信諾集團 (CI) 2006 Q1 法說會逐字稿

完整原文

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, thanks for standing by for CIGNA's first-quarter 2006 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 the queue to ask questions at that time. (OPERATOR INSTRUCTIONS).

  • As a reminder ladies and gentlemen, this conference, including the Q&A session, is being recorded.

  • We will begin by turning the conference over to Mr. Ted Detrick.

  • Please go ahead Mr. Detrick.

  • 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 CIGNA HealthCare; and Jon Rubin, CIGNA HealthCare's Financial Officer.

  • In our remarks today, Ed Hanway will begin with some highlights of CIGNA's first-quarter results.

  • Mike Bell will then review the financial details for the quarter and provide the financial outlook for both the second quarter and full year of 2006.

  • David Cordani will discuss our medical membership results and outlook.

  • We will also make remarks about CIGNA HealthCare's improving competitive position and value proposition as it relates to consumerism.

  • Ed will then conclude our prepared remarks by commenting on the long-term growth prospects for our healthcare and related benefits businesses.

  • 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 net income before realized investment results and special items, with special items being unusual charges or gains, as the principle measure of performance for CIGNA and our operating segments.

  • A reconciliation of adjusted income from operations to net income, which is the most directly comparable GAAP measure, is contained in 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.

  • Now, before turning the call over to Ed, there are three items that I want to cover pertaining to our disclosures.

  • First, this quarter, we made a reclassification to our medical membership disclosure, which increased our ASO membership and decreased our experience (indiscernible) members by 84,000 lives, based on updated data by funding type from our in-state systems.

  • The second item relates to our operating cash flows.

  • In connection with our investment strategy to enhance yields, operating cash flows for the first quarter of 2006 included cash outflows related to the funding of mortgage loans originated with the intent to sell a senior participation.

  • Now, the accounting for these activities requires that the funding associated with these mortgage loans, as well as any future sales, being reported through operating cash flow.

  • The impact in the first quarter was to decrease operating cash flow by $240 million.

  • Excluding this amount, operating cash flow would have been a net positive of $153 million for the first quarter of 2006.

  • Now, previously, we have encouraged you to be thoughtful about using GAAP operating cash flow as a key analytical metric.

  • We continue to believe it is more appropriate to focus on cash and investments at the parent company as a key indicator of our capital position.

  • The third item is that, this quarter, we made some enhancements to our statistical supplement to provide additional transparency into our healthcare business.

  • Specifically, we have provided a further breakdown of other healthcare operating expenses, which include expenses related to certain revenue-generating initiatives like disease management, Medicare Part D and pharmacy.

  • We are also providing separate disclosure of Medicare Part D revenues and memberships.

  • In addition, we have provided the Medical Cost Ratio for our total guaranteed cost business and also separately disclosed total premium for all our other guaranteed cost medical businesses.

  • We hope you will find these enhancements beneficial, and we remain committed to looking for additional ways to improve the transparency of our financial reporting in the future.

  • With that, I will turn it over to Ed.

  • Ed Hanway - Chairman, CEO

  • Thanks, Ted.

  • Good morning, everyone.

  • As Ted noted, I will start today's call with a few brief comments on our results.

  • Mike will then provide more details on the first quarter and our 2006 outlook.

  • Then David will discuss how we are differentiating ourselves in the marketplace, which is resulting in a leadership position for us in the area of consumerism and health advocacy.

  • In my closing remarks, I want to provide my perspective on the opportunities we have to grow our HealthCare business.

  • Overall, our first-quarter results were better than expected, driven by very strong results in our group disability and life and international businesses.

  • First-quarter adjusted income from operations was $258 million or $2.11 per share, well ahead of our expectations.

  • While our HealthCare earnings, excluding prior-year development, were at the lower end of our expectations, we remain confident in our ability to execute on our 2006 HealthCare priorities.

  • Results in the HealthCare ASO and experience-rated books were strong.

  • Now, we're not satisfied with pricing yields in our guaranteed cost business, however, and we have actions underway to improve our performance there.

  • Overall, we feel confident about our full-year HealthCare earnings and membership outlook.

  • Middle-market membership continues to grow, and we are receiving positive feedback from both brokers and customers about our innovative products and services.

  • In addition, we are seeing early positive signs for the 2007 national account selling season with our pipeline up significantly versus this time last year.

  • These early signs also suggest that our national account persistency should continue to improve.

  • Our group and international businesses continued to perform very well during the quarter.

  • Our group insurance business reported earnings of $58 million with an after-tax margin of 9.4%.

  • That remains industry-leading.

  • Our international business reported earnings of $37 million, which increased 23% from a year ago on very attractive revenue growth.

  • Both our group and international operations continue to be very strong businesses.

  • We also continue to be active with share repurchase.

  • Through April, we have repurchased over $500 million of our stock, which is on the heels of repurchasing 1.6 billion in 2005.

  • Overall, our first-quarter consolidated results are strong.

  • We believe we're well positioned to achieve our full-year earnings and membership goals.

  • Mike will now cover the specifics of the first-quarter results, as well as our outlook for 2006.

  • Mike?

  • Mike Bell - CFO

  • Thanks, Ed.

  • Good morning, everybody.

  • In my remarks today, I will review CIGNA's first-quarter 2006 results.

  • I will also discuss our outlook for the full year and for second quarter of 2006.

  • In my review of consolidated and segment results, I will comment on adjusted income from operations.

  • This is net income, excluding realized investment results and special items.

  • This is also the basis on which I will provide our earnings outlook.

  • Our first quarter earnings were $258 million, or $2.11 a share, compared to 297 million or $2.24 a share in the first quarter of 2005.

  • The quarter's results were higher than we had previously estimated, mainly due to stronger-than-expected performance in our group and international businesses.

  • I will now review the segment results, starting with HealthCare.

  • First-quarter HealthCare earnings were $156 million.

  • Earnings included favorable prior-year claim development of 16 million after-tax, of which 5 million was related to our guaranteed cost book.

  • First-quarter earnings reflected strong medical management results and solid operating expense execution.

  • However, our guaranteed cost earnings were lower than we expected.

  • In addition, our Medicare Part D losses were somewhat higher than we had previously estimated.

  • Membership at the end of first quarter was consistent with the expectations that we discussed on the last call.

  • Our regional membership increased 3% while our national accounts membership declined 5%.

  • Our total membership was 1% below year-end 2005.

  • Total HealthCare operating expenses in the quarter were 2% lower than in first quarter a year ago.

  • The new disclosures in our [stat] supplement provide a useful view of expenses by breaking out the impact of transformation amortization and of our pharmacy, Medicare Part D, and disease management growth initiatives.

  • Excluding these items, our first-quarter operating expenses were 8% below first quarter in 2005.

  • This result primarily reflects continued progress in our efforts to improve productivity, including achievement of operating efficiencies in our service operations.

  • It also reflects some timing of expenses relative to the balance of the year.

  • As a result of the strong medical cost and operating expense performance, first-quarter experience rated and ASO earnings were better than expected.

  • Guaranteed cost earnings were lower than expected in the quarter, due to lower pricing yields on renewing business, which in part reflected the competitive pricing environment.

  • With respect to Medicare Part D, losses in the quarter were $11 million after-tax, compared to our previous estimate of approximately 7 million.

  • For our guaranteed cost business, which represents 12% of our total membership, our first-quarter medical loss ratio, excluding prior-year claim development, was 87.3% versus 84.7% for full year of 2005.

  • The increase in the loss ratio reflected lower pricing yields.

  • Now, we're taking actions to improve earnings for our guaranteed cost business, and I will say more about these actions in our full-year outlook in a few minutes.

  • First-quarter premiums and fees for the segment reflected the loss of a large prescription drug program, which we discussed in the February call and which had minimal earnings impact.

  • Excluding the impact of this account, premiums and fees were up 6% year-over-year.

  • For the recap, our HealthCare earnings, excluding prior-year claim development, reflected strong medical management results and solid operating expense execution but were at the low end of our expectations, primarily due to lower-than-expected guaranteed cost earnings.

  • Now, I will discuss the results for our other segments.

  • Our Group Disability and Life operations produced strong results in the quarter with earnings of $58 million.

  • Our disability results remained very strong competitively.

  • Our international business generated earnings of $37 million and had strong topline growth.

  • International earnings were 23% higher than the first quarter of 2005.

  • Overall, our group insurance and international businesses continue to be important contributors to our results.

  • Our remaining operations, including run-off retirement, run-off reinsurance, other operations and corporate, had combined earnings of 7 million for the quarter, which was modestly better than our expectations.

  • Now, I will comment briefly on our capital position and our 2006 capital outlook.

  • Our parent company capital position continues to be very strong, and our subsidiaries remain well capitalized.

  • At the end of the first quarter, cash and investments at the parent company were approximately $1 billion.

  • During the first quarter, we continued our share repurchase program and repurchased 3.4 million shares of our stock for $419 million.

  • In April, we repurchased approximately 1 million shares for 121 million.

  • We have approximately 720 million of remaining repurchase authority at this time, which includes an additional 500 million authorized by our Board of Directors last week.

  • Our capital management priorities remain consistent with our communications in recent quarters.

  • 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 regularly review a range of acquisition 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 capital outlook, we expect to maintain our strong capital position and good financial flexibility.

  • Our capital outlook is essentially unchanged from our February discussions.

  • Our expectations for full-year 2006 subsidiary dividends to the parent remain approximately $1 billion, and this estimate reflects operating earnings and the anticipated withdrawal from excess surplus from CG [White].

  • At this point, we expect other sources and uses to approximately offset each other, excluding any share repurchase and any potential M&A activity.

  • Overall, we expect to continue to have significant capital flexibility.

  • I will now review the earnings outlook for the full year and second quarter of 2006.

  • For the full year of 2006, we're raising our estimate of consolidated adjusted income from operations by $20 million, relative to the expectations we communicated in February.

  • The updated range of 920 to $980 million reflects the stronger outlook for group, international and our other operations.

  • I will now discuss the components, starting with HealthCare.

  • For the full year 2006, we continue to expect that our HealthCare membership will increase by 1 to 2%, driven by continued success in the regional market.

  • We expect full-year 2006 medical cost trends for our total book to be in the range of 7.5 to 8%, and this is 50 basis points better than our expectations last quarter.

  • We expect the full-year 2006 guaranteed cost medical loss ratio to be approximately 86.5%, excluding prior-year claim development.

  • This estimate reflects our plans to maintain a strong focus on medical cost management, underwriting and pricing in the balance of the year.

  • Our estimate for full-year 2006 HealthCare earnings remains a range of 600 to $650 million.

  • This range includes our first-quarter favorable prior-year claim development but assumes no additional prior-year development in the balance of the year.

  • First-quarter earnings were somewhat below the midpoint of our previous estimates, and we're taking specific actions to improve results in the balance of the year.

  • First, we are targeting higher rate increases on our guaranteed cost block.

  • Second, while we expect to increase our investments in consumer-directed capabilities in second through fourth quarters, we have plans to achieve additional operating expense savings in other areas.

  • We are confident that these actions will drive earnings improvement in the remainder of the year.

  • In addition, we expect our Medicare Part D results to improve to the previously communicated range of 0 to $5 million of after-tax profit for the full year.

  • Turning to our other reporting segments, we expect our remaining operations to contribute approximately 320 to $330 million of earnings in 2006.

  • This is 20 million higher than our February estimate.

  • We're putting together all of the pieces.

  • We estimate that our full-year 2006 consolidated adjusted income from operations will be in a range of 920 to $980 million.

  • Our consolidated earnings per share will be affected by any share repurchase that occurs in future periods.

  • As I 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 activities.

  • On this basis, our estimate of full-year EPS for 2006 is now a range of $7.50 to $8 a share, which is higher than our previous range, reflecting the outlook for increased earnings and the benefit of share repurchase activities in February.

  • Turning now to the second quarter of 2006, we currently expect consolidated adjusted income from operations of 210 to $230 million.

  • Second-quarter HealthCare earnings are estimated to be in the range of 140 to 150 million.

  • We expect the balance of our reporting segments to contribute approximately 70 to 80 million of earnings.

  • Excluding the impact of future share repurchase, our estimated second-quarter 2006 EPS is in the range of $1.75 to $1.90 a share.

  • For the recap, our consolidated first-quarter earnings reflected particularly strong performance in group insurance and international.

  • While HealthCare, earnings at excluding prior-year claim development, were at the lower end of our estimated range, we are confident that we're taking the actions needed to achieve the full-year earnings estimates that I've discussed.

  • With that, I will turn it over to David.

  • David?

  • David Cordani - President of CIGNA HealthCare

  • Thanks, Mike and good morning, everyone.

  • Before I highlight the key areas where we are seeing meaningful progress, I did want to spend a minute on the guaranteed cost rate execution issue that Mike outlined.

  • Our guaranteed cost book continues to be profitable.

  • In fact, the profitability is in line with prior year.

  • However, it is lower than our expectations for 2006.

  • The primary driver, as Mike noted, was lower yield on a renewal book of business.

  • I would remind you that this book is approximately 1 million members, of which approximately 50% renew on January 1.

  • For the balance of the year, we will target higher rate increases for the business that is yet to renew.

  • We will also continue to drive the consistent, effective medical management that we have realized over the past year.

  • I would also note that we view the shortfall in the guaranteed cost book as a short-term issue, one that will be remedied by the actions we are implementing and one that will not impact of the overall progress or long-term earnings power with the book.

  • Now, despite this specific challenge, it is important to recognize that CIGNA HealthCare is continuing to move forward in the right direction.

  • We are gaining traction in the marketplace and earning recognition as a leader in consumer-directed healthcare.

  • I will now turn my attention to a brief summary of five critical areas where we are continuing to see meaningful progress.

  • First, membership at March 31 is in line with our expectations and is consistent with the trajectory required to make our full-year outlook, which is to grow by 1 to 2%.

  • Second, the market has embraced our consumers and capabilities, specifically our consumer-directed product, where membership will triple by year-end, 2006.

  • Third, we continue to improve our net worth value proposition through aggressive contracting and creative uses of target alliance opportunities.

  • Recently, we announced our third such alliance, this one with Health Partners in Minnesota.

  • Fourth, our health advocacy and actual information capabilities are gaining even greater acceptance in the marketplace and as such, we launched a new business unit, Care Allies, in December of 2005.

  • Care Allies is positioned to deliver health management, health coaching, health adviser, lifestyle management, disease management, and decision support services to members where large employers desire consistent services across their entire population.

  • We've had some recent exciting success here, and we look forward to much more.

  • Fifth, people -- we continue to import talent from a variety of sources and for a broad level of roles, including general managers, sales leaders, service leaders, and clinical leaders.

  • In short, with our performance in membership, consumers and capabilities, network, health advocacy and actual information and talent, we have positioned the Company for continued success.

  • Now let me spend a couple of minutes on each of these five areas.

  • First, with respect to membership, through the first quarter, we had approximately 9 million members.

  • This result is consistent with our expectations and compares favorably to our membership position for the same time period last year.

  • Moreover, we continue to expect net growth in our total book of business of 1 to 2% for the full year.

  • Our persistency across all product lines and segments has improved.

  • Our sales pipeline and close ratios have also improved.

  • As Ed mentioned, we are seeing some early positive signs for our 2007 national accounts selling season.

  • Specifically, our membership pipeline has doubled from what it was a year ago.

  • Equally as important, we have less of our business going out to bid.

  • An additional key indicator of emerging traction is, for 2007, is the fact that we have closed five national accounts sales for July 1 of this year.

  • We are also seeing particularly good traction in relation to the market's recognition of our consumers and capabilities.

  • It's worth noting that, as of January 1, CIGNA was the fastest-growing national carrier in the area of consumer-directed health plans.

  • We had 100,000 members in funded plans -- that is HSAs and HRAs -- at year-end 2005.

  • Based on first-quarter 2006 enrollment, we now have approximately 250,000 CDHP members and are well on our way to achieve our goal of tripling our 2005 membership levels in full year 2006.

  • This growth rate represents a pace that will outperform the overall industry.

  • Now this result is hardly a coincidence.

  • It's a direct reflection of our capabilities in consumers and health advocacy, our consistent delivery of our value proposition in 2005, and a more effective sales effort spearheaded by highly accomplished sales executives who have industry-leading credentials in healthcare consumerism.

  • Now, let me turn to highlight, in a little bit more detail, the second area where we are realizing significant progress, our consumers and capabilities.

  • A recent CIGNA HealthCare case study of over 180,000 consumers and traditional plan users provided strong evidence that our consumers and capabilities delivered significant reductions to medical costs and made positive changes in health behavior, all while delivering industry-leading clinical quality.

  • The study showed that, given greater choice, more control, the right incentives and health advisors, our members became more involved in their health and wellness decision-making while not compromising needed care.

  • The total medical cost trend for these members was 12% lower than the traditional plan control group.

  • That is 12% lower with actuarially equivalent benefit plans.

  • Pharmacy costs were lower than those for traditional plan members, yet medication days supplied increased.

  • Our CIGNA Choice Fund members are more compliant with medications that manage ongoing conditions and are more discerning in the use of medications with generic and over-the-counter alternatives.

  • Cost savings occurred across all spending categories and were most pronounced amongst the higher utilizers.

  • The study results demonstrated that even high utilizers -- those who have exhausted their cost sharing responsibilities -- adopted more discerning behaviors.

  • Suffice it to say, we and the market are very excited about the power of these results.

  • I will now turn to the third area, network.

  • We have improved our network discounts significantly during the past year.

  • In addition, we are continuing to enhance our access profile on a targeted basis.

  • To achieve these results, we have successfully used traditional and nontraditional network actions.

  • Again, a recent example of a nontraditional healthcare action is our strategic alliance with Health Partners in Minnesota.

  • This is the third such relationship for CIGNA.

  • In each alliance, including HealthSouth plan in Massachusetts, Health Alliance Partners in Michigan, and now Health Partners in Minnesota, we are able to align with the highest-quality clinical and member services provider in the market.

  • Our unique alliances resulted in a leading cost value proposition with fully competitive costs and access to industry-leading clinical service delivery.

  • Our value proposition is increasingly resonating with employers who recognize the opportunity to improve the health of their employees and reduce costs through the relationship with CIGNA.

  • I will now turn to the fourth area, health advocacy and actionable information.

  • As a leader in health advocacy, we help members understand their burdens of illness and we facilitate access to care that's effective.

  • We use actionable information to help employers connect the health of their employees to the health of their business, and we are providing a new generation of healthcare metrics and expert consultation.

  • In specific terms, these points of differentiation are reflected in a wide range of programs and service offerings, all designed to enhance the consumer healthcare experience.

  • We are constantly adding new offerings to the mix.

  • One of our latest innovations is our new custom Benefit Builder.

  • Here, employers and employees who like benefit options unique to their needs -- from an employer's perspective, the custom Benefit Builder can be integrated with CIGNA HealthCare's online enrollment tools, simplified plan administration, and thus help reduce overall medical costs as well as administrative expenses.

  • From an employee's perspective, the custom Benefit Builder is ideal for constructing benefits based on specific, personal needs using simple, online tools to obtain information to help employees become better managers of their own health.

  • We've also broken new ground in the marketplace with our hospital value tool, which provides patient outcomes and cost efficiency rating for hospital-based treatments of 19 different medical conditions.

  • We've recently announced the introduction of additional tools that make quality and cost data related to ambulatory surgery and radiology more transparent and accessible.

  • We take very seriously our responsibility as a consumer health advocate.

  • Our strategic goal is to be the trusted advisor for our members, a true advocate ready and able to provide knowledge, align incentives, and create opportunities that engage consumers at a personal level and motivate them to attain their personal health goals.

  • To that end, we are constantly enhancing an already strong array of health and wellness coaching programs, emphasizing personalized education and support for consumers who want help managing high blood pressure, high cholesterol or diabetes, and who need a helping hand coping with weight issues, tobacco use or stress.

  • Here, we look at the whole person, bringing together our broad portfolio of medical, pharmacy, behavioral, dental, vision, disability and life benefits.

  • Now, let me briefly turn to the fifth area, people.

  • You know, as a health services company, we define ourselves by retaining and attracting some of the best talent in the industry.

  • We've successfully added key leaders in many areas, including regional leaders for national accounts, regional leaders in middle market and regional service leaders, just to name a few.

  • You see, when the best of the best want to change jerseys and join our team, it serves as a great indicator of future success.

  • So to recap, we have made meaningful progress in the areas of membership, consumers and capabilities, network, health advocacy and actionable information, and talent.

  • Based on what we're hearing from our customers and prospects, our outlook for success is very good.

  • In early March, we hosted an annual gathering of our top 130 customers and prospects at our national accounts client forum.

  • We had an opportunity to get direct feedback on the performance and capabilities to address their needs.

  • We heard positive reviews from them on many fronts, particularly in benefits innovation as exemplified in our consumer-directed plan and consumers and capabilities, in health advocacy, in quality of care for their employees, and in actionable information, specifically information for the employer to understand plan performance and member activation and critical information for the members to understand alternatives available to them.

  • We heard the same message later in the month at a meeting of our national producer advisory council.

  • The members of the council represent the industry's top brokers and consultants, and many of them indicated to us that they recognize the steps that we've taken to differentiate ourselves in the marketplace.

  • Now, let me move to close.

  • We recognize we certainly have more to do to fully maximize our market position, including making further progress with our guaranteed cost book.

  • However, we have made meaningful progress in the areas of membership, consumers and capabilities, network, health advocacy and actionable information and talent.

  • Finally, we remain excited about our opportunity as we look to the future.

  • With that, I will turn it back to Ed.

  • Ed Hanway - Chairman, CEO

  • Thanks, David.

  • Now, before we respond to your questions, I want to share with you a few thoughts on our longer-term growth strategy and our vision of the future for the healthcare sector.

  • Our long-term growth strategy focuses on the following major areas.

  • First, our primary focus for growth will remain the employer-sponsored healthcare arena.

  • The ability to take market share, particularly from the local and regional healthcare payors and third-party administrators, is real and offers us significant opportunities for growth.

  • In addition, we will look to further expand our business with existing healthcare customers by selling them more of our broad array of specialty healthcare products and services.

  • This includes our award-winning disease management and health advocacy programs.

  • We will also continue to expand our presence in the small employer (indiscernible) and government markets.

  • We are also developing healthcare solutions to address the senior population with a particular emphasis on the fastest-growing segment, which is the 55 to 64-year-old age group.

  • Now, within that group, we are especially focused on providing products and services to the employer-sponsored, non Medicare-eligible seniors.

  • We are also developing new capabilities to address the emerging needs for voluntary health coverages that complement our strong employer group position.

  • Finally, we will also continue to grow our group and international businesses while maintaining their competitively strong margins.

  • In summary, I believe that our opportunities for organic growth are significant and will be achieved through solid execution of the fundamentals and continued product and service innovation.

  • I will now spend a few minutes discussing our vision for the future of the healthcare industry, where we believe consumerism will be the prime catalyst for growth.

  • Consumerism will dramatically change the way healthcare services are delivered.

  • In order for healthcare service providers to be successful in this new marketplace, they must be able to provide the consumer with the tools necessary to make informed decisions about their healthcare.

  • Successful service providers must also become trusted advisors for their members through proactive outreach and health coaching.

  • We are making significant investments to position us to capitalize on this market shift.

  • We are taking a holistic approach to consumerism, which focuses on providing integrated solutions to our customers.

  • These integrated solutions are achieved through the interaction of health advocacy and clinical quality, which is a cornerstone of CIGNA HealthCare, as well as the use of actionable information.

  • In closing, our first-quarter consolidated results significantly exceeded expectations, based on the strength of our group and international businesses.

  • The results in several of our healthcare lines of business were strong, and while we are not satisfied with HealthCare's guaranteed cost results, we are taking actions to improve our performance there.

  • But overall, we are confident in our ability to effectively execute on our 2006 priorities and our ability to achieve our full-year earnings and membership goals.

  • This concludes our prepared remarks.

  • Now, we would be glad to take your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • John Rex, Bear Stearns.

  • John Rex - Analyst

  • Good morning.

  • Could you speak a little more to what you referred to as the lower yields you saw in the quarter in the competitive price environment?

  • What I want to focus on I guess is it would appear, then, you've got lower yields.

  • So were you expecting cost trend to moderate more than it did when you accepted those yields?

  • Or, did you -- was there a sense that you could accept a lower margin on the business?

  • I'm just trying to understand how that all played together.

  • Mike Bell - CFO

  • Don, it's Mike.

  • Good morning.

  • In terms of the yields in the quarter on the guaranteed cost block, we made conscious decisions at the account level while following our underwriting protocols, so we did face more pressure late in the process on an overall profitable book and did accept lower rate increases.

  • Therefore, it's more in the latter category.

  • We accepted a lower margin to preserve an overall profitable book.

  • Now, once again, we are not satisfied with the overall results.

  • It's important to note that we do expect to achieve higher rate increases on the 400,000 or so guaranteed cost members that will renew in the remainder of the year.

  • But specifically in terms of the first quarter, that's what happened.

  • John Rex - Analyst

  • I mean, just from a philosophical standpoint, since it's always difficult to make it up in enrollment when you are sacrificing margins, I mean, how should we think about this going forward?

  • Should we think about the fact that you will be satisfied with a lower margin business going forward, at least in terms of -- and maybe help us understand what you were seeing on the competitive price environment.

  • I guess, first, should we expect that you are targeting, all-in, somewhat a lower margin now than you had been achieving?

  • Mike Bell - CFO

  • John, it's Mike.

  • Regarding the remainder of 2006, we are targeting higher rate increases and therefore a lower medical loss ratio and therefore a higher margin than what we have experienced in the first quarter, so we do expect our guaranteed cost margins to expand over the remainder of the year.

  • In terms of looking out at 2007, I think it's too early at this point to give you a specific directional comment.

  • But that's a game plan for the remainder of the year.

  • David, do you want to add?

  • David Cordani - President of CIGNA HealthCare

  • Yes, John, David.

  • Again, we evaluate each account and concluded, on the renewal book, that where we stood, the organization is better off retaining the accounts at profitable levels.

  • We had expectations to expand margins which obviously we didn't, but again the book is very profitable.

  • As you referenced, the marketplace is indeed competitive.

  • We do see opportunities to take the first step in terms of expanding margins in the second half of this year and then into next year through really two levers -- one, rate execution and two, considering to garner continued expense efficiencies as we continue to deliver on the strong medical management results. (multiple speakers)

  • Ed Hanway - Chairman, CEO

  • The only other thing I would add, and I think you mentioned it in your first question, is on the medical cost side, I think we feel quite good about the medical management that we saw.

  • I think Mike noted that our forecast for the total book medical cost is actually 50 basis points better than we had previously.

  • So from a medical cost management standpoint, we feel quite good.

  • John Rex - Analyst

  • Can you tell us what the yields were that you achieved in the first quarter?

  • Mike Bell - CFO

  • John, it's Mike.

  • In terms of the guaranteed cost book itself, we have roughly 1 million members there, and since it experienced significant mix changes in the quarter, the specific first-quarter yields in medical costs were skewed.

  • There is also more volatility than normal in the medical loss ratio.

  • But specifically there, our current estimate is that the guaranteed cost book experienced between 300 to 400 basis points of favorable benefit demographic and geographic mix changes.

  • We estimate, overall, the underlying yields trailed our expected medical cost trends by 200 to 250 basis points for the overall book.

  • I think that's a better way to look at it than to try to kind of sort out the mix points.

  • Now, as we discussed, we expect to do better in the second half of year, and we've discussed this morning the corrective actions that we plan to take to improve the MLR over the remainder of the year.

  • Operator

  • Christine Arnold, Morgan Stanley.

  • Christine Arnold - Analyst

  • Good morning.

  • I'd like to follow up on kind of this line of questioning.

  • In terms of your medical cost trends first quarter, what is your sense for that, relative to what you saw in 2005?

  • Do you believe it was lower?

  • If so, do you expect it to go lower?

  • So I'm trying to figure out -- are you lowering your cost trend expectations because you are seeing lower trends, or because you hope to see them?

  • Mike Bell - CFO

  • Christine, it's Mike.

  • Regarding the medical cost trends, so far, the trends are favorable for early 2006, and that's really a continuation of what we saw in the latter half of 2005.

  • So specifically on a rolling 12-month basis for the entire book of business, we are experiencing trends in the last 12 months of approximately 7 to 7.5%.

  • Now, what will be built into the earnings model at this point for the remainder of the year is a full-year calendar year 2006 trend of 7.5 to 8%.

  • That's down 50% from what we talked about a quarter ago; it's down a think 100 basis points from what we talked about two quarters ago.

  • We specifically saw a better-than-expected experienced rate of results in the first quarter as a result of those favorable medical costs.

  • Christine Arnold - Analyst

  • What about the medical costs for your guaranteed cost book?

  • What was the MLR, kind of the way you used to report it, for the guaranteed cost?

  • Mike Bell - CFO

  • Okay, for the medical costs for the guaranteed cost book, as I was indicating to John, the first quarter MLR for the guaranteed cost book is more heavily estimated than normal because we had substantial -- we had substantial business mix changes in the first quarter.

  • We also, as you are I think alluding to, we did good, in this quarter's stat supplement, the overall guaranteed cost medical loss ratio, which in our view is a lot more relevant than the specific commercial HMO book, because we're seeing growth in the marketplace as well as growth in our own book on the open access product, and we think that's more meaningful.

  • So, I'd like to deemphasize the commercial HMO numbers, but just to give you a ballpark, the CHMO pattern was very similar to what we saw in the overall guaranteed cost book.

  • The CHMO loss ratio was, ballpark, 50 basis points better than the overall guaranteed cost/loss ratio but I think the guaranteed overall guaranteed cost/loss ratio is the more meaningful number going forward.

  • Operator

  • Matthew Borsch, Goldman Sachs.

  • Matthew Borsch - Analyst

  • I'm sorry, I'm going to ask another question on the guaranteed cost business, which is really to try to put it in perspective.

  • You know, I know what percentage of your enrollment it is, but I'm wondering if you guys could give us at least a broad side of the barn idea of what percentage of CIGNA's total company-wide earnings base this business represents.

  • The backdrop to that question is what you call the guaranteed cost business represents the majority of the earnings base for the other major commercial managed care companies, but it seems like it's significantly less at CIGNA.

  • Finally where I'm leading to here is that I'm sure this isn't a step that you would contemplate at this point but if you were to decide that the pricing environment was such that you are going to get let a lot of that business go, what the impact might be.

  • Mike Bell - CFO

  • Matthew, it's Mike.

  • I appreciate the (indiscernible); that was nicely summarized.

  • You are absolutely right.

  • We're not to the point where we want to disclose very specific guaranteed cost earnings, but I'll give you a way to think about it here.

  • For our entire guaranteed cost book -- so the a little less than 1.1 million members that we have, it's about 12% of our membership, we earn, on an all-inclusive basis, pretax margins in the mid single digit range, based upon the first-quarter results.

  • So, if you take that and you multiply it by -- I believe first-quarter revenue for that block was a little more than 850 million.

  • If you go through that kind of calculation, you would conclude that, in terms of the percentage of total CIGNA consolidated earnings, it would be roughly in that 10 to 15% kind of range.

  • Matthew Borsch - Analyst

  • Right, great.

  • Ed Hanway - Chairman, CEO

  • Matthew, let me just add something.

  • It'd Ed, too.

  • I'm just going to repeat something I think David said before, which is, you know, we still have a profitable book of business here, and as a practical matter, we had targeted some profit improvement there, which we didn't see, to the extent we had planned.

  • But having said that, we still have what we believe to be a very attractive book.

  • As Mike noted, we did have some mix changes.

  • Actually, those mix changes appear to be relatively positive.

  • So, we are a long way from the point you made in your earlier question, relative to deciding that this book of business is not attractive.

  • Just the opposite -- it is.

  • David Cordani - President of CIGNA HealthCare

  • Matthew, it is David.

  • On the tail of your question, which is (indiscernible) it is, your question was really around the trade-off relative to rate and retention.

  • So as we framed, there's 400,000 members yet to renew this year.

  • The overall book of business is running a case retention level in the mid 80s% range, so if you take the 400,000 members and you drop 5% erosion and retention or 10% erosion and retention, you are talking 20 to 40,000 members or 20 to 40 basis points in terms of our overall membership profile.

  • I think that's what you are looking to box as well.

  • Matthew Borsch - Analyst

  • Great, no, that's very helpful.

  • If I could just -- one follow-up -- on the experienced rated business, as we look at the dynamics, how should we think about that business from two perspectives -- one, to the extent that those are employers who, if you didn't have experience rating, might be in either guaranteed cost or in your fee-based book?

  • You know, where what they more naturally fit?

  • Then the second question is where the experience-based book is at this point, relative to the potential for either a benefit or detriment to earnings from the underwriting results there?

  • Mike Bell - CFO

  • Sure.

  • Matthew, it's Mike.

  • Regarding your first question on where would the experience-rated book most likely shake out?

  • Remember, for the most part, the experience-rated book is a set of middle-market accounts, and I think it's fair to guess that if experience-rated was not an option, it would probably be split.

  • I will ballpark it and David can edit me here.

  • I would state roughly 50-50 in terms of whether they would go guaranteed cost or ASO.

  • For the most part, these are people that want to pay their own claims but also like the in some sense backstop of having some short-term stability to their cost.

  • So it would probably be likely 50-50.

  • In terms of the experience-rated underwriting results, we feel really positive about our experience-rated underwriting results here in the first quarter of '06 as well as going back to 2005.

  • Our pricing yields on the experience-rated block were in the 8.5 to 9% range, and that compares to medical cost trend in that book on a rolling 12 basis of between 6 and 7%.

  • So overall, we continue to feel good and those earnings for the experience-rated block were actually better than expected in the first quarter.

  • Operator

  • Josh Raskin, Lehman Brothers.

  • Josh Raskin - Analyst

  • My question also relates to cost trends.

  • It sounds like your expectations are now about 50 basis points lower actually than you were anticipating, so I'm wondering I guess a couple of things.

  • One, any way to quantify what that better-than-expected cost trend did for your earnings in the first quarter, and sort of how we think about it for the HealthCare book overall?

  • Then just how does that sort of correspond with the fact that you saw somewhere between 2 -- I think you said 2 and 250 basis points of negative spread on the guaranteed cost book?

  • I'm just trying to reconcile that.

  • Should we -- (technical difficulty) -- suggest that you guys were actually looking for maybe 300 basis points of compression on the spread?

  • Mike Bell - CFO

  • Josh, it's Mike.

  • First regarding your first question on medical costs in the quarter, our experience-rated book benefited in the quarter by approximately $4 million after-tax due to the more favorable medical costs versus what we were expecting.

  • The yields in the rest of the ER book came in about as expected, but we've got a $4 million after-tax benefit from the better medical costs.

  • In terms of the deterioration and the loss ratio for the guaranteed cost block, we had expected that loss ratio to be roughly flat with the full year 2005.

  • So that deterioration of almost or around 250 basis points cost us, in the quarter, between 12 and $15 million after-tax.

  • Now again, we expect to do better over the course of the full year than that amount, annualized, but we don't expect to fully make that gap up for the calendar year.

  • Josh Raskin - Analyst

  • I'm sorry.

  • So is to fair to say that if you guys came in 250 basis points of deterioration, I guess I'm just trying to reconcile -- you had expected it to be flat, and then cost trends came in 50 basis points lower and yet you still saw a 250 basis point impact in the quarter.

  • I guess I'm just missing -- how did yields come in?

  • I guess would be 300 basis points below what you expected.

  • Mike Bell - CFO

  • Josh, as David and I were commenting on earlier, we made conscious decisions at the account level.

  • We followed our underwriting protocols and limits of authority, but with the benefit of hindsight, we had more pressure late in the process on an overall profitable book, and we accepted a lower rate increase on that renewal book than we had originally expected.

  • Jon, do you want to add?

  • Jon Rubin - CFO of CIGNA HealthCare

  • Just one additional comment to try to frame this -- the 50 basis point improvement in our trend relates to our overall book of business.

  • That's largely driven by an improvement in the outpatient category and relates primarily to our open access products, a smaller portion of which is embedded in the guaranteed cost book.

  • So, that also I think is important to kind of frame the overall question that you have.

  • Operator

  • Charles Boorady, Citigroup.

  • Charles Boorady - Analyst

  • Thanks, good morning.

  • I appreciate the candor on the higher loss ratio; it sounds like it was a deliberate or a conscious effort to retain these accounts, which is a relief versus the alternative.

  • It wasn't an underwriting or a cost problem.

  • But I'm just curious, sort of philosophically.

  • I'm trying to understand why you would decide to make that decision consciously for those accounts, but then you are telling you are going to plan to make up for by raising -- by taking correction active I presume on price, later this year, to presumably some other customers or other book of business.

  • So I was just wondering.

  • Is that on renewal business you're planning to do that, or are you hoping to do that on new business, and why you would sort of favor keeping those accounts that were renewing January versus the opportunity to gain new accounts or retain other accounts later in the year?

  • Mike Bell - CFO

  • Charles, it's Mike.

  • I'll start and I'll ask David if he wants to add.

  • First, philosophically, our overall game plan has not changed.

  • I mean, in any given period, it's always a balancing act in terms of balancing membership and earnings.

  • Certainly longer-term, Charles, our belief is that we had the opportunity to grow earnings on this book through a combination of a better medical loss ratio, lower operating expenses, and also membership growth.

  • So philosophically, our view has not changed.

  • In terms of the contrast that you are drawing between our decisions around first quarter as versus the June-through-December period where we are targeting greater rate increases, as a general rule, there were more large accounts that renewed in 1-1, and we made some judgments on those accounts based upon both account level as well as market level dynamics.

  • In terms of the remainder of the year, we are working at both new business as well as renewal book pricing.

  • I cannot emphasize enough that these actions are going to vary by local market, they will vary by account, and obviously will be higher for poorly performing accounts and poorly performing markets versus the well-performing ones.

  • Particularly since those accounts as a general rule are running a little higher loss ratio today and also tend to be smaller cases, we think that there's an opportunity there.

  • Now again, we will obviously do the post-mortem as we get data, and I'm sure we will factor that into our thoughts here around 1-1-07.

  • David, do you want to add?

  • David Cordani - President of CIGNA HealthCare

  • Charles, a couple of points to reinforce and maybe a couple adds -- specifically the actions we're talking about primarily affect the renewal book going forward.

  • Secondly, the point Mike highlighted, in terms of the size of the case, they tend to be larger on 1-1 versus the rest of the year.

  • A couple of additional points to that is we believe, as we go forward in the (indiscernible) part of the year, we are in a little bit stronger position, just from the market acceptance of our value proposition, sales execution, continued strong delivery of our medical costs, etc.

  • The final caveat may be implied in a couple other questions is our full-year membership outlook fully contemplates the rate actions that we're talking about for the guaranteed cost book, so our membership outlook for the residual part of the year contemplates these actions on the renewal book as well.

  • Charles Boorady - Analyst

  • If you experience the same thing in the middle of the year that you did earlier this year, meaning that you had to come -- aim lower on price in order to reach those enrollment targets, do you think you would make the same decision middle of the year to compromise on margin, on the gross medical margin, if you can make up for it elsewhere, like on SG&A, in order to reach those enrollment targets?

  • Or do you think you would behave differently midyear and this time forego those customers in order to reach the underwriting targets?

  • David Cordani - President of CIGNA HealthCare

  • Charles, David.

  • Your question asks me to speculate a little bit, but to your point, most importantly, the actions are going to be highly varied by market, so this is a market-by-market open business approach and be varied by account.

  • Having said that, all things remaining equal, we will push the rate actions a bit in the second half of the year, again based upon all the items we referenced to date.

  • So we believe we are in a better position to be able to push the rate actions.

  • We're not talking, you know, massive 10% build this year in rate actions.

  • As I referenced before to Matthew, the impact from a persistency standpoint for the latter have the year with the 400,000 members left to renew we believe provides a good trade-off for us.

  • So all other things being equal, push the rates a bit, but again highly varied by market and highly varied by case.

  • Ed?

  • Ed Hanway - Chairman, CEO

  • Yes, I would only add one thing, Charles, and that is I think we obviously will make decisions, appropriate decisions, case-by-case.

  • As David mentioned in his comments earlier, we will look to ensure that, on that business which is profitable, that we retain it and that we differentiate the pricing actions that we take based on the relative profitability of the business.

  • We think we can do that pretty effectively by being a bit more aggressive relative to rate overall and hence improve the margin of the book of business.

  • Operator

  • Justin Lake, UBS.

  • Justin Lake - Analyst

  • I guess I'd like to follow up on the last question in that it sounds like a there's some degree of dispersion that maybe is bigger than what I might have expected among the margins in your guaranteed cost book.

  • Can you tell us, you know, give us some color around where -- you talked about mid single digit margins.

  • Can you talk about what percentage of your book?

  • It sounds like some of the higher-margin business is going down towards a more normalized margin.

  • Can you kind of talk about the dispersion in margins there?

  • How much of that business is above high single digits, and how much of that do you think you can keep there, given the competitive marketplace?

  • Then just as a follow-up, can you talk about any specifics, from a market standpoint or geography, the type of book, where you are seeing more or less pressure from a rate standpoint?

  • Mike Bell - CFO

  • Justin, it's Mike.

  • I will take your first question, and I will see if David wants to talk about the geographic differences.

  • First, in terms of the dispersion of the profitability, as you can imagine, it's a reasonably bell-shaped -- pardon the pun -- curve here in terms of distribution, both by market as well as by account.

  • So, it's not like we've got just a huge pocket of enormously profitable accounts that we would have to give up on and not have offsets otherwise.

  • I mean, overall, we feel confident in our ability to hit the kind of numbers that we talked about.

  • I would also just reinforce -- remember the guaranteed cost block is only 12% of our overall membership.

  • The other 88% of our membership, ASO and experience-rated, ran better than expected in first quarter and certainly we will look for opportunities there as well.

  • David, do you want to add anything on geography?

  • David Cordani - President of CIGNA HealthCare

  • Yes, Justin, relative to geographic, your question is, is there any unique experience in specific markets relative to competitive positioning of the rate environment?

  • I would say no.

  • Where we stand right now, generally speaking, the market pressures are pretty consistent around the country.

  • There will always been little ebbs and flows to pockets, but broadly speaking, I would not call out an individual geography.

  • Justin Lake - Analyst

  • Okay, just one quick follow-up, then -- on the -- when you talked about the national, the larger-sized account renewing 1-1, I kind of -- my thoughts are that you would think that those accounts would be lower-profit accounts, just because they are larger and you are willing to accept a lower risk margin.

  • Is there some misunderstanding there that I have about that type of book of business?

  • Why would that business be what is most under pressure?

  • Given the MLRs, you would think they are higher in the first place.

  • Why do you think that you can pass along higher rates on what you would think would be a lower MLR book of business and a higher-profitability book of business down-market?

  • Mike Bell - CFO

  • Justin, it's Mike.

  • First, just to be very clear, as David correctly pointed out, there's competitive pressures in all geographies and also all sized segments, so I wouldn't specifically highlight one versus another.

  • The main point that we are making is that, for the remainder of the year, so for that book of business that renews in the June through December time frame, it does tend to be smaller cases.

  • For us currently, that block tends to be a little less profitable on an all-in basis versus the block that renewed earlier in the year.

  • So, we are going to test whether there's an opportunity to get those margins up closer to the level that the first quarter block is.

  • Again, we will see what the experience is and we will make some decisions here for 1-1-07.

  • Ed Hanway - Chairman, CEO

  • Yes, Chuck, this is Ed.

  • The only other thing I would add is you mentioned national accounts and some of the comments we made earlier.

  • The national accounts of block of business is predominantly, almost exclusively an ASO block of business where our profit model is based on delivering competitive medical costs through both utilization and managing unit costs well within our networks and having the greatest level of efficiency we can and also selling significant specialty products within to that population.

  • So that book of business is much different than the 12% of the guaranteed costs that we're talking about here.

  • Operator

  • David Shove, Prudential.

  • David Shove - Analyst

  • Yes, just briefly, I want to make sure -- and I don't want to be a dead horse here, but I want to make sure I understand the context of the quarter's results.

  • What happened in the guaranteed cost was that the MLR was up 250 basis points.

  • That caused you to have lower-than-expected earnings of about $12 million, and the guaranteed cost business is roughly 12% of operating earnings, and that $12 million represents, of a total reported earnings, about half of 1%.

  • So, that's where the stress is in the model.

  • The rest of the model outperformed and more than made up for that.

  • Is that an accurate characterization?

  • Mike Bell - CFO

  • David, it's Mike.

  • I think that's a fair characterization. (multiple speakers) -- a lot of moving parts there, obviously, but overall, for the consolidated enterprise, that's a fair characterization.

  • Operator

  • Carl McDonald, CIBC.

  • Carl McDonald - Analyst

  • Thank you.

  • I just wanted to understand the sequential progression in HealthCare earnings guidance.

  • If we start from the run rate of 140 million in the first quarter, presumably the 11 million PDP loss in first quarter is going to become something closer to breakeven; there's going to be a lower PDP implementation costs, presumably not a lot of Q2 renewals.

  • Is there anything else we should think about in terms of seasonality or any other items, in terms of the second-quarter guidance?

  • Mike Bell - CFO

  • Carl, it's Mike.

  • First, you're absolutely right.

  • The improvement first quarter to second quarter in Part D results is meaningful.

  • We expect the Part D loss in second quarter to be minimal, likely to be in that 0 to 3 kind of range, so approximately a 9 million improvement versus the first quarter.

  • You know, there's some other puts and takes, Carl.

  • The main point I would make there is we are still evaluating options around operating expenses for the full year 2006.

  • We do expect to ramp up our technology investments related to consumer-directed and health advocacy over the course of year, so I would just suggest, as you're thinking about your model, I would suggest that you not just [blankedly] annualize first quarter for the full year.

  • Now, on the other hand, as I mentioned in my prepared remarks, we do expect some additional productivity savings and some other expense reductions in other areas to help the balance of HealthCare.

  • So, that's the other main moving part that is going to impact the quarterly pattern of earnings.

  • Carl McDonald - Analyst

  • In terms of the SG&A reduction in the second half of the year, would that be on top of the SG&A reduction that you've talked about previously, or would that be included in that roughly 275 million number?

  • Mike Bell - CFO

  • Let's see.

  • Let me answer it in two different ways.

  • First, the operating expense reductions we're looking at for the second half of the year protect the technology investments related to consumer-directed and health advocacy.

  • We are also very cognizant of the need to continue to protect our customer service levels.

  • So I just want to make clear that those areas will continue to be protected.

  • We do continue to expect, beyond 2006, an additional $200 million of operating expense savings on a pretax annual basis in our service and technology organizations while still delivering the strong customer service.

  • So the 275 that you're talking about, relative to '05, includes 200 beyond '06, and that game plan is still on track.

  • So, the additional expense reduction opportunities we're looking at in the second half of the year would tend to be additive to that $200 million number that you are referencing.

  • Operator

  • Douglas Simpson, Merrill Lynch.

  • Douglas Simpson - Analyst

  • Good morning, everyone.

  • Mike, I know you've touched on the cash flow early on and it jumps around quarter to quarter.

  • I was just wondering.

  • Could you give us a sense?

  • When do you think that would start to turn up in a meaningful way?

  • Or is there a structural reason why your cash realization ratio would be consistently below the others?

  • Then just also, would you guys consider -- it just might be helpful if we would be able to get like this segment cash flow data.

  • I know (indiscernible) does that, just to kind of break out the different businesses.

  • Mike Bell - CFO

  • Doug, sure.

  • It's Mike.

  • Let me answer your second question first.

  • We do have an initiative underway to look at breaking out HealthCare's operating cash flow from the remainder of the enterprise.

  • That work is underway.

  • I am not ready to commit to you the second specific quarter that we will begin disclosing that, but we take that very seriously and we've already heard that suggestion from you and others and believe it's a good idea, so more to come there.

  • In terms of your question on when would our cash flow normalize, that's a challenging question to answer because, remember, we still have a significant amount of a run-off book of business.

  • So as an example, let's take first quarter as an example.

  • In first quarter, we had $40 million of hedge losses in our (indiscernible) book that we settled out in cash.

  • So that was -40 million of cash flow.

  • That was equally offset by a $40 million reduction in the [bad B] reserves, which we think a smaller (indiscernible) book is a good thing, but it does impact cash flow in the given quarter.

  • We also continue to have some ongoing settlements back and forth with Pru that we would expect to ramp up in second quarter.

  • So there are some things here and the (indiscernible) book will be around for a while.

  • I expect, at this point, that the Pru settlement will pretty much wrap up in second quarter.

  • But I think the more meaningful piece is your second question.

  • When can we start focusing on healthcare?

  • I just assure you that work is underway.

  • Douglas Simpson - Analyst

  • Okay.

  • Then maybe could you just walk us through -- and I apologize if you mentioned it earlier -- DCPs in the quarter and specifically just on the guaranteed cost side, or maybe even if you have it, the gross medical claims payable DCPs -- where are they at the end of Q1 and where was that a year ago?

  • Where should we think about that going in the future?

  • Mike Bell - CFO

  • Doug, it's Mike.

  • First, I'm not a big fan of days claims payable, but if you look at our release, you will see that our HealthCare medical claims payable, on a net basis, were approximately 750 million at the end of March.

  • That compares to approximately 800 million at year-end 2005, so it was down sequentially approximately $50 million.

  • Approximately half of that was the prior-year development that we reported in earnings, so roughly 25 pretax, 16 after-tax is the prior-year development in earnings.

  • There was another roughly 25 million pretax that relates to experience-rated accounts that were in surplus position, so that's not an earnings item since that goes back to those experience-rated accounts as an increase in their rate credit liability.

  • So, there were a number of other smaller pluses and minuses but those were the main drivers.

  • So there was not a material change versus year-end, for example, in the claim processing speeds.

  • Now, the claim processing speeds have increased over the last couple of years and also reflect the higher auto adjudication.

  • But that was not a big driver of the first quarter versus year-end.

  • Operator

  • Peter Costa, FTN Midwest Securities.

  • Peter Costa - Analyst

  • Just in terms of looking at the run-off reinsurance business again and understanding the $40 million loss that was booked there and obviously the corresponding benefit improvement, did that come from early redemptions?

  • Exactly can you explain exactly how to look at that business on a going-forward basis?

  • Mike Bell - CFO

  • Peter, it's Mike.

  • First, to be clear, run-off reinsurance for the quarter was roughly breakeven.

  • The [bad B] book in particular has been pretty close to breakeven for several quarters now.

  • So it's not a loss.

  • What happens is we have a hedging program that protects the [bad B] book from changes, primarily in the stock market.

  • So, as a result of the stock market performance being strong in the first quarter, we had hedge losses that were equally offset by a drop in the reserve.

  • And so, you know, in terms of the [bad B] book, there continues to be uncertainty there, but the fact that we've gone now several quarters without a material earnings event and the fact that experience has tended to be in line with our reserve assumptions makes us feel like we're on the right track.

  • But I can't tell you there's zero uncertainty in that book going forward.

  • Peter Costa - Analyst

  • So when I look at the $40 million loss that was booked in revenues and the corresponding benefit expense improvement, what's that going to look like going forward?

  • Are we going to see that stay relatively consistent?

  • If you compare this to the run-off reinsurance business to a year ago, it was a little -- you know, a loss of 16 million in the quarter and a loss of 35 million in the fourth quarter and this quarter was flat.

  • But how can we model that business going forward?

  • Mike Bell - CFO

  • Peter, it's Mike.

  • In the ideal world, hedge losses would equally -- or hedge gains for that matter would be equally offset by reserve changes.

  • We do think, at the end of first quarter, that our reserves are appropriate there.

  • Therefore, the loss would just be the ongoing operating expenses and legal expenses that are just part of that business.

  • So, our expectation is, from a point estimate standpoint, is that there would be a small loss each quarter going forward.

  • But there's significant uncertainty there.

  • Again, I cannot guarantee you that that will take place, but our expectation is that our first-quarter reserves fully reflect the present value of future claims and therefore the losses would be minimal.

  • Operator

  • Joe France, Banc of America.

  • Joe France - Analyst

  • I just had two quick questions.

  • One, you mentioned, in your formal remarks, that you close to five new national accounts this year (indiscernible) for '07 already, and I was curious how many lives that was.

  • Second, the pharmacy contract that was lost and noted in the press release, did you ever identify who that account was?

  • Mike Bell - CFO

  • David, do you want to take the first question?

  • David Cordani - President of CIGNA HealthCare

  • Joe, relative to the five national accounts for 7-1 of this year, approximate membership there is 50 to 60,000 members that are made up in those accounts.

  • Ed Hanway - Chairman, CEO

  • Joe, just to be clear, those are not 1-1-07s; those are actually midyear effectives within '06.

  • I think David's comment was to suggest and we believe that those are a good sign relative to our kind of success in the marketplace and how the market is now viewing us, vis-à-vis how they viewed us over the last 18 or 24 months.

  • Mike Bell - CFO

  • Joe, it's Mike.

  • To your other question on the pharmacy business, while we normally don't like to talk about accounts, I think it's public information that that is referring to the New York State prescription drug program.

  • Just to be clear there, we were not the PBM on that account.

  • All we offered was an insurance wrapper.

  • It had very, very thin margins and it was a piece of business that did not renew here for 1-1-06.

  • Joe France - Analyst

  • Great, thank you, and thank you, Ed, for the clarification.

  • Operator

  • Ed Kroll, Cowen & Co.

  • Ed Kroll - Analyst

  • Good morning.

  • I don't know if you told us.

  • What was the impact on earnings from the rate actions you took in the guaranteed cost book?

  • Mike Bell - CFO

  • Ed, it's Mike.

  • If we just isolate it to the higher medical loss ratio on the guaranteed cost book, the impact in the quarter was between 12 and $15 million after-tax.

  • Ed Kroll - Analyst

  • [From] 15 after-tax.

  • And so, just, you know, as you think about -- you kept the overall HealthCare earnings for the year the same as the guidance you previously gave on the Q4 '05 call.

  • You know, what's the offset there, I guess?

  • Is it operating earnings in ASO?

  • I'm just wondering where the offset there comes?

  • Mike Bell - CFO

  • Sure, I understand your question.

  • First, we do expect better overall operating expenses for the full year of 2006 than what we had previously anticipated.

  • In fact, first-quarter operating expenses were better than expected and that contributed to higher ASO earnings in the quarter.

  • So we do now expect ASO earnings for full year to be higher than previously estimated because of more productivity benefit.

  • In addition, as I mentioned earlier, the medical costs were better than expected in the quarter.

  • That has some benefit in our experience-rated book.

  • On the other hand, in the experience-rated book, the memberships down a little more than we expected, but the medical costs certainly help with the overall picture.

  • Then keep in mind, Ed, that the estimate for the full year now, the 600 to 650, now includes the prior-year development of 16 million that we had in first quarter.

  • The 600 to 650 a quarter ago did not anticipate any prior-year development.

  • So those are really the major pieces.

  • Ed Kroll - Analyst

  • Okay, so then actually, on an operating basis, go forward, you are tweaking down the guidance? (multiple speakers)

  • Mike Bell - CFO

  • I'm sorry, on a consolidated basis, Ed, we are increasing the guidance because of the strength in the other businesses.

  • But it is the case that the full\-year estimate that we've currently communicated, the 600 to 650, now includes 16 million of prior-year development where it did not before.

  • Operator

  • Thank you, Mr. Kroll.

  • Ladies and gentlemen, this concludes CIGNA's first-quarter 2006 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 719-457-0820.

  • The pass code for both numbers is 6157402.

  • Thank you for participating.

  • We will now disconnect.