A mid-year update on industry pricing and product trends

A national perspective on the middle market We hosted a conference call with Ken Ambos, national employee benefit practice leader for Equity Risk Partners, a full service insurance brokerage and employee benefit consulting firm with a focus on the mid-sized employer (middle-market) segment of the industry. We continue to see this market segment as a bellwether for health insurance industry trends.

A transcript of the conference call is provided in the PDF file of this report.

Near-term, incrementally stronger pricing discipline Market trends have not changed materially from a year-ago, but Ken Ambos and his firm see an incremental strengthening of pricing discipline so far this year as compared to 2007, which is manifested in tighter bidding spreads, longer negotiation cycles, and increased carrier demand for incumbent carrier rates when bidding for new business.

At the same time, Ambos expects a more volatile market next year with increased employer willingness to switch carriers owing to greater price sensitivity driven by timing factors as well as the twin pressures of the weak economy and the ever-escalating cost of health coverage.

Pricing trends are seen in the 9-12% range or about 5-8% after product design changes, approximately comparable with the year-ago level.

In this cycle we don't believe price discipline will prove sustainable Increased pricing discipline is a positive for managed care and could fuel further near-term upside to the stocks as the sector recovers from the mid-July valuation trough. However, we are not moving away from our bearish bias on the sector (even though valuations still keep us Neutral in our coverage view). Middle market trends are volatile and we expect increased employer price sensitivity will help to undermine price discipline when combined with the other structural factors that we expect will drive margins lower beyond 2008. These factors include the strong capitalization levels at the major not-for-profit plans, as well as the still-high profit margin levels and growth strategies of the public companies.

For those investing in managed care, we continue to favor Humana and CIGNA that have less exposure to commercial risk earnings, but should participate in a near-term rally.

Matthew Borsch, CFA (New York) (212) 902-6784 Goldman, Sachs & Co. Daryn Miller, CFA (New York) (917) 343-3219 Goldman, Sachs & Co.
Mikael Landau (New York) (212) 357-4835 Goldman, Sachs & Co.

Disclosures applicable to research with respect to issuers, if any, mentioned herein are available through your Goldman Sachs representative or at http://www.gs.com/research/hedge.html