidenced by greatly improved customer persistency and increased sales pipeline in both national account and middle market segments.
Overall I'm very pleased with our progress and I'm confident that CIGNA is well positioned for profitable growth.
Let me turn my attention to our strategy and prospects for 2006.
As we look forward, our focus is centered on consumerism.
We see consumerism as a fundamental change in the way Health Care services are delivered in the marketplace.
We are responding to this change by making consumerism our key strategic focus and by making significant investments in our capabilities to develop a differentiated approach to deliver value-added services to consumers.
We believe we are uniquely positioned to capitalize on this industry shift from the traditional cost-based managed care approach to a value-based consumer driven model because of our strong capabilities in medical management, clinical quality and health advocacy.
Our approach to consumerism will yield significant value through our ability to provide superior health advocacy and actionable information to our members.
We continue to receive positive recognition about our consumer directed capabilities through industry awards and feedback from employers and brokers which validates our strategic focus.
Now, regarding our 2006 outlook, we expect our 2006 Health Care membership to grow 1 to 2% from our year-end 2005 levels, and this represents significant improvement from the last few years.
And further demonstrates that our position in the marketplace is strengthening.
Our 2006 membership outlook is further evidence of our improved fundamentals, and it positions us to deliver strong Health Care earnings.
In my closing remarks, I will briefly discuss our strategic approach to consumerism.
In the meantime, though, let me now turn it over to Mike for the specifics of the third quarter results and our outlook for 2005 and 2006.
Mike.
Mike Bell - CFO
Thanks, Ed.
Good morning, everyone.
In my remarks today, I'll review CIGNA's third quarter results, also discuss our outlook for the balance of 2005 and for the full-year 2006.
In my review of consolidated and segment results I'll 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'll provide our earnings outlook.
Overall our consolidated earnings for the quarter reflected strong results in each of our Health and related benefits businesses and were higher than we had previously estimated.
Our third quarter earnings were 251 million, or $1.94 a share compared to 230 million, or $1.69 a share in third quarter last year.
I'll now review each of the segment's results beginning with Health Care.
Health Care earnings in the third quarter of 2005 were 164 million compared to 206 million in the third quarter of last year.
Both quarters benefited from $25 million of favorable prior year claim development.
The third quarter 2005 favorable prior year development included 9 million in commercial HMO which reflected continued strong medical management results.
Excluding prior year development and Medicare Part D start-up expenses Health Care earnings were in the upper end of the estimated range we provided in August, primarily reflecting strong underwriting and medical cost fundamentals in our experience rated business.
Third quarter membership was stable relative to second quarter and modestly higher than January 2005 levels.
This result reflects continued progress relative to our full-year goal of stabilizing membership.
Premiums and fees for the segment declined 10% relative to last year primarily due to lower membership partly offset by price increases.
Relative to medical cost trend the year-to-date trend for our total book of business was approximately 8%.
We continue to expect the full-year results 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 prior year claim development, was 85.4%.
This was slightly improved from the mid-year result.
So to recap, our third quarter Health Care results, excluding favorable prior year development and Medicare Part D expenses, were in the upper end of the estimated range we provided in August reflecting strong fundamentals.
Now I'll review the results for our other segments.
Third quarter earnings for the Disability and Life segment were 57 million compared with 41 million in the third quarter of last year.
The third quarter benefited from continued favorable mortality in the group life business.
Our results in Disability and Life continue to be very strong competitively.
In light of the favorable mortality that we have experienced so far this year, our year-to-date profit margin for this segment is modestly higher than the run rate we expect to see in the future.
Turning now to our International segment, third quarter 2005 earnings were 24 million compared to 23 million in the third quarter of 2004.
Results reflected strong performance in our life accident and health and expatriate benefits businesses.
In aggregate the remaining operations, including runoff retirement, runoff reinsurance, other operations and corporate, generated 6 million of earnings in the third quarter versus a loss of 40 million in the quarter a year ago.
The improved result primarily reflected less reserve strengthening in our runoff reinsurance business versus last year.
Before providing our outlook for 2005 and 2006 I'll comment briefly on our 2005 capital position.
Our parent company capital position continues to be strong and our subsidiaries remain well capitalized.
At the end of the third quarter, cash and investments at the parent company were approximately $900 million.
Consistent with our discussion on the second quarter call, we made an accelerated contribution to our defined benefit pension plan in the third quarter.
Taking into account tax consequences, the full-year impact of this contribution on parent company cash will be approximately $300 million.
The third quarter impact was an outflow of 440 million, and this is reported in our GAAP cash flow from operations for the quarter.
We expect to realize the related tax benefits in the fourth quarter of this year.
During third quarter, we continued our share repurchase program and repurchased approximately 4.1 million shares of our stock for $465 million.
Through October 14th, we repurchased an additional 1.1 million shares for 128 million.
Year-to-date, we've repurchased 11.5 million shares for $1.2 billion.
We have approximately $700 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 remains consistent with the views discusses on our second quarter call.
Specifically, we expect our net cash position at year-end to be approximately $1.4 billion excluding any additional stock repurchase in the balance of the year.
As I noted, we had approximately 900 million at the parent on September 30th.
We expect to receive approximately 400 million in subsidiary dividends in the fourth quarter.
We also expect to receive the $200 million in cash related to the second quarter tax benefits.
Relative to uses of cash in the fourth quarter, we expect approximately 100 million in net other uses including October stock repurchase.
Overall we now expect the parent to end the year with cash and investments of approximately $1.4 billion excluding any further repurchase activity.
In summary, our capital position remains very strong.
I'll now review the earnings outlook for full-year 2005.
Consistent with our normal practice the estimates I provide will be for adjusted income from operations.
Our third quarter earnings were strong and as a result, we are increasing our full-year estimates.
Specifically, our updated range is that full-year 2005 consolidated earnings will be in the range of 990 million to 1.02 billion compared to our previous estimate of 920 to 980 million.
Our current estimate for full-year Health Care earnings is in the range of 655 to 675 million.
We continue to expect membership to be stable through the end of the year.
And relative to our participation in the Medicare Part D program, we now estimate that we will incur start-up expenses of 25 to $35 million pretax this year.
On an after-tax basis, Part D expenses were approximately 4 million through third quarter, and we expect to incur an additional 10 to 20 million in fourth quarter.
Our updated full-year outlook now includes Medicare Part D expenses and also reflects the strong earnings in third quarter.
As a reminder, our previous Health Care earnings estimate of 625 to $675 million excluded any Part D expenses.
With respect to the balance of our operating segments we now expect our other businesses to contribute approximately 335 to $345 million of earnings for the full-year.
This is higher than our previous estimates, primarily reflecting our strong third quarter results.
So to summarize we're increasing our consolidated outlook for full-year 2005 to a range of 990 million to $1.02 billion.
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 $7.60 to $7.80 a share, compared to our previous range of $7 to $7.40 a share.
Turning now to the full-year 2006 outlook, we currently expect consolidated adjusted income from operations of 900 to $960 million.
I'll discuss the components starting with Health Care.
As Ed indicated, we currently expect that our membership will increase by 1 to 2% for the full-year 2006.
We currently expect 2006 premium yields to be in the range of 8 to 9% and we expect medical cost trends to be approximately in the same range.
Based on these factors our estimate for full-year 2006 Health Care earnings is a range of 600 to $650 million.
When comparing our estimated 2006 Health Care results to 2005, it's important to remember that our results to date in 2005 include 126 million of favorable prior year development while our 2006 estimate assumes zero prior year development.
A useful way to understand the 2006 Health Care outlook is to start with the midpoint of our full-year 2005 earnings estimate for Health Care which is $665 million.
Subtracting our year-to-date favorable prior year development and estimated Medicare Part D expenses, yields a starting point of approximately 555 million.
The $625 million midpoint of our 2006 range represents growth of 13% from this space.
There two are key drivers of the increase.
The first is operating expense productivity improvement of approximately 50 to $60 million after-tax.
The second is approximately 10 to 20 million of 2006 earnings from Medicare Part D.
The 2006 earnings outlook assumes continued significant investments in consumerism and health advocacy capabilities.
Overall our progression in improving Health Care fundamentals and capabilities has positioned us to increase earnings in 2006 relative to our underlying 2005 result which excludes prior year development and Part D expenses.
Turning to the balance of our reporting segments, we expect our other operations to contribute approximately 300 to 310 million of earnings in 2006.
This estimate is approximately 3% higher than the expected fourth quarter 2005 run rate.
We expect our Disability and Life and the International businesses to continue to grow revenue in 2006 while maintaining strong margins.
I'd also note that our earnings estimate assumes a return to more normal mortality levels in Disability and Life.
Putting together all the pieces, we estimate that our full-year 2006 consolidated adjusted income from operations will be in a range of 900 to $960 million.
Our consolidated earnings per share will be affected by share repurchase activity that occurs in future periods.
As I've mentioned before, 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 EPS for 2006 is a range of $6.85 to $7.30 a share.
Now I'll comment on the outlook for our capital position in 2006.
Our priorities for capital deployment are consistent with our communications last quarter.
Our first priority is to maintain appropriate liquidity at the parent company and to ensure that our subsidiaries remain adequately capitalized to support growth and to maintain and improve their credit ratings.
Our second priority for excess capital is to consider acquisition opportunities.
We recently acquired Choice Links, which strengthened our consumer-directed capabilities, and MCC, which strengthened our position in Nevada.
These were targeted and relatively small acquisitions.
Of course, we regularly review a range of acquisitions opportunities that would enhance our strategic position and meet our return on investment goals.
We do not know when or if we would find additional opportunities that would meet our criteria.
Absent these items our priority would be to buy back our stock.
Regarding the 2006 outlook, we expect to maintain our strong capital position and good financial flexibility.
We expect to generate full-year 2006 subsidiary dividends of approximately a billion dollars.
This will be generated through operating earnings and the withdrawal of some excess surplus from the operating companies in 2006.
At this point, we expect other sources and uses to approximately offset each other, excluding any share repurchase.
So overall we expect to continue to have significant capital flexibility.
To recap, our third quarter results reflected good execution in Health Care and strong results in our other businesses.
Our earnings estimates for 2006 reflect further progress in improving our Health Care results and continued strong performance in Disability and Life and International.
With that, I'll turn it to David who's going to discuss our continuing progress and strengthening our capabilities and improving our membership results.
David.
David Cordani - President Cigna Health Care
Thanks Mike and good morning, everyone.
As Mike indicated, our Health Care operations performed very well in the third quarter as evidenced by our membership and earnings performance.
Today I will update you on our membership position and the underlying dynamics driving our membership stabilization and growth initiatives.
My comments will include specifics regarding our 2006 membership outlook.
I'll also talk about how the marketplace is responding to our value proposition, specifically the strength of our capabilities and consumerism, health advocacy and information.
Finally, I will briefly discuss our prospects in the Medicare Part D market.
First, the membership update.
As Ed and Mike noted, our total membership remains stable through the third quarter.
Moreover, we're now positioned to be stable through January of 2006 and resume growth thereafter.
Through September 30th we had approximately 9 million members in CIGNA Health Care.
This result is consistent with the result we reported last quarter.
Our stabilized level of membership is a good result, one that reflects the competitive strength of the fundamentals of our business, specifically our improved cost and service levels, as well as the growing attractiveness of our value proposition in the marketplace.
In the regional segment for example, membership has grown by 4% since January 1st.
Our client retention rates in this segment continue to be strong and year-to-date we've improved customer retention rates by nearly 1,000 basis points.
We're also generating better sales results due to a stronger pipeline and an improved close ratio.
I'll now turn to our 2006 outlook.
Our 2006 outlook represents net growth of 1 to 2% and is a significant improvement over the membership results for 2004 and 2005, which, to remind you, was a net membership decline of 16% and 7% respectively.
In 2006, we expect to realize a meaningful improvement in both our regional and national account segments.
In the regional segment we expect net growth in the mid single-digit range for the full-year due to strong customer retention levels and sales pipeline as well as improving close ratios.
With respect to the national account segment we expect to see a decline in the low to mid single-digit range.
This represents a marked improvement over the 14% decline we posted in 2005.
As we've noted in the past we expect our national account improvement to show a similar pattern as our regional block did.
Specifically, first we expect to see improved customer retention levels, then additional sales to existing customers, followed by improving sales pipeline, and finally improving close ratio.
And to that end, in January 2006 we expect our customer retention level for our national account segment to improve by 500 basis points to 91%.
In addition, we continue to receive positive feedback from brokers, consultants and customers regarding our consumerism, health advocacy and information solutions suite.
In fact a good indication of this progress is our growth in our consumer directed membership which will more than double from 2005 to 2006.
Our high deductible and consumer directed coverages together will grow by approximately 50% from 2005 to 2006.
And our health advisor program will double from 2005 to 2006.
In summary for membership, we stabilized our membership levels in 2005 which was our number one priority.
Regarding 2006, we expect the first quarter to be stable, and we expect to see continued improvement in our total membership, resulting in growth for the full-year of 1 to 2%.
Now I'll turn my attention to our prospects for Medicare Part D in 2006.
Overall we're pleased with our progress to date.
As you know, we're a national provider of Part D programs for 2006.
To date, our marketing efforts are yielding good response rates and strong interest in our products.
The exclusive partnership we have with Nations Health is going well as they are actively marketing our program to their 2 million discount prescription cardholders.
In addition, our recently announced marketing alliances with major pharmacy and retail chains are generating increased call traffic.
Now although it's still early in the marketing campaign, I thought it would be helpful for me to mention our goals for our Part D program.
First, we expect enrollment of 400,000 to 600,000 members for 2006.
This will be realized through a combination of direct marketing, leverage from our exclusive marketing alliances, employer sponsored arrangements, and dual eligible auto assigns.
We expect earnings for this product to be in a range of 10 million to $20 million on an after-tax basis in 2006.
So to recap, our marketing efforts are going well and we believe that our Part D program will grow over time in both the employer and individual markets.
I'll now comment on the changing marketplace, the consumerism movement, and how our value proposition aligns with those market dynamics.
In previous calls we talked in detail about health care consumerism and that it represents a sea change in the way health care benefits will be delivered in the future.
We believe that consumerism will impact the industry on a very large scale.
We believe it will redefine the business model just as the advent of HMOs did in the 1980s.
And to be clear, CIGNA is absolutely committed to lead the market transition to a new consumerism model by helping to engage, educate, and enable consumers.
Our conviction is that the most effective care is delivered through the union of consumerism and health advocacy supported by personalized actionable information and insights.
Our approach to health advocacy is to build the knowledge and skills, align the incentives, and create the opportunities that motivate consumers to attain their personal health goals.
We facilitate our role as health advocates by providing the right actionable information.
For example, for employers, they can use this information to assess the health of their employees and the efficacy of the benefits they provide.
For consumers, they can use it to the make the best possible health care choices in managing their own health and well-being.
We believe that the broad shift to consumerism necessitates a new approach, one that requires effective communication, education, coaching and advocacy, one that also offers tools for consumers, employers, and providers to engage more effectively.
At CIGNA we're leading the way in this change.
We've already evolved and refined our approach to the consumer driven marketplace, and we will continue to make the investments in the capabilities necessary to sustain and enhance our leadership position.
We're convinced that CIGNA's approach differentiates us from other major players.
CIGNA is uniquely qualified in the industry to deliver that continuum of services that engage, educate, and enable consumers, help members take control of their own health care, manage their well-being, control cost and the quality of care they receive, and to support and aid our members as their trusted advisor, all with one simple objective, and that is to improve the health of our members.
I'd like to highlight a few points of differentiation.
First, we have over 2.5% of our members actively engaged in core and specialty case management programs versus a competitive average of 1.5%.
And satisfaction levels are topping 94%.
Second, we ranked first in issue resolution in a 2004 independent customer value analysis study.
Third, we've developed and launched the industry's only fully integrated depression and fully integrated obesity disease management programs.
Fourth, we are the first and only carrier with full pharmacy point of sale pricing tools.
I'd also remind you that we earned awards from the consumer-directed health care conference which honored CIGNA for providing the best health plan initiative for consumer-directed health care and for offering the best technology introduced by a health plan for consumer choice.
And lastly, CIGNA Health Care also recently received a leadership award presented by the disease management association of America.
That organization recognized CIGNA's leadership in providing disease management programs that help members with chronic medical conditions better manage their health.
The result, better health for our members, lower cost for employers and members, better productivity for employers, and ultimately a better quality of life for our members.
I'd note that feedback from the broker community has been positive and promising as well.
Virtually all major RFPs we are receiving from our national account and regional segments are asking us to delineate our capabilities in consumerism and the feedback on those capabilities is very positive.
This bodes well for us in terms of membership growth in the long-term.
Our capabilities in consumerism are deeply rooted in clinical excellence which is a prime differentiator for us.
Our leadership in delivering health care quality is confirmed independently through NCQA and [HETUS], which place us at or near the top of their effectiveness of care rankings.
The consumerism trend is already apparent.
Last year we had approximately 10,000 members enrolled in consumer driven health plans.
This year there are more than ten times that number, and this number will increase significantly in 2006 and will continue to grow significantly during each of the next five years.
Before I close, I'd note that Ed, Mike, and I, as well as other members of the CIGNA leadership team will be talking about consumerism in the health care marketplace later this month at a consumerism forum we're hosting in New York for members of the investment community.
We're very much looking forward to this opportunity to demonstrate face to face the strength of our value proposition in an informative and interactive fashion, and we hope to see many of you there.
And with that I'll turn it back to Ed.
Ed Hanway - Chairman, CEO
Thanks, David.
Now, before we respond to your questions, I wanted to cover three items.
I'll provide a recap of third quarter results, some highlights, or I'll highlight some important items from our 2006 outlook, and finally I want to provide my perspective on consumerism.
Regarding the third quarter, we achieved strong earnings across each of our businesses and these results have further strengthened our capital position.
We've made significant progress in strengthening our business fundamentals which has enabled to us stabilize membership.
Further, our Health Care specialty businesses continue to perform very well and give us the ability to differentiate ourselves in the marketplace by providing integrated solutions for our customers.
Our 2005 Health Care turnaround progress, our strategic focus on consumerism, and strong market position in each of our businesses position to us achieve attractive future earnings and returns for our shareholders.
We expect 2006 to be another strong year.
We expect to grow our medical membership 1 to 2% for the full-year 2006, our Health Care operations will continue to produce strong earnings growth with the expectation that earnings before prior year development and Part D expenses in '05 will grow 13% next year.
We expect our group Life and Disability and International businesses to leverage their market positions to continue to deliver competitively superior margins and strong earnings.
And finally, our capital position remains very strong.
Now, regarding our views on consumerism, as David mentioned, the market shift to consumerism is very significant.
As significant as the emergence of managed care in the 1980s.
Consumerism is not just the evolution of the next generation of product.
It is not just the addition of HRA and HSA products to our portfolio.
Rather, it is a fundamental change in the way health care services are delivered and funded.
As importantly, it also represents a shift in customer expectations.
It is the movement from a cost-based business model to a value-based model in which the consumer is assuming more of the responsibility for the decision making, as well as more of the cost for the care being received.
Because of the significance of this market shift, we've made consumerism a key strategic focus.
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.
As David indicated, we recognize that health advocacy and actionable information will play a key role in the consumer's equation.
Specifically, the industry leaders here will enable consumers to obtain knowledge about their health and develop incentives to motivate individuals to attain their health goals.
To be a winner in a consumer-driven market, health benefits companies will need to remake themselves from their role as the gatekeeper of care in the old cost-based model, to becoming the trusted advisor and coach in the value-based model.
To be an effective advisor and coach requires competency in clinical quality, which has been a traditional strength here at CIGNA.
We demonstrate our competency in clinical quality in several ways including our industry leading [HETUS] effectiveness of care scores and strong commitment to clinical resources as evidenced by our best in class ratio of clinicians to members.
We are very well positioned in this regard as we leverage our 3,000-plus expert clinicians to coach and to guide consumers and help them understand their health conditions and choices.
Clearly the move to consumerism is in its early stages, and it will take several years to evolve.
The market shift to consumerism over time will provide the opportunity to offer integrated solutions to meet the health care needs of both employers and consumers.
We envision a marketplace where we will be able to develop revenue streams based on our health advisory and information-based capabilities, as well as our health and wellness products.
I'm confident we're taking the right approach to this dynamic market shift and that over time, we will deliver strong earnings and return for shareholders.
This concludes our prepared remarks.
And now we would be glad to take your questions.
Operator
[OPERATOR INSTRUCTIONS] And we will take our first question from Josh Raskin with Lehman Brothers.
Josh Raskin - Analyst
Hi.
Thanks.
Good morning.
First question just relates to the 2006 outlook in the Health Care segment.
Curious on two points.
One, sounds like your expectations for cost trends in '06 are about 50 basis points higher than what you're seeing in '05, so would love to see some color maybe on the components that are driving that.
And then secondarily, if we back out the difference in the earnings, you know, on the core numbers, backing out the Medicare expenses as well as the PPRD, and then we add back the expense improvements, it sounds like the base sort of Health Care operations are not expected to change.
I'm wondering, you know, how come, I guess I would have expected some improvement, especially with the growth that we've seen in the specialty businesses, et cetera.
I'm wondering what's leading to the conservatism around just what I would call sort of base Health Care gross margins?
Mike Bell - CFO
Josh, it's Mike.
Let me take your first question and I'll ask Jon Rubin if he wants to add to it and then get to your second question.
First, regarding the 2006 medical cost trends, what we're indicating here is that our pricing assumption for 2006 is that medical cost trends will be in the 8 to 9% range, and our current pricing strategy is to target approximately a consistent stable medical loss ratio and essentially stable overall insured margins.
That's what's built into our 600 to $650 million estimated range for 2006.
I'd really suggest that you not overweight half a point or so here or there.
To the extent that it's better or worse by half a point across the board, I mean that would be worth less than $10 million on an after-tax basis to us.
I wouldn't suggest that you overweight the importance.
Does that answer it, or would you like some additional detail?
Josh Raskin - Analyst
Okay.
So it sounds like what you're basically saying that you're expecting similar trends, let's not argue over the 50 basis points then, and I guess just any clarity on the components there?
Drugs versus, I know you guys have seen a lot of improvement on the inpatient side.
I think you mentioned contracting in the press release.
Any update on the hospitals versus maybe the pharmacy, those two components?
Jon Rubin - CFO, CIGNA Health Care
Josh, this is Jon Rubin.
The high level components of the 8 to 9% built into our pricing and medical cost outlook are roughly as follows: Inpatient high single digits, outpatient high single to low double digits, professional, mid single digits, and pharmacy, low to mid single digits.
Once we complete our January 2006 renewals, we'll have a much clearer view of the associated book of business mix changes that impact our net medical cost trends, and as such I'll be in a position to provide greater specificity around the components of our trend at our year-end results call.
Josh Raskin - Analyst
Okay.
That's very helpful.
And then just the base health care business for '06.
Mike Bell - CFO
Sure, Josh.
It's Mike.
As I indicated in my prepared remarks, we are seeing a major benefit in 2006 from the improvements in productivity, primarily in our service operations.
And that will serve, or we expect that to serve to increase primarily our ASO earnings to the tune of the 50 to $60 million after-tax that I referenced.
Our outlook for the insured block, including experience rated as well as full risk, is for approximately flat earnings.
Now, there are various puts and takes, as you can imagine, in there.
There are puts and takes in specialty, there are puts and takes in the various components, but the major driver of our core earnings year-over-year is the productivity improvement and that, as we've talked about before, we expected, have expected for some time now to continue to improve productivity, and 2006 is a meaningful step forward in that regard.
Josh Raskin - Analyst
Okay.
And then just lastly, quick clarification on the PDP, it sounds like that 10 to 20 million roughly using a $90 [PNP], I'm getting around a 2 to 4% margin, net margin on that.
Is that a fair number?
Mike Bell - CFO
That's a fair number, Josh.
Josh Raskin - Analyst
Okay, thanks.
Operator
Thank you, Mr. Raskin.
We'll go next to Scott Fidel with JP Morgan.
Scott Fidel - Analyst
Hi.
Thanks.
Good morning.
The first question just has to do on the SG&A outlook and you talked about the potential cost saves there.
Could you help us think though through first, you know, thinking about the underlying productivity improvements offset by how much you're actually investing for all the consumer-driven initiatives?
And then also just in terms of the transformation initiative the time line there and the expected cost save time line on that.
Mike Bell - CFO
Sure, Scott.
It's Mike.
Regarding the productivity improvements, the numbers that I described in my prepared remarks are a net number so that's an all-inclusive number in service ops and technology, including year-over-year change in consumerism and health advocacy spending.
To walk through a few of the pieces there, as I mentioned to Josh, the productivity improvements in 2006 primarily come in our service operations.
We have continued to drive strong productivity improvement in service ops for some time now, and we're getting that at the same time that we're further strengthening our customer service results.
It's also key, I'd point out, that we stabilize our membership and get some modest membership growth in 2006, but in terms of the productivity we're going to benefit in 2006 from two trends.
First, we're going to have a greater proportion of our overall membership on the two in-state platforms since in first quarter 2006 we expect that 99% of our membership will be on in-state at that point in time.
And second, we expect to continue to increase our productivity itself on the in-state platforms.
As we've climbed that learning curve we expect to continue to increase the productivity there.
And together on a year-over-year earnings basis, we'll get approximately 50 to $60 million after-tax from earnings benefit from that.
Now, in terms of your question around spending on consumerism and health advocacy, overall we expect to continue to have this be an area of significant investment for us.
We expect the investment that we'll make in 2006, depending upon exactly how you want to count it, will continue to be approximately 50 to 75 million, which is a comparable amount to what we're spending in 2005.
Now, your other comment around the time line on the transformation savings and the further productivity savings, in addition to the major step forward we took in 2006, or expect to take in 2006, beyond that, we expect to ultimately realize an additional 200 million per year of pretax savings versus that 2006 starting point.
Now, while we expect to fully realize that $200 million per year by the time we get to 2010, we do expect incremental savings each year, 2007 through 2010 as compared to that 2006 starting point.
Scott Fidel - Analyst
Okay.
That's helpful.
Follow-up question just clearly the Company is, you know, views consumerism, you know, as the key growth area in the commercial business.
Just interested if you can talk about how you think that's going to impact the financial profile of the Health Care business in terms of the margins and the dollar profit per member?
And then also just thinking about the different pieces of that between the MLRs and SG&A.
And then also just breaking that down further how the margin profiles might shift between adding members from either a conventional self-funded product or from a conventional fully insured product and to a CDHP member, you know, how that impacts the margins.
Mike Bell - CFO
Okay.
Scott, I'll start.
First, in the near-term, just looking in a vacuum at 2005 and 2006, the investments that we've made in consumer-directed products is a net drag on our earnings.
We've spent more in '05 and '06 than we've collected in incremental earnings, and I suspect that's probably true for the entire industry, and obviously that's embedded in the outlook that we've talked about today.
Longer term, I would expect it to be a positive for earnings and for margins for the industry.
It gives us an opportunity to sell additional products at the consumer level.
It allows us, even today, it allows us to collect additional ASO fees versus the traditional ASO fees.
In terms of your comments around MLR and the mix of business to date, we've quoted on a fair amount of both ASO and fully insured business, but for the most part what we've sold to date has tended to be ASO.
And again, we've collected incremental fees for that and would expect that to continue further.
Ed, you want to add?
Ed Hanway - Chairman, CEO
Scott, what I would add is, obviously the consumer world is a much higher touch, more intensive service world.
We've used the word health advocacy, we've used the word coaching.
And it's very clear to us that the opportunities for us to develop incremental revenue streams in those areas to assist individuals in not only understanding their benefits but making appropriate health care choices and having appropriate information to assist them and walking them through that process is an area where we think because of the clinical capabilities we have we are very well positioned.
So I think our expectation is because of a combination of the breadth of specialty capabilities we have and the strong clinical orientation and resources that we have, that we can build very attractive revenue stream in a consumer-directed world that look a little different than the revenue streams we have today, but nonetheless are quite attractive.
David Cordani - President Cigna Health Care
Scott, it's David.
Just one point to wrap up on and we'll spend some time at our consumerism conference on.
As you carry across from where Ed was highlighting, the advocacy and coaching capabilities that we would offer to our members, you could see an environment where we'll have opportunities to expand other services we might offer to them through what the industry might consider as voluntary or supplemental services today, because we intend to position ourself as that trusted advisor to the member and identify additional services or needs that they might have.
Scott Fidel - Analyst
Thank you.
Operator
Thank you, Mr. Fidel.
We'll go next to John Rex with Bear Stearns.
John Rex - Analyst
Good morning.
Thank you.
First, just want to clarify on membership.
Did the Nevada acquisition come in this quarter?
Did it have any impact on the member count or is that coming later?
Mike Bell - CFO
John, it's Mike.
We did pick up it was between 30 and 40,000 members in the quarter in Nevada from that acquisition.
John Rex - Analyst
So we should think of membership as up as you described about flat ex that acquisition?
Mike Bell - CFO
Yes, it's up very modestly ex that acquisition versus second quarter, and second quarter was up very modestly relative to first quarter.
John Rex - Analyst
Okay.
And then the component cost trends you described, it looks like you're expecting inpatient to ramp a bit from where, I think you were talking kind of mid to 5 to 7% last quarter.
I think you're talking high single in your outlook now.
I was wondering if you could help us understand what's going on on your inpatient side?
Jon Rubin - CFO, CIGNA Health Care
John, it's Jon.
I wouldn't read too much into that.
The only thing I'll mention is that our 2005 inpatient trends benefited from, as we discussed previously, the initial introduction of our most effective clinical programs to our open access customers.
And while we expect that we and our customers will get additional benefit from this in 2006, the expected magnitude is lower than in 2005, but if you put that aside and exclude the impact of it, fundamental medical costs results in 2006 are expected to continue to be strong and consistent with our 2005 results.
And again, our net medical cost trends for 2006 will be impacted by our ultimate book of business mix and I'll be positioned to provide more color on it at our year-end call.
John Rex - Analyst
Okay.
And just one follow-on.
I know you don't spike out the other segment separately but that has been consistently running well above the run rates you have talked about even on in terms of what we should think about for runoff kind of COLI business.
How should we think about that business tracking as we're thinking over the next couple of years?
What kind of magnitude of earnings declines should we expect or do you expect that we'll stick up in this level for the next couple of years?
Mike Bell - CFO
John, it's Mike.
First, I appreciate your recognition of our strong results there.
And the three points to think about here as you think about the outlook for 2006.
First, I would just reinforce your point.
We've had very strong results in Disability and Life and International in 2005.
I mean, it's something we're real proud of, that those two businesses are likely to contribute 70 to $75 million of year-over-year earnings growth '05 as compared to '04.
And we're proud of those businesses.
They're focused on their core competencies, and they're executing well.
Specifically in terms of the pieces, in CIGNA group insurance, our Disability and Life segment, the year-to-date results include approximately $20 million after-tax benefit from very favorable mortality in the group life business.
We think that's challenging to try to count on going forward.
So [inaudible] for Disability and Life, while we expect to report in 2005 between 225 and 230 million for that segment, we estimate that the result excluding that favorable mortality would be in the 205 to 210 range.
So more like 8.5% after-tax margins as compared to the 9s that it's been running in this year.
And in terms of your specific question on how to think about 2006, we expect margins for CGI next year to be in the mid 8s.
We expect approximately 5% year-over-year revenue growth, so we'd expect earnings plus or minus for that segment in '06 to be about 220.
For International, International's been another strong contributor for us this year.
We expect it will, expect earnings for International in 2005 between 100 and 105 million.
We do expect double-digit earnings and revenue growth for 2006 for International, so that would equate to 110 to 120.
And the other segments, which have posted a small gain, if you consolidate the runoff retirement, runoff reinsurance, other ops and corporate, we've reported small gains in the first three quarters of this year.
We are expecting a loss for those four segments combined.
Our current estimates are a range of minus 25 to minus 35 in 2006, and due to the nature of that remaining block and the uncertainty there, that we think that's a prudent range at this point.
Obviously we'll update those estimates as time goes on.
John Rex - Analyst
Is most of the swing factor in the other due to the, is a lot of that coming from the corporate on life insurance business?
I'm thinking particularly on that how we should be thinking about the declines.
It's held up much better even than maybe I thought a few years ago in terms of the earnings stream off that.
And I'm talking now particularly about what you label as the other segment.
Mike Bell - CFO
John, you're absolutely right.
In the corporate and life insurance business in particular has done quite a bit better than we had projected.
That's a strong business for us.
We've got good people there.
It's producing good earnings.
And since we decided to retain that we've really been focused on running that business very effectively.
And I'm real proud of the management team there, and specifically, on a year-to-date basis, COLI has earned $58 million after- tax.
If you add something in there for fourth quarter, you get a strong result.
Given that that result has benefited from very strong mortality and also strong persistency, I think it's reasonable to assume a decline year-over-year.
What we have built into our estimates, plus or minus, is approximately 50 million for next year.
Ed, did you want to add something there?
Ed Hanway - Chairman, CEO
John, not necessarily related to COLI, but I wanted to just reinforce something that Mike said.
The group operation, which we are very pleased with and which has a very strong market position, the 8 to 8.5% margins that Mike talked about on a run rate basis, they are clearly best in breed, and we believe we can sustain those and grow the revenue at about 5%, which is also pretty reasonable in that market.
So I would hasten to add that while this year was particularly strong, counting on the kind of mortality benefit we've seen doesn't make sense.
But, the underlying growth rate of this business and the margins of it are very attractive.
John Rex - Analyst
Great.
Thank you.
Operator
Thank you, Mr. Rex.
We'll go next to Carl McDonald with CIBC.
Carl McDonald - Analyst
Thank you.
I want to just better understand the earnings outlook for the experience rated business next year.
It sounds like you're going to see some pretty favorable earning growth in the ASO business.
It sounded like you were looking for fairly stable earnings in the commercial at risk.
So what you're thinking about experience rated?
Mike Bell - CFO
Carl, it's Mike.
Regarding the experience rated outlook for 2006, excluding prior year development, we expect 2006 operating earnings to be reasonably close to 2005, maybe down a little bit.
Specifically, we expect yields in that business to be in the 8 to 9% range which is consistent with our pricing assumption for medical costs of 8 to 9%.
But we do expect that as we've seen so far in 2005 versus 2004, there are fewer deficits out there for to us recover versus what we had in 2004, and we expect that trend to continue in 2006.
So, you know, I'm not talking about a massive step-off here, but a decline, you know, call it something a little less than 10 million year-over-year is a reasonable estimate at this point.
Carl McDonald - Analyst
And how did favorable development, the 25 million breakdown between segments this quarter?
Mike Bell - CFO
Okay.
The 25 million, 9 million of it was in commercial HMO, 10 million was in experience rated, and 6 was in the other guaranteed cost products.
Carl McDonald - Analyst
Lastly, just trying to understand the share repurchase.
In October it looks like the average price there was 116.
What the thinking there was in light of the guidance today and also when you can start repurchasing stock again.
Mike Bell - CFO
Okay.
Carl, first, in terms of October or any other month, consistent with our historical practice, we don't comment on share repurchase.
It's just our consistent practice, and I'd like to keep that.
In terms of when we get back into the market, it's roughly, Ted, you can help me here, but it's roughly the middle of November.
So we'll be back in for about half a month.
Carl McDonald - Analyst
Thank you.
Operator
Thank you, Mr. McDonald.
We'll go next to Christine Arnold with Morgan Stanley.
Christine Arnold - Analyst
Hi there.
A couple of questions.
First, was the prior period positive development in this quarter related to prior year or prior quarters?
Mike Bell - CFO
Christine, it's Mike.
The prior year development that I mentioned in my prepared remarks, the 25 relates to prior year.
Christine Arnold - Analyst
Okay.
All prior year?
Mike Bell - CFO
All 25 of that is prior year.
We did have, in addition to the 25, we had a little bit of favorable development to the earlier quarters this year but it was relatively small.
It was less than 5 million.
Christine Arnold - Analyst
Okay.
Now, in the year ago, was the 25 million a year ago all prior year as well?
Mike Bell - CFO
That's correct.
Christine Arnold - Analyst
Okay.
And as I think about the SG&A guidance, the SG&A guidance, when you had guided kind of at other times for reduction in SG&A, it was that we would see that reduction in an absolute level in your operating expense.
I understand that you're guiding that this is going to benefit a sub segment, but there'll be offsets so we won't actually see a net reduction of SG&A of 50 to 60 or am I misunderstanding?
Mike Bell - CFO
You've got it basically right.
On an apples-to-apples basis, the service operations will decline on a true dollar basis.
We're estimating 70 to 75 million.
Actually, that's service and technology together. 70 to $75 million lower in 2006 versus calendar year 2005, and, you know, that, coupled with some, the fact that that's absorbing some inflation gives us 50 to $60 million of earnings lift.
Now, completely separately from that number, we expect in 2006 to spend more on operating expenses to support things like the Medicare Part D program, which, again, there we would expect to get commensurate revenue and have that be an overall earnings contributor of 10 to 20 million.
We're also expanding our disease management programs, and we would expect additional revenue and operating expense in 2006 related to that.
But stripping out the earnings impact and specifically the dollar amounts in service and technology, yields the 50 to 60 million after-tax benefit that I referenced.
Christine Arnold - Analyst
But it will look different in the income statement.
Mike Bell - CFO
Correct.
And we are reviewing our disclosures.
We're trying to sort out is there a way we can specifically lay that out for you.
That's still work underway.
Christine Arnold - Analyst
Thank you.
Operator
Thank you, Ms. Arnold.
We'll go next to Matthew Borsch with Goldman Sachs.
Matthew Borsch - Analyst
Good morning.
Thank you.
Wondered if you can comment on the national account segment where, if I recall, you said low single-digit to mid single-digit decline expected in January.
A couple questions there.
One, does that include your win of the state of Tennessee account, and if you can just comment on how many members you expect to pick up there?
And then related to that, how much of the dynamic in national account, the national account movement do you think relates to sort of the last exit related to the 2002 and 2003 issues versus the level of competition that you're seeing in national accounts, if you can contrast that with what you're seeing in middle markets.
David Cordani - President Cigna Health Care
Matthew, it's David.
I'll start and I'll hand it over to Ed.
Several questions in there.
Let me address the broad question around national accounts in terms of our outlook.
You did have it correct.
I asserted that we'll have low to mid single-digit decline in 2006.
Also noted that that was a meaningful improvement.
First off, we were very clear in terms of our expectations of seeing the retention level of the national account both improve first as an initial sign of our improvement and we're pleased with that improvement of 500 basis points taking us into the low 90s at about 91%, which is quite important.
Secondly, we've made good inroads in expanding relationships with existing customers, which is the next lever we expected to improve on.
Our pipeline for 2006, we're, generally speaking, pleased with the pipeline.
The close ratio was not an optimal close ratio by any stretch of the imagination.
What we've seen in terms of postmorteming the pipeline is that about 80% of the cases we looked at didn't move from the incumbent, and that actually underscores a little bit of your comment relative to the competition in the marketplace.
Overall we think that 1/1, 2006 is next logical step in terms of the improvement of the national account segment moving off the improved retention levels and then improvement in the expansion of existing relationships.
Clearly, to one of your points, there's some lag indicator.
We would like to think that beyond 2006 the 2002, early 2003 hangover is beyond us, but clearly there would be some impact there of the 2002 issue.
Relative to the state of Tennessee specifically, business that the state or municipality business is not part of what we define as our national account segment.
That's actually part of what we would define as our middle market segment.
So specifically the results we're talking about in national accounts exclude the state of Tennessee win, which is a 1/1/06 effective date.
I'll turn it to Ed.
Ed Hanway - Chairman, CEO
Matthew, the only thing I would add is, our expectation is consistent for national with the pattern that we saw in regional.
First and foremost it's important to keep the customers that you have, and I think there we are quite pleased in terms of the improved retention rate that David just mentioned, and the pipeline is indicative, I think, of people recognizing that our value proposition has been materially improved.
So we're comfortable with the pattern of improvement we've seen.
It obviously takes a bit longer because the sales cycles are longer, and there's probably, or has been, at least as it relates to second half of '05, still a little lingering hangover from our '02-'03 issues.
Having said that, we've also seen some customers come back to us for portions of their program who had left us in that '02-'03 time frame.
That's very encouraging to us because they like the value proposition, particularly the clinical approach that we have.
So we like the underlying pattern that's developing here.
Obviously we are focused on continuing to improve it and expect that we will.
Matthew Borsch - Analyst
And if I could just ask a follow-up on the intensity of price competition, there have been a few of your competitors that have commented on aggressive or below trend pricing by some of the not for profit Blue Cross companies, and I'm just curious if you've seen any of that and, you know, maybe how your product positioning has side stepped that issue, if that's applicable?
Mike Bell - CFO
Matthew, it's Mike.
I'll start.
First, we continue to see certainly market conditions that are very competitive, and we certainly continue to see selected examples of very aggressive pricing, particularly intense at the lower end of the middle market.
But overall we've not changed our pricing strategy, and overall we expect to continue to improve our membership results by strengthening our fundamentals, all the things that we've talked about today, our medical costs results, our customer service, and also taking advantage of our competitive advantages in consumerism and health advocacy.
David Cordani - President Cigna Health Care
Matthew, it's David to reinforce.
We've been pretty consistent as well indicating that the pricing environment is competitive, and it's competitive, you know, on a national franchise.
Specific to your point on the not for profit blues, there's some press in the marketplace you can look at in terms of some select not for profit blues returning some surplus capital in the marketplace and we have seen and expect to continue to see ebbs and flows in that space.
And typically you'll see that play out in the bottom half of the middle market and higher end of the small segment in specific geographies as those local not for profit blues seek to secure and can preserve their local share.
Matthew Borsch - Analyst
Okay.
Great.
Thank you.
Operator
Thank you, Mr. Borsch.
We'll go next to Doug Simpson with Merrill Lynch.
Doug Simpson - Analyst
Thanks.
Was just wondering, I didn't hear you, if you mentioned this specifically, but the reinsurance recoverables came down about 300 million it looks like in the quarter.
Was just trying to see what was that and where does that kind of hit the cash flow.
Mike Bell - CFO
Sure, Doug.
It's Mike.
Specifically, the reinsurance recoverables did drop sequentially 309 million. 269 of that 309 million relates to the sale of our retirement business through Prudential.
So we had a commensurate drop-off in the liabilities associated with that.
And as customers continue their novation process, we'd expect that to continue.
There's about a billion and a half left in terms of reinsurance recoverables from the Pru transaction.
The other 40 million was a mix of things, including we've continued to settle contracts for our runoff reinsurance business.
That contributes, and, again, in terms of how that impacts the cash, I would not characterize it other than the Pru transaction, which you're well aware of, it does not materially change the GAAP cash flow.
Doug Simpson - Analyst
Is it fair to say the 269 is kind of a wash in your GAAP cash flow because you have it coming in and going out?
Mike Bell - CFO
That's correct.
Really, we collected cash from Pru back when we sold the business and completed the transaction in 2004.
So specifically, there would not be material cash from that item.
Doug Simpson - Analyst
Okay.
And then, you know, thinking about the impact of claims liabilities on cash flow, kind of two cross currents here, one would be you've got the lapsed members for which you're paying claims, and you would expect that that would kind of start to fall off as we put some distance between the loss and risk membership you saw in '04 and kind of where we are today.
And then it sounds like maybe an offsetting dynamic there is the greater expediency in processing claims which can actually, you know, be somewhat of a drag on cash.
I'm just wondering how you think about those two dynamics?
Mike Bell - CFO
Doug, what we're describing is certainly fair.
In terms of the roll forward of the Health Care reserves, as we noted in our press release, the net reserves declined to 800 million here at third quarter.
It really is impacted by the items that you describe but also impacted by the significant prior year claim development.
So of the $286 million decline relative to year-end '04, 195 of that is the prior year claim development that we've talked about.
It's 126 after-tax.
The other items you described also impacted it as well.
Doug Simpson - Analyst
So directionally, if you're thinking about change in insurance liabilities line, would it be more reasonable to expect it to the go up, down, stabilize, just directionally how do you see that playing out over the next two to three quarters?
Mike Bell - CFO
First, we do specifically spike out in the balance sheet the Health Care medical claims payable.
That's on a gross basis.
And then in the release we give it to you on a net basis.
In terms of how that would change, you know, I would not expect would it change materially here in fourth quarter.
Now, as we grow our membership next year and continue to see medical cost inflation of 8 to 9%, I would expect that to grow next year, but I'd rather, until we see the exact mix of business here on 1/1/06, I'd rather not be more specific about a number, but fair to say we'd expect flattish fourth quarter in growth next year.
Doug Simpson - Analyst
Thank you.
Operator
Thank you, Mr. Simpson.
We go next to Patrick Hojlo with Credit Suisse First Boston.
Patrick Hojlo - Analyst
Good morning, guys.
Can you talk about the fact that your premium yields as reported on your income statement continue to drop again sequentially, and what that says about guidance for next year and how we should really be modeling premium yields as opposed to what you're guiding to?
Mike Bell - CFO
Patrick, it's Mike.
I'll start.
First of all, tin terms of yields for 2006, which I think is the essence of your question, we do expect to see a flat and stable MLR as well as overall insured margins next year.
Now, the specific amount of medical cost increase on a PMPM basis as well as the specific yields will be impacted by mix and benefit buy-downs and such.
But within the ballpark, we would expect experience rated as well as the fully insured yields to be in the 8 to 9% range next year.
Now, the ASO yields will be quite a bit smaller than that.
We're expecting something closer to 1.5% next year for the ASO yields.
But that's our expectation for 2006.
Now, in terms of your comment around 2005, we have seen commercial HMO yields in 2005 that you're referencing on the income statement at about the 5% level, and that's the mix change that we've talked about on prior quarters.
The experience rated premiums in our income statement really reflect the favorable medical costs, because for an experience rated customer, that is not in deficit, those favorable medical costs get returned to that customer in terms of a refund.
So as a result, it shows up as lower premiums, since we booked that rate credit liability against the experience rated premium, so it shows up as that.
The underlying yield, though, in experience rated is approximately 9% this year.
Patrick Hojlo - Analyst
Got it.
And one more question on '06 guidance.
One reason why your guidance is a little lighter for some folks expected it to be is that certainly not everyone's excluded all your prior year development from your baseline number this year.
Obvious a lot of it should be given your membership shrinkage.
Could you talk about that dynamic and, you know, in the context of your days claims trend or your claims payable trend in general?
Mike Bell - CFO
Sure, Patrick, it's Mike.
I'll start.
As you indicated, rightfully, we do acknowledge that we've had a significant amount of favorable prior year development in 2005 related to 2004, and we recognize we had similar amount in 2004 related to 2003, and what that tells us is with the benefit of hindsight, our medical management and underwriting results improved faster than we had estimated at the time, and as we thought long and hard about this call, we concluded that it is not appropriate for to us try to estimate that future prior year development and concluded that we were better off communicating to you a range of 2006 earnings estimates that explicitly excludes prior year development as opposed to trying to embed something in that range.
Rest assured, just as we've done this year, as claims emerge next year, we'll tell you how much of that amount impacted reported earnings and we'll reconfirm for you that, in the amount of prior year development was, in fact, excluded from the 600 to 650.
Patrick Hojlo - Analyst
Is it possible to tell us what you think the sort of one-time prior period development this year was?
In other words, what the net, true net prior period development from perhaps membership you don't have any more or from extra reserving last year was, as opposed to sort of a run rate prior period development?
Mike Bell - CFO
Patrick, I'd prefer not to go down that road.
Why don't we instead, let's let 2006 emerge as it is and let us communicate to you at that point in time whatever prior year development that we have.
Patrick Hojlo - Analyst
Got it.
One more quick one.
How many dual eligibles are you assuming you'll get in Part D?
David Cordani - President Cigna Health Care
Patrick, it's David.
As I mentioned our Part D marketing strategy is focused on a variety of tactics.
First, we built our products to address what we call the free agents of the non-dual eligibles, number one.
Two, the employer-sponsored program.
Then third, the dual eligibles.
Round numbers in the 400 to 600,000 members, we have targeted the dual eligibles will be less than 100,000 of that number.
Patrick Hojlo - Analyst
Thanks.
Operator
Thank you, Mr. Hojlo.
We'll go next to Peter Costa with FTN Midwest Securities.
Peter Costa - Analyst
Hi.
I've got two questions.
The first, again, have you changed anything in terms of the way you're reserving that would imply that you would be booking less in prior period development next year than you did this past year?
That's my first question and then I have a follow-up.
Mike Bell - CFO
Okay.
Peter, it's Mike.
We have not had any change to our underlying reserve methodology.
We continue to have a consistent process and a consistent methodology.
Now, we do make judgments every quarter based upon the information that we have at that time, but the underlying methodology and process are the same.
Peter Costa - Analyst
Okay.
And then the second question relates to your cash that you have available.
By the end of 2006, it sounds like you'll have about just under 2.5 billion in cash to be applied to sort of whatever you want.
You've done a couple of small acquisitions this year.
Do you expect that to step up next year, and if so what types of acquisitions would you be looking at?
Ed Hanway - Chairman, CEO
Peter, it's Ed.
I think Mike did a good job in the prepared remarks of delineating what our uses of capital are and how we prioritize that.
I think what I would say relative to acquisitions is we feel quite good about our current competitive position.
As we've said, membership is stabilizing.
We look to grow it a bit next year.
We think our set of capabilities are quite strong.
The industry continues to consolidate, obviously, and there are a range of opportunities we will look at.
We've acknowledged two small acquisitions recently.
They added particular capabilities to us.
So our process for looking at M&A activity is something strategic, [would it pencil], and I think you can judge from our recent acquisitions that we've continued to pursue that course.
And that's what we would expect to do through 2006.
Peter Costa - Analyst
Okay.
Thank you.
Operator
Thank you, Mr. Costa.
Our final question of the day will come from Ed Kroll with SG Cowen.
Mr. Kroll, your line is open.
Please go ahead with your question.
Mr. Kroll, you may have your mute button on at this time.
If you would please deactivate any mute button you do have and/or pick up your handset.
I do apologize.
Hearing no response, we'll move on.
Ladies and gentlemen, this does conclude today's CIGNA's third quarter 2005 results review.
CIGNA Investor Relations will be available to respond to additional questions shortly.
A recording of this conference will be available for ten business days following this call.
You may access the recorded conference by dialing 888-203-1112, or internationally at 719-457-0820.
The passcode for the replay for both phone numbers is 1485879.
Thank you for your participation we will now disconnect.