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Operator
Ladies and gentlemen, thank you for standing by for Cigna's third quarter 2012 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 question and answer session is being recorded.
We'll begin by turning the conference over to Mr. Ted Detrick.
Please go ahead, Mr. Detrick.
- IR
Good morning everyone, and thank you for joining today's call.
I'm Ted Detrick, Vice President of Investor Relations, and with me this morning are David Cordani, our President and Chief Executive Officer, and Ralph Nicoletti, Cigna's Chief Financial Officer.
In our remarks today, David will begin by commenting on Cigna's third quarter results.
He will then discuss how continued effective execution of our strategy coupled with our differentiated capabilities are creating significant value for our global clients and customers.
David will also review our capital deployment strategy, and the progress we have made toward achieving our goal of delivering meaningful shareholder value over the long term.
And finally, David will conclude his remarks by making some brief observations about 2013, which we will discuss in more depth when we provide our 2013 outlook at our Investor Day in New York City on November 16.
Next, Ralph will review the financial results for the third quarter and provide an update on Cigna's financial outlook for full year 2012.
We will then open the lines for your questions.
And following our question and answer session, David will provide some brief closing remarks before we end the call.
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, as the principal measure of performance for Cigna and our operating segments.
And a reconciliation of these measures to 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 and we would remind you that there are risk factors that could cause actual results to differ materially from our current expectations, and those risk factors are discussed in today's earnings release.
Now before turning the call over to David, I will cover a few items pertaining to our third quarter results and disclosures.
Regarding our results, I note in the third quarter we recorded two charges to shareholders net income which we reported as special items.
The first special item was an after-tax charge of $50 million or $0.17 per share for severance and other costs associated with a series of actions we are taking to improve our organizational alignment, operational effectiveness, and efficiency.
The second special item was an after-tax charge of $12 million or $0.04 per share for transaction costs related to the HealthSpring acquisition.
I would remind you that special items are excluded from adjusted income from operations in today's discussion of our third quarter results and our full year 2012 outlook.
Now relative to our run-off reinsurance operations, our third quarter shareholders net income includes an after-tax non-cash gain of $32 million or $0.11 per share related to the guaranteed minimum income benefits business otherwise known as GMIB.
I would remind you that the impact of the Financial Accounting Standards Board Fair Value Disclosure and Measurement Guidance on our GMIB results is for GAAP accounting purposes only.
We believe that the application of this guidance is not reflective of the underlying economics, as it does not represent Management's expectation of the ultimate liability pay out.
Because of application of this accounting guidance, Cigna's future results for the GMIB business will be volatile as any future change in the exit value of GMIB's assets and liabilities will be recorded in shareholders net income.
Cigna's 2012 earnings outlook, which we will discuss in a few moments, excludes the results of the GMIB business and therefore any potential volatility related to the perspective application of this accounting guidance.
And also please note that when we discuss our full year 2012 outlook, it will be on a basis which excludes any future capital deployment and includes the year-to-date results for our run-off guaranteed minimum death benefits business known as VADBe, but does not include an estimate for future impacts for this business as these potential impacts including the effects of changes in capital markets or periodic updates to long term reserve assumptions are not known or reasonably estimable.
And with that, I'll turn the call over to David.
- President and CEO
Thanks Ted, and good morning everyone.
Cigna is a Global Company, but I do want to take a moment to acknowledge the recent events back here in the United States.
This has been a tough week for many of you impacted by Hurricane Sandy on the East Coast, and I know that New York, New Jersey, and Connecticut were hit particularly hard and many dedicated individuals are focused on leading us to recovery.
For those of you who were impacted by the storm, we appreciate you joining us on today's call.
We hope you and your families remain safe and that you experience a speedy recovery.
Now before Ralph reviews our results and outlook, I want to take a few minutes to comment on our third quarter performance.
I'll then discuss how the focused execution of our strategy and ongoing strengthening of our capabilities are creating value for our clients and customers across the globe.
I'll also review our progress on deploying capital to support our goal of optimizing long term shareholder value, and finally I'll briefly comment on our expectations for 2013.
Turning to our results, we are pleased with our strong performance in the third quarter.
We delivered outstanding revenue growth, our earnings exceeded expectations, and we further grew our medical customer base.
We also increased our strategic investments in targeted markets, and in capabilities to position us to drive sustainable growth.
Based on our third quarter results and the momentum we've experienced in the first nine months of 2012, we are once again increasing our full year outlook for earnings and capital available for deployment.
Moving to the specifics of the quarter, we reported adjusted income from operations of $496 million or $1.71 per share representing a 33% increase in earnings per share versus the third quarter of 2011.
Our consolidated revenue increased by 31% to $7.4 billion.
These results reflect the effective and disciplined execution of our Go Deep, Go Global, and Go Individual strategy.
We continue to deliver on the fundamentals of our business including clinical quality, service, and pricing discipline, while providing clients and customers with solutions that improve their health, well being, and sense of security.
As a direct result of our focus, each of our ongoing businesses, Health Care, International, and Group Disability and Life, provided attractive revenue and earnings contributions in the third quarter.
Specific to Health Care, results reflect continued organic growth in our target customer segments and significant contributions from our HealthSpring acquisition.
Our Health Care revenues grew 46% relative to third quarter 2011.
Our medical customer base grew by 1.25 million people during the first nine months of 2012, representing nearly 11% net growth from year-end 2011-- including more than 7% from organic Commercial customer growth.
Essentially all of our organic growth was in our highly transparent self-funded ASO products, which enabled Cigna clients to design benefit plans from our comprehensive suite of productivity in health solutions and effectively manage their costs.
Our ability to retain, expand, and acquire new clients and customers in our targeted segments reinforces the value we are delivering in the marketplace.
In our International business, Cigna delivered top line growth of 22% compared to the third quarter of 2011 driven by attractive customer retention rates, successful cross-selling, and new business sales as well as the acquisition of FirstAssist.
We are seeing continued demand for health, life, and accident products amongst the growing middle class who want to supplement coverages and fill gaps in their government-sponsored programs.
And we continue to see demand for our highly specialized Health programs for globally mobile individuals employed by multi-national companies and governmental organizations.
In Group Disability and Life, our revenue growth was 8% over the third quarter of 2011, and we reported solid earnings, demonstrating the value of our health and productivity programs for CIGNA clients and customers.
Overall, our third quarter results reflect strong and focused execution of our growth strategy.
Our portfolio of businesses, US Commercial, International and Seniors strongly position us for sustained growth in markets where we have a leading position and offer a distinct value to our clients and customers.
Our key points of differentiation are helping to improve health outcomes, increase work productivity, and enhance well being for the people we serve.
These points are -- customer-centricity, physician engagement, and consultative distribution.
To maintain our competitive position and fuel for future growth, we will continue to invest in these differentiators to address client and customer needs for greater value and affordability.
I'm going to briefly comment on each of these differentiators and then we will provide a more in depth review when we're with you during our Investor Day on November 16.
With respect to customer-centricity, Cigna was at the forefront of transitioning to a retail-oriented consumer-driven approach in health care.
We have invested in resources that empower individuals to make better health and quality decisions through a personalized, helpful, and simple service experience.
In our US Commercial business, our customer focus is delivering demonstrable results.
We were the first and remain the only global health service company with 24/7, 365, live telephonic support.
We continue to develop tools to allow customers to connect with us any time, anywhere, on the platform of their choice.
For example, our customers can access us through cigna.com from any mobile device to price medications, access account balances, get real time cost of care estimates on prospective treatments as well.
In September, our innovative search engine for finding doctors and services was named one of the Top 10 technology innovations of 2012 by Information Week Magazine.
Internationally, our effective customer segmentation and direct-to-consumer distribution gives us a competitive advantage in our ability to design the right products to meet our customers needs, and deliver those products through channels preferred by our customers.
Another key element of our success, is our ability to work effectively and partner with physicians.
We took a leadership role in physician partnership long before the US Affordable Care Act.
We started in 2008 with the launch of our first Collaborative Accountable Care Initiative, or CAC, which is Cigna's approach to accountable care organizations.
In the third quarter of 2012, we announced nine new CACs, and we now have 42 programs spanning 18 states.
We are on track to reach our goal of 100 programs by the end of 2014.
With the addition of HealthSpring's physician engagement programs, we have accelerated our ability to reshape the delivery of health care.
Specifically, we are actively expanding HealthSpring's footprint for 2013 by deepening their presence in existing markets and offering HealthSpring's customers access to home delivery pharmacy benefits.
We are supporting growth in new markets, with development for 2014 well under way already, and we are extending the value of their physician engagement model to develop new Commercial offerings.
Most recently, by leveraging HealthSpring's physician engagement programs to launch two new CAC initiatives that together increase access to high quality, coordinated care for Cigna's Commercial customers.
Next, I'll discuss our approach to consultative distribution of our products and services to our clients and customers around the world.
In our US Commercial business, our consultative distribution approach helps employers design customized programs to improve the health and productivity of their workforce while maximizing the value of their overall spending.
Similarly in our International business, we drive strong retention and sales through our market leading sales organization, with in-country telemarketers leveraging more than 200 Affinity partnerships.
In addition, we effectively use bank assurance channel, internet distribution, direct response TV, and home shopping programs to meet our customers needs.
Combined, these differentiated capabilities, customer-centricity, physician engagement, and consultative distribution continue to drive growth in Cigna's customer and client relationships.
Now I'll discuss how we are creating sustainable shareholder value through the disciplined management of our capital, and our focus on continuously identifying operating efficiencies.
We continue to deploy capital with three priorities in mind.
Our first priority is to support our current business with the capital required, while making investments to develop capabilities that position us for long term growth.
As we have discussed previously, we are experiencing a challenging global economy.
And yet at Cigna, we have grown meaningfully during this time because of the disciplined focus on our strategy and ongoing investments.
As we look to 2013, we expect to see continuing economic headwinds, and we believe that now is a time to further accelerate our investments in targeted areas in order to strengthen our competitive posture.
To provide additional capacity to further invest, we've proactively identified efficiency gains throughout our organization.
As a result, we are taking a $50 million after-tax charge in the third quarter to cover a series of actions that will yield annual after-tax expense savings of $60 million.
These savings will allow us to reinvest in priority markets and in capabilities that will further improve our ability to provide superior service and affordable solutions for our clients and customers, while delivering sustainable value for our shareholders.
It's important to view these actions in context.
Over the past three years, we have increased our revenue by more than 50%, and our net employment base by 17%.
This announcement while difficult, reflects the necessary steps to support our ongoing expansion of our business and drive sustained success.
Second, relative to strategic acquisitions and partnerships, we continue to pursue opportunities that align with our growth strategy and create strategic market advantage and differentiation.
In the US for example, our inorganic growth to date is focused on acquiring unique capabilities in the Seniors market, and expanding Cigna's retail capabilities.
Acquiring HealthSpring with their best-in-class physician coordination model, is a clear example of our abilities to successfully deliver inorganic growth.
We are also strengthening our capabilities to win in the US individual market with our acquisition of Great American Supplemental Benefits, which we closed during the third quarter.
With the Great American acquisition, Cigna is now one of the largest producers, distributors, and marketers of supplemental health and related products in the US.
This business is highly complimentary to our successful Global Health, Life and Accident business.
Within our International business, our joint ventures in India and Turkey will further expand our reach in geographies with significant middle class growth, while our acquisition of FirstAssist adds a portfolio of travel related products to extend to our customers.
These investments will enable Cigna to capitalize on high growth opportunities, and enhance our ability to provide value to our customers across all stages of their lives regardless of how we access those customers.
Through an employer, through the government, through an Affinity relationship, or directly.
After fully considering the first two priorities of capital deployment, specifically supporting the growth of our ongoing business and pursuing financially attractive strategic M&A activity, we evaluate opportunities to return capital to investors.
As of November 1, we repurchased approximately 4.4 million shares of our stock for $210 million.
Our disciplined investments and ongoing operations, our successful track record with acquisitions, and our share repurchase program demonstrates Cigna's commitment to deploying capital to build sustainable shareholder value.
Now, turning to 2013.
We have been operating in a dynamic environment for some time, and we see that environment particularly the uncertain global economy continuing for the next several years.
That said, we are stepping into 2013 with strong momentum created by our focused effective execution of our strategy, which has resulted in attractive revenue and earnings growth in both 2011 and 2012.
We believe we are well positioned in our targeted markets, and we will continue to build off that positive momentum.
As such, we expect 2013 to be another successful year in which we deliver both revenue and earnings growth.
We look forward to providing you with more insights on our outlook for 2013 at our Investor Day on November 16.
Now before I turn it over to Ralph, I'd like to reemphasize a few key points.
We delivered attractive revenue growth in each of our ongoing businesses, and our earnings exceeded expectations.
Our customer base grew, demonstrating the unique value we offer and our ability to retain, expand, and acquire new clients and customers in our targeted segments.
We continue to increase our strategic investments in targeted markets and customer segments, while strengthening the value we offer customers and clients by further developing our capabilities in customer-centricity, physician engagement, and consultative distribution.
Our results reflect the focus and commitment of our Cigna colleagues around the world who work to help to improve the health, well being, and sense of security of the people we serve.
Based on our third quarter results and the momentum we've built during the first nine months of 2012, we are again increasing our full year outlook for earnings and capital available for deployment.
And I am confident in our ability to achieve our full year outlook and believe our performance in 2012 gives us strong momentum to deliver continued success in 2013.
With that, I'll turn the call over to Ralph.
- CFO
Thanks David.
Good morning everyone.
In my remarks today, I will review Cigna's third quarter 2012 results, and provide an update to our full year 2012 outlook.
In my review of consolidated and segment results, I will comment on adjusted income from operations.
This is also the basis on which I'll provide our earnings outlook.
Before I get into the specifics of the quarter, I want to emphasize that the results in the quarter were better than our expectations which enabled us to further increase our full year outlook, and are primarily driven by favorable pharmacy and medical costs in our Health Care business and favorable loss ratios in our International business.
The quarter was highlighted by strong revenue and EPS growth and continued effective deployment of capital, including the resumption of share repurchase activity and the acquisition of the Great American Supplemental business.
These results provide us confidence to increase our updated full year outlook for both earnings and parent Company cash.
Before reviewing the specifics of the quarter, I will comment briefly on the realignment and efficiency plan we implemented during the quarter.
We reported a special item charge of $50 million after-tax related to the actions we are taking across our Global operations to enhance our focus and ability to deliver value and affordability to our customers and clients, and increase our productivity and operational efficiency.
The majority of the expected annualized savings of $60 million after-tax is expected to be reinvested in the business to enhance our ability to grow in our targeted markets.
Now moving to operating results.
Our third quarter 2012 consolidated revenues grew 31% to $7.4 billion, driven by continued contributions from the HealthSpring acquisition and growth in our targeted markets.
Third quarter consolidated earnings were $496 million or $1.71 per share, excluding the after-tax loss of $0.02 a share from the results of our run-off VADBe business.
Turning to the segments.
Overall, Health Care results for the third quarter of 2012 were particularly strong across both our Commercial and Seniors businesses.
Third quarter premiums and fees for Health Care grew 51% to $4.9 billion, reflecting strong contributions from both HealthSpring acquisition and organic growth in both of our Commercial and Senior businesses.
Excluding the effect of HealthSpring, premiums and fees grew 7%.
Third quarter earnings for Health Care were $384 million, highlighted by revenue growth including further specialty penetration, favorable pharmacy and medical costs, and continued underwriting and pricing discipline.
We ended the third quarter of 2012 with approximately 12.7 million US medical customers, representing sequential growth of over 110,000 customers, and year-to-date growth of approximately 1.25 million customers.
Of which, about 850,000 are Commercial customers primarily in our priority markets.
Turning now to medical costs.
Across our Commercial and Medicare risk books of business, our third quarter earnings reflect favorable pharmacy and medical costs, including favorable prior period favorable claim development of $24 million after-tax of which $6 million after-tax related to prior years.
Specific to Commercial guaranteed costs, our third quarter 2012 Medical Care Ratio or MCR was 80.2% on a reported basis.
Our third quarter 2012 MCR for Medicare Advantage was 80% on a reported basis.
I would remind you that 85% of our Commercial customers are in ASO funding arrangements where they directly benefit from these medical cost results.
Overall, we are pleased with the results as they continue to reflect good pricing and underwriting discipline, as well as sustained quality health care for our clients and customers.
For the third quarter, the total Health Care operating expense ratio is 22.9%, which represents a significant improvement over the third quarter of 2011, driven by the change in the business mix associated with the HealthSpring acquisition, benefits of our cost savings initiatives, and strategic spending to support our near and long term business growth in service capabilities.
Now I will discuss the results of our International business.
International continues to deliver attractive growth and profitability.
The results reflect targeted new sales, strong retention, and further product penetration to existing customers.
Premiums and fees grew 22% quarter-over-quarter, driven by strong customer retention in growth in our Health, Life and Accident business, and increased risk membership in our Global Health Benefits business, as well as contributions from our recent acquisitions.
Third quarter earnings in our International business were $79 million, and reflect improvements in operating expense efficiencies, and favorable claims experience in both Health, Life and Accident and Global Health benefit businesses.
For Group Disability and Life, third quarter results were in line with our expectations in a difficult environment.
Group premiums and fees increased 9% over the third quarter of 2011, driven by 11% growth in Disability premiums and fees.
Third quarter earnings in our Group business were $62 million, reflecting favorable Life claims experience, which was partially offset by unfavorable claims experience in the Disability business.
Results in this quarter also include a net favorable impact of $5 million after-tax related to reserve studies completed during the quarter.
Results for our remaining operations including run-off, reinsurance, other operations and corporate, totaled to an after-tax loss of $36 million for the third quarter.
These results include a reserve strengthening of $6 million after-tax to our run-off VADBe book of business.
Overall, as a result of the continued effective execution of our strategy, our third quarter results reflect strong revenue and earnings contributions from our ongoing businesses.
And as a result, we continue to generate significant free cash flow.
Regarding our investment portfolio, we continue to be pleased with our results.
Overall, our strong investment management capabilities, diversified portfolio, and disciplined approach to risk management continued to deliver solid returns.
Now turning to our outlook.
Based on the strength of our third quarter results, we are confident in our ability to achieve our increased full year outlook.
We now expect consolidated adjusted income from operations in the range of $1.655 billion to $1.705 billion, and consolidated EPS of $5.70 to $5.90 per share, reflecting continued strong underlying results in each of our ongoing businesses.
This increased outlook represents an increase of $100 million in earnings at the mid point, and $0.30 to $0.45 per share over our previous expectations, driven primarily by the strength of this quarter's Health Care and International results.
I would remind you that consistent with prior practices, our outlook excludes any contribution from additional capital deployment.
I will now discuss the components of our 2012 outlook, starting with Health Care.
We now expect full year Health Care earnings in the range of $1.29 billion to $1.32 billion.
This increased outlook for Health Care reflects the impact of better than expected pharmacy and medical claim development recognized in the third quarter, and continued effective execution of our strategy.
Regarding US medical customers, we now expect full year 2012 growth of approximately 1.25 million people, of which 850,000 is in our Commercial book of business.
Overall, we're pleased that employers of various sizes continue to value our consultative approach and our differentiated health and productivity programs.
Turning to our outlook for medical costs.
For our total Commercial book of business, we now expect full year medical cost trend to be in the 5.5% to 6% range.
We have also updated our expectations for our full year Medical Care Ratios, and now expect an MCR of approximately 80% for our Commercial guaranteed book of business, and MCR of approximately 81% for Medicare advantage business.
Both represent an improvement of 50 basis points from the mid points of our previous expectations.
We also have updated our operating expense ratio outlook, and now expect the full year 2012 ratio to be approximately 23%, in the range of our previous guidance.
As we look to the fourth quarter, we expect a lower level of Health Care earnings from the third quarter due to an absence of favorable prior period medical cost development; risk sharing nature of our Medicare Part D business; seasonally higher medical costs in our Commercial risk business; and an increase in operating expense to support January 1 readiness and Medicare enrollment, as well as continued strategic investments.
Now moving to other components of our outlook.
For our International business, we expect continued strong top line growth and now expect earnings in the range of $280 million to $290 million, which represents earnings growth of more than 25% versus full year 2011.
We expect the fourth quarter results to reflect more normalized claims experience and an uptick in strategic investments.
Regarding Group Disability and Life business, we now expect full year 2012 earnings in the range of $265 million to $275 million.
And regarding our remaining operations including run-off reinsurance, other operations, and corporate, our updated outlook is now an expected loss of $180 million for 2012.
So all-in, for full year 2012, we now expect consolidated adjusted income from operations of $1.655 billion to $1.705 billion, and consolidated EPS in the range of $5.70 to $5.90 per share, which reflects the share repurchase activity through October 31.
I will now discuss our updated capital management position and outlook.
Overall, we continue to have good financial flexibility, as our subsidiaries remain well capitalized and are generating significant free cash flow to parent.
Reflecting a strong return on capital in each of our ongoing businesses.
We ended the quarter with parent company cash of approximately $435 million, and during the third quarter we repurchased approximately 1.9 million shares of Cigna Common Stock, and we subsequently repurchased an additional 2.5 million shares through October 31 through the deployment of approximately $210 million of available capital.
After reflecting capital deployed for share repurchase through October 31, we now expect to have approximately $700 million in parent company cash by the end of 2012, with approximately $250 million available for deployment.
This represents an $125 million increase compared to our previous capital outlook, primarily reflecting increased subsidiary dividends due to improved business fundamentals.
We are confident in our updated outlook, and our capital position remains strong.
And our capital deployment strategy and priorities remain unchanged.
Now to recap.
Our third quarter 2012 consolidated results reflect the strength of our differentiated portfolio of global businesses, and a consistent and disciplined execution of our focus strategy with continued growth in our targeted customer segments.
Our quarterly results represent another strong performance, reflecting solid organic and customer growth, which are expected to deliver an increase of $100 million in earnings or $0.30 to $0.45 in earnings per share for 2012, and an additional $125 million in capital available for deployment.
We effectively deployed capital during the quarter for our strategic acquisition of Great American Supplemental Benefits, and share repurchase.
And based on the strength of these results, we are confident in our ability to achieve our increased full year 2012 outlook.
With that, we'll turn it over to the operator for the Q & A portion of the call.
Operator
(Operator Instructions)
Matthew Borsch with Goldman Sachs.
- Analyst
Yes, good morning.
Could you just talk about what you're seeing on the commercial while also Medicare/medical cost trend side, and the degree to which that's changed from the first half, and also how it influences your view of trend for next year?
- President and CEO
Matthew, good morning it's David.
I'll just frame that and see if Ralph wants to expand it a little further.
But as you track us throughout the course of the full year, our medical cost trend outlook for the year has improved overall for our total portfolio business.
You recall that last quarter as well as this quarter we acknowledged some further improvement in our overall loss ratios.
And at the end of the day, broadly speaking, our contracting and our effective partnership with physicians and hospitals is working in line with our expectations.
And broadly speaking overall, the rate and pace of projected escalation and utilization is not as significant as we might have thought it would be earlier part of this year.
Ralph, could I ask you to expand in terms as we look forward to the latter part of the year our expectations?
- CFO
Sure.
Matt, regarding as we look at the balance of the year, we would see the fourth quarter in the 5.5% to 6% range kind of reflecting a continuation of the trend that we just saw this quarter.
And in terms of some of the pieces, by and large they really haven't changed materially versus what we talked about in the first part of the year.
Inpatient is pretty muted, and professional service utilization up a little bit, as well as outpatient, principally in the size of claims.
- Analyst
Great, and if I just could as a follow-up on the pricing side.
Incrementally, have you seen anything that you would characterize as a shift in the degree of pricing pressure you face if you can sort of average that out across different markets and segments?
- President and CEO
Matthew, it's David.
Consistent with prior dialogue, I would say no macro shift.
So we've continued to say the pricing environment is competitive.
There's always puts and takes in geographies, given the breadth of our portfolio or segments.
But no major shift in movement.
I would add to that, that the breadth of our capabilities our funding mechanisms, so having the full breadth from the ASO through the experience rather than guaranteed cost capabilities helps us in environments if there are smaller flare ups.
But broadly speaking, no major change and the environment is still very competitive from a pricing standpoint.
- Analyst
Thank you.
Operator
Scott Fidel with Deutsche Bank.
- Analyst
Thanks, can you hear me okay?
- President and CEO
We can.
- Analyst
Okay good.
First question, just interested in any impacts that you're expecting from Hurricane Sandy, and specifically just relative to utilization.
Would expect that you'd see some lower utilization in some of the Northeast markets in the fourth quarter as a result of the storm?
- President and CEO
Scott just broadly speaking, I'll go in two phrases.
First and foremost, when something like this transpires, there's a lot of actions that are put in place to expand access to care, expand ease of access to pharmaceuticals, professional services, outpatient services, offer more coordination points, even working with the Red Cross to get the right medication to the right people the right way.
So those activities unfortunately we're well attuned in how to manage and that's well under way.
But broadly speaking, I wouldn't expect a material effect given again the broad portfolio of our book of business.
You might see a little dampening for a very short period of time, but we're not projecting a broad impact here at all.
- Analyst
Okay, and then just the follow-up question, just on 2013.
And you highlighted you expect revenue and earnings growth.
Maybe some preliminary thoughts you can give us on membership growth, and specifically how the national accounts selling season ended up closing out for you.
- President and CEO
Sure Scott.
A few points.
As we noted in our prepared comments for 2013, given the momentum we continue to build through '11 and '12, our broad expectations of that we will grow revenue as well as earnings.
And I'd ask you to step back and think about some of our capabilities to enable us to do that in this really challenging environment, and then I'll comment on national accounts.
First, our broad funding capabilities in the United States are very helpful as employers of all sizes are looking for the most effective way to align their incentives and engage their employees.
Secondly, our broad portfolio of specialty capabilities, health improvement and productivity capabilities continue to be a strong add to us.
Third, we now have a very well positioned Medicare Advantage portfolio of businesses.
And fourth, our International portfolio of businesses will be extremely helpful to us as we step into 2013.
As it relates to national accounts, the national account selling season is sufficiently complete.
There's always some open switches that are in front of us.
As we sit here today, we would expect for national accounts, which we define as commercial employers with 5,000 or more employees that are multi-state, so we define it more narrowly than some define it.
For that marketplace we'd expect at this point in time, overall a good retention rate.
We had an outstanding retention rate in 2012.
We expect a very good retention rate in 2013.
At this point in time, we see less business as having moved in either direction.
So the net effect of that is that we're expecting that we will keep share or maintain share in aggregate in the national segment.
We view the national segment as a shrinking segment, if you track the employer profile.
So that's about a 2% shrinkage factor that we expect to exist in the overall national account marketplace, because of the employment pattern.
And we expect to maintain share in that environment.
The class thing I'd add is, we expect to further grow revenue and further grow our specialty penetration in that portfolio based on the focus of repositioning that book of business.
- Analyst
Okay, so basically just maybe down 2 percentage points in national accounts for '13?
- President and CEO
Broadly speaking, yes.
And again I'd amplify with strong retention, good specialty penetration, and overall revenue growth.
- Analyst
Okay, thank you.
Operator
Josh Raskin with Barclay's Capital.
- Analyst
Hello, thanks.
Just a quick question on a couple of the charges.
I guess just starting with the HealthSpring transaction cost, I might have missed it but it looks like there was $28 million in the first quarter and then $12 million in the third but nothing in the second.
So I'm just curious what's going on with the timing of transaction costs with HealthSpring.
- President and CEO
Sure Josh.
You could think of it as in the first quarter, the costs you mentioned really were to complete the transaction that we closed the end of January.
In the third quarter, what you see there is a settlement of a final shareholder appraisal rate situation, and that was the charge we put.
And that would be the end to what we would expect to see on those kinds of costs.
- Analyst
Okay, so that's the end.
And that was sort of a fixed month run out type of thing.
- President and CEO
Right.
- Analyst
Okay.
And just on the $50 million realignment, maybe you could give us a little bit of color as to what that means from an organizational efficiency.
Is this just a head count reduction?
And then I guess, combined with that is just where exactly are those targeted investments going into?
If you're saving $60 million a year, where should we think about that increased spending going?
- President and CEO
Sure Josh.
It's David.
So let me frame that a little bit more broadly.
First by way of context, consistent with our strategy, we've been able to improve our operating expense ratio each of the last several years, both as we've grown the business but as we've secured productivity gains.
And we would expect that to continue into 2013 more broadly.
In addition to that as we referenced, we've taken a series of actions to further strengthen alignment and identify some operating efficiencies in the Company, and we're going to use that broadly speaking as an additional pool of resources to reinvest.
The $60 million after-tax is a run rate, so you should expect that to get to a run rate level as we get to 2014, because those actions will be executed throughout the course of 2013 and the latter part of 2012.
Specific to the types of investments, you should think about those as a continuation of things that we've been doing.
So market expansion, technology and solution capabilities, and brand building would be three types of examples of where those resources in addition to existing resources would be amplified to further drive our profitable growth going forward.
- Analyst
Okay, so you said David that the $60 million of run rate that these actions are going to continue through 2013.
Does that mean there's additional charges coming as well, or is this to cover the expected severance and actions taken over the next say year or so?
- President and CEO
There are not additional charges.
It is expected to cover actions that will be taken over the next several quarters.
- Analyst
Okay perfect, thanks.
Operator
Justin Lake with JP Morgan.
- Analyst
Good morning.
Just a couple of quick follow-ups on '13.
Outside of national accounts, I remember last year you talked a little bit more broadly about overall Health Care membership growth expectations for '11, so wondering if you could share that number.
And also, when you talk about earnings growth can you just verify you're talking about net income growth next year?
- President and CEO
Justin good morning, it's David.
At this point, we're not providing detailed guidance for 2013.
We'll give you a little bit more insights at our Investor Day, and then when we blow out the entire segment view.
But at this point in time, we have good visibility in national accounts and that's what we sought to frame.
As we step back, the comment specifically on earnings is net earnings.
So operating earnings growth, very specifically and separable from EPS, which you'd obviously expect contribution there.
And more broadly as we said in our prepared remarks, we expect to profitably grow our revenue yet again in 2013.
- Analyst
Okay, any reason why at this point last year you had a little more visibility on membership?
Is there decisions being made later in the year or anything on that nature?
- Analyst
I would say nothing broadly.
Again we're not going through detailed 2013 guidance today.
We'll provide you more insights at Investor Day.
A little bit later decision-making cycle, but you know our business pretty well, Justin.
So national accounts, good visibility today.
Our regional segment which is our largest segment, the higher end of the size of the case count, good visibility.
But there's a lot of business in the 300, 400, 500, 600, 700 Life account class that are still being worked today with -- we are bullish on that segment.
And then the select segment which is our fastest growing segment, that selling season for 2012 ends on December 31, 2012.
So, we're clearly selling for 2013.
Broadly speaking again, we will grow revenue.
So you should expect to see growth from the franchise, but we'll provide more insights in the near future for you.
- Analyst
Okay, great and then if I could just even step further ahead into 2014.
I'd just ask a couple of quick questions.
One, in Medicare Advantage there's going to be an MLR floor instituted, 85%.
If you look at some of the stat filings for HealthSpring, they are MLRs in some states that are in the mid to high 70%s.
So curious as to what you think that impact might be from the implementation of MLR floors.
And then on the other hand, as you get into 2014 you've got the industry tax or the industry fee whatever we want to call it kind of being implemented, and only on risk-based business.
If that stays that way, one would think that there might be a further shift in the move of mid size employers from risk to ASO, which could benefit you.
I'm curious if you've started also to get the temperature for the appetite for employers to do that.
- President and CEO
Well Justin, first let me just put a back drop on this.
I'll go right to the I'll call it the direction of the MLR for 2014, and then I'm going to ask Ralph to expand on I'll call it our pricing posture relative to the industry tax, which I think is very relevant to your comment.
Broadly, to frame this though, 85% of our portfolio today is ASO.
And we're a Company that believes in having transparent highly aligned programs for our clients and customers, and we continue to see a good demand today in those programs, and we see that continuing.
Specific to the MLR for Medicare Advantage and HealthSpring, you're correct.
There's puts and takes in individual markets and geographies.
But if you step back, one, as you very well know there'll be adjustments to the calculation to the numerator and denominator for activities that are engaged in health improvement, health management et cetera.
When you take that into consideration, in aggregate the HealthSpring book of business today is approximately compliant with the MLR with some outlier markets.
We take that into consideration, and are actively taking that into consideration with the ongoing management of the HealthSpring book of business throughout 2013.
And as we approach the 2014 bidding cycle, that will be front in mind for us.
Said otherwise, we do not expect that as a large step function headwind by the time we step into 2014 for the HealthSpring book of business, but there will be some puts and takes in individual geographies that we need to manage once you adjust for all of the health management activities and programs.
I do want Ralph to expand a little bit in terms of our posture relative to how we're dealing with the industry tax as we step throughout 2013, and this year with an eye toward 2014.
Ralph?
- CFO
Yes, thanks David.
Justin, as we look at the tax, our philosophy on pricing is essentially to price underlying cost trends, which we would view this part of.
So beginning in 2013, would for policies that overlap into 2014, we will include and reflect the industry tax in that pricing.
Operator
Ana Gupte with Sanford Bernstein.
- Analyst
Hello, thanks, good morning.
So I just wanted to explore the Medicare outlook for 2013.
The selling season has now been under way for a few weeks.
Can you give us a sense for would you likely expect to exceed the CMS average of forecast of I think they had about 11%?
And then from a margin perspective, as you're looking at your designs and comparing it with some of your competitors that might have been adversely selected against, would you see this 81% loss ratio as carrying forward into 2013?
- President and CEO
Ana, good morning it's David.
Just again to put your very important question in context, if you look back over time, the HealthSpring strategy and approach to positioning products and services forward one year has been to try to get that delicate balance between enhancing benefits to provide a great value to the customers or beneficiaries.
Working in tight concert with their very innovative physician partnership relationships, and then generating a fair return from a shareholder standpoint.
The result of that has been on average, they've generated market average growth in their book of business.
They've had relative stickiness with their portfolio, because it has an undulated back and forth to the large grab movements in any way, shape or form.
And that process continues as we go forward to try to get that balance.
The same team that has actively managed and successfully managed the HealthSpring portfolio to date is managing the big process and managed it through 2013.
And again, we're not providing detailed guidance, but we'd expect to grow that portfolio.
As you know, that portfolio is largely individual MA.
So we'd expect the average growth to be in line with the overall business.
We'd expect it to have good retention, and we'd expect it to have a very good profitability profile at this point in time.
- Analyst
But following up again on the Medicare angle, you have distribution as one of your three big pillars of differentiation.
I might have missed this, but I don't think you have a retail partnership on the Part D side.
And I think United put something out as they need to this year, and we already have Humana and Aetna and Coventry with something.
What are your thoughts on partnering with pharmacies on Part D?
And then on the group side, the group selling to Medicare Advantage, given that was one of the pillars of synergies between Cigna and HealthSpring, any movement on that front?
And what's the outlook for 2013 and '14.
- President and CEO
Sure, so two very important points.
To date, when you bring both of the organizations together, both Cigna and HealthSpring had approximately the same size PDP books of business.
Both of those books of business were largely auto assign, and then web enrollment relationships that came through the CMS with some additional bolt on activities, and our strategy to date has not been to deviate from that.
As we look to 2013, broadly speaking, we expect to keep share or have slight erosion in the PDP book of business, but maintain the profitability profile that is very attractive in that book.
Secondly you're correct.
The group opportunity is a perspective synergy between Cigna and HealthSpring.
We indicated that would be a ramped opportunity as we went forward, and we did not articulate a significant step up in 2012 or 2013.
There's been some targeted market activities.
There's been some demand.
There's been some market driven demand because of the attractiveness of HealthSpring value proposition and network, and we'd expect to see some movement in that through 2013.
But broadly speaking as you think about 2013, what drives the Medicare chassis for Cigna, Cigna HealthSpring is the individual MA book of business that has been a strong performing, stable, a high retention and good growth book of business, tightly aligned with the physician partnership, discipline across the PDP, and then some growth opportunity in the group space which will ramp over time with some movement in 2013.
- Analyst
And final one on SG&A.
Can you give us a view on what your target efficiency savings are for SG&A in the next one to three years as you've put this workforce reduction and efficiency program in place?
- President and CEO
Yes Ana, we've not provided 2013 guidance.
When we do, we will lay that out for you.
But in my prior comments, I noted that we have generated in line with our strategy expense ratio leverage each of the last three years, and would expect to generate expense ratio leverage in 2013.
But when we provide guidance, we will break that out for you as we have in the past.
Operator
Kevin Fischbeck with Bank of America Merrill Lynch.
- Analyst
Okay, great.
Thanks.
Question for you on -- a couple of times during the call, and then we've each talked about the pharmacy costs being a driver to some of the strong results in the Health Care segment.
Can you just talk a little bit about what specifically that you're referring to there?
And I might have missed it, but I thought that maybe in the comments you indicated that you were driving or doing some home delivery of drugs to your Medicare beneficiary.
Was that something that Cigna was doing, or is that a new product through Catamaran?
- CFO
Sure Kevin.
It's Ralph.
Just overall on pharmacy, that business is performing well.
We saw it primarily here in the third quarter is a mix shift to generics and lower costs in that area as well.
So that's primarily what was driving our results -- the favorable results in the third quarter.
And as I noted in my remarks, even a little beyond what we had internally expected as they came in favorable.
Regarding home delivery, maybe I'll ask David to comment on that.
- President and CEO
Essentially what you see, broadly speaking, is a little bit of best of both worlds.
So our objective for the benefit of our customers or the beneficiaries in this case of PDP Medicare Advantage et cetera, is to get the best value and we take a total low cost and clinical efficacy approach.
PDP is notoriously low from a mail order penetration standpoint, and you're able to get a great convenience for seniors by getting maintenance medications for a 90 day supply delivered to their home.
We're at the early stages of getting some leverage there, and it's leverage of both the existing HealthSpring relationship as well as the Cigna PBM capabilities.
- Analyst
Okay, so when you talk about pharmacy in particular, is that just your PDP earnings being higher?
Or is that just general when you think about medical trend being lower because of the shift to generics?
- President and CEO
Kevin it's both.
Meaningful on the PDP side with what Ralph referenced in terms of both the further movement in generic, the mix in generic, and therefore the cost profile that again very importantly benefits the beneficiary, as well as us.
In addition, because of the ongoing strong performance of our captive PBM in our commercial portfolio of business, we see continued improvement there from a pharmacy standpoint.
- Analyst
Okay.
And then finally, you guys keep ticking up your cash flow guidance, and I think next year we're looking at another good year for you from a cash flow perspective.
How do you think about the dividends when you think about those three capital priorities that you outlined earlier for this year?
Does that change at all as you get a full year benefit of all of the HealthSpring cash flow next year?
- CFO
Kevin, it's Ralph.
Clearly we feel great about the cash flow on the business and the strong return of capital we have across the different business lines.
I would expect that to continue into next year.
Our capital priorities haven't changed, as David alluded to in his remarks principally around supporting the base operation, strategic M&A across the priority areas that he articulated.
And then we'll look at share repurchase and dividend policy on a regular basis as another means of creating value.
Operator
And as a reminder, please limit yourself to one question and one follow-up.
Christine Arnold with Cowen & Co.
- Analyst
Hello, thanks for taking the question.
International earnings, you've seen a lot of growth with acquisitions.
Can you give us some kind of same-store earnings growth that you've seen this year?
And is there any reason that that shouldn't grow double digits, which was kind of your same-store guidance entering this year going into next?
And then just following up on Kevin's question, if we think about the cash flow, it feels like $1.7 billion in subsidiary dividends might be doable next year.
How do we think about how much cash you feel you might need to keep as powder dry for subsidiary capital requirements for growth, versus how much you could use given what's happening in 2014?
- CFO
Sure Christine, first on the capital and the cash flows, clearly we feel good about where we're landing this year and have opportunity to deploy.
We have been averaging a little above our net income on cash generation, and that already reflects strong capitalization of our subsidiaries.
So they're generating sufficient cash to keep our RBC ratios well intact, and then have ample room for dividend to the parent.
So, and that's why you see us ahead there.
- Analyst
Okay.
- CFO
Okay.
- Analyst
So something in the neighborhood of $1.8 billion plus in terms of what might be available next year?
- CFO
Well I don't think at this point we want to project where next year is going to be, but I think if you look at our track record, we've been able to bring in strong cash flow as you saw this year and deploy it right.
We'll cover that more as we talk in a few weeks at Investor Day.
- Analyst
And then how should we be thinking about International?
- President and CEO
Christine just picking that up, as you noted we've had some very targeted acquisitions.
I'd also note offsetting that in a way has been our focus on additional investment within the franchise.
So organically, we're making the investments to open and expand Turkey.
Organically we're making the investments to enter India effectively.
So stepping back, we're very pleased with both the top line and bottom line growth of that franchise.
And I think at the core of your question, is it reasonable to assume double digit earnings growth as we look forward?
We've indicated to you before that's on our strategic horizon, and we'll provide more detail for '13 specifically.
But double digit earnings growth is a reasonable assumption for that business.
- Analyst
Thank you.
Operator
Carl McDonald with Citigroup.
- Analyst
Thanks, I wanted to focus on your experience rated business in the context of the industry tax and anything else that you'd highlight specific to that business that may be a little bit different as we head into '14.
- President and CEO
Well David, just broadly speaking what I would start with amplifying is that, that business we've continued to indicate is a bit of a niche business and specifically focused on a sub segment of buyers.
It's performed well over time, and it continues to perform well when we see it as being an important product as we look forward.
Secondly from an industry tax standpoint, it would be deemed to be more risk-based than non-risk-based.
So it would be exposed to the tax activities.
And the important part when you take it all into consideration is, are we able to provide a good highly transparent relationship with an employer, wrap the clinical programs, it is highly penetrated with our specialty capabilities, and deliver a overall net cost that an employer likes, but with the, I'll call it revenue management and expense management that benefits of an employer because of the risk sharing nature of the product.
So we would expect it to continue to be used on a very targeted basis going forward.
- Analyst
So the conversations that you've had to this point haven't indicated that the tax would be enough to make those experience or your customers consider switching to a fully self-funded product?
- President and CEO
Yes, Carl I think it's always hard when you say in an absolute sense, right?
So, our whole approach is, as we talk about our consultative selling, we sit with clients, we call an employer a client, and we have that broad set of capabilities.
So long before the industry tax, we have environments where experience rated employers would move to ASO or vice versa.
We expect that phenomenon to continue.
The important part is, are we able to demonstrate good value by improving health, lowering health risks, managing total costs and clinical quality, and we think that will continue.
So, are there employers who may move from experience rated to ASO?
Sure, but that happened in the past as well, and the industry tax is just another factor that comes into the thought process.
- Analyst
Okay, thank you.
Operator
Peter Costa with Wells Fargo Securities.
- Analyst
I want to circle back to the cost trend questions from before.
You talked about on the second quarter, cost trend being 6% to 7%.
And this quarter you're saying 5.5% to 6% I think you said.
That's a 75 basis point improvement.
Yet when you broke it down by sub component, you really didn't say any changes other than maybe on the pharmacy side, which seems lower.
Did all of that 75 basis points of improvement come from a pharmacy trend?
And if so, it seems like that would be hard to do just from a shift to generics all-in one quarter.
Was there something else that altered your view on trend?
And then lastly regarding pricing for next year, you would have been pricing at say 6% to 7% before, so do you think you're positioned now if cost trend stays at the 5.5% to 6% range to have more substantial margins next year?
- CFO
Peter it's Ralph.
Just to clarify on the medical cost trend, even as it relates to the second quarter, in the movement from the 6% to 7% down to the 5.5% to 6%, that's really across all components in pharmacy and other medical as well.
And as I mentioned earlier, what we saw was essentially the same components move but at a lower rate of increase than what we had thought they would at the end of the second quarter.
So, pharmacy was a piece of it, but clearly the other aspects of it were part of what you're seeing in the favorable medical costs in the third quarter.
- Analyst
Although the prior period development was mostly on the pharmacy side based on your Part D MLR.
So I assume that's where a lot of the PPD came from this quarter.
- CFO
Actually the prior period was largely in the medical side.
- Analyst
Okay.
- CFO
And the pharmacy was more, as I mentioned earlier, around the mix and generic side within the quarter.
- President and CEO
Peter on the second question, it's David.
Go back to the context of our business.
85% is ASO, the residual 15% is split between the experience rated and guaranteed costs.
So for ASO customers, you're reflecting a trend projection.
You work with them in terms of what they would like to build into their own respective budgets.
Similarly, you do the same thing from an experience rated standpoint agree upon a revenue stream.
And lastly for our guaranteed cost book of business, because we do not play in the under 50 market, the vast majority of our business is rated on the credibility or the experience of those cases.
So point is, you have more case specific visibility of costs that you're baking into pricing.
Now having said all that, to the extent our secular trend pick at a given point in time is higher than it actually turns out to be, there may be some favorable development.
And if that transpires, we would talk about that quarter-to-quarter as we have in the past.
But the case specific visibility and the, I'll call it the shared risk visibility, tends to mute that for our Company.
- Analyst
Okay, thanks and just on the experience rate book of business, going into next year are we going to see that business have to give back some of the profitability, or are you going to be in a position where you're not really doing that this year?
- President and CEO
Peter, there's always puts and takes in there.
When we look at the overall book of business, that book of business had been pretty stable over I'll call it the case level performance and the average portfolio performance, and we see no meaningful change looking into 2013.
- Analyst
Thank you.
Operator
David Windley with Jefferies.
- Analyst
Hello, good morning.
Thanks for taking the question.
So David on your individual business, you generally talked about that as being small and opportunistic as we move into exchanges.
And I wondered if you could comment on a couple of things there.
One, you saw pretty solid membership growth and what's the focus or emphasis there that drove that growth?
And then two, what are your current thoughts and expectations about readiness of exchanges and Cigna's preparedness to launch into exchanges?
- President and CEO
Good morning, David.
You're correct.
To date, our focus, your question is relative to US individual and US individual primary or comprehensive insurance.
Our focus to date for the past 2.5 years or so has been to pick a limited number of markets where we have a strong value proposition, and then target and test a whole variety of product offerings, distribution strategies, et cetera, so we could test and learn and be in a better position as the marketplace moves going forward.
And you see the results of that coming through our overall portfolio of business.
Through that process, we've tested a whole variety of distribution strategies and we've leveraged some of our non-US experience.
Whereas we've talked about in the past, and I mentioned, we have significant experience in terms of direct-to-consumer distribution, internet-based distribution, Affinity based distribution and the like.
As it relates to exchanges, as you very well know, there's a lot of moving parts still in the marketplace relative to exchanges.
We have our internal view and our posture in terms of those markets using our go deep strategy that are highly strategic, and we'd have a bias to playing in.
And our priority for the organization is to get the organization ready to both comply with and play in target markets from an exchange standpoint.
But we're keenly focused on the amount of moving parts that exist within the regulatory environment, and within the State and federal environment over the next two to three quarters.
- Analyst
Very good, thanks.
And then shifting for my follow-up over to operating expenses, you had talked about some investments from earlier in the year in technology and some other things.
Wondered if you could give us an update on the progress there, and if you're seeing efficiency enhancement from those investments already?
And then also as you think about this realignment, I'd be curious to understand a little bit more deeply your decision process around dropping those savings to the bottom line versus reinvestment and how much reinvestment do you think you need to do?
- CFO
Sure David.
First, the investments we did make in the first half of the year are paying dividends for us in the back half on operating expense efficiencies, particularly the larger ones as we had noted previously was in kind of the telecommunication infrastructure area.
And that's benefiting us in the back half as we expected, and that's reflected in our operating expense ratio in the third quarter and in our full year projection.
So maybe David, do you want to comment on the overall?
- President and CEO
Absolutely.
So expanding on again your rightful framework.
I'll just pick the word you used, it's balance.
The key for us in terms of executing our strategy is to make sure balancing both the near term, the intermediate term, and the long term.
What we're pleased with is that we've been able to deliver expense ratio improvement in each of the last years.
And as we've noted, we will further improve the expense ratio looking into 2013.
Above and beyond that, we were able to secure a program to identify additional efficiencies to target investments.
Some of those investments will bear fruit relative to efficiencies.
Some of them will be product capabilities and new solutions, and some market entree to further accelerate.
So we're seeking that right balance, and I would submit to you that our results thus far as we've executed our strategy over the last three years, we've delivered double digit EPS growth, operating expense efficiency and an attractive revenue growth.
That's the balance we're going to seek to have as we go forward as well.
- Analyst
Good, thank you.
Operator
Ralph Jacobi with Credit Suisse.
- Analyst
Thanks, good morning.
There's been somewhat of a re-emergence of private exchanges, at least in the news.
I guess what's your view here, or what are you seeing or hearing in terms of the interest level with the conversations you've had specifically with ASO clients?
- President and CEO
Sure, good morning, Ralph.
Good to talk with you.
Yes, there's been some dialogue in the marketplace around private exchanges.
Broadly speaking though, what we think about them is, it's another distribution mechanism and it's a different way to frame the market.
It's a way to capture choice, and deliver it back to an individual for the employer.
We think you'll see some movement in private exchanges over time.
We've been actively managing and engaging in those activities.
We're actively engaged today, and we they that it will be part of the equation as you go in the future.
We don't think that it will be the sole equation, but it will part of the equation as we go to the future.
Last thing I would add to it is going back to our non-US experience, we have meaningful experience outside the US where we now have over 10 million individual supplemental policies in force including our joint venture in China.
And we have significant experience working with Affinity partners, working with electronic distribution, working with choice.
And some of those both marketing and distribution capabilities will serve us well here in the United States as it relates to public exchange, private exchange, or direct individual distribution.
So, it's a part of the equation going forward.
We're actively engaged in it today, and we're going to leverage some of our non-US capabilities to play there.
- Analyst
Okay, that's helpful.
And then just as a follow-up, any updated thoughts on the PBM and plans for HealthSpring or maybe even just timing on how you're thinking about that going into the New Year?
- President and CEO
Ralph broadly speaking, no directional change to our thought process around the PBM.
So let me make sure I re-articulate what it is.
Our PBM has been a strong performing asset for the Corporation, and for the benefit of our clients and customers.
Our recent results yet reinforce that.
It's a growing asset.
It's contributing nicely.
And when you think about pharmaceuticals as the number one gap in care in America, it's an important clinical quality and service enhancer for our customers and clients.
Having said that, once we were able to secure the acquisition in HealthSpring, it was acutely obvious the aggregate pharmacy capabilities of the Company were going to grow and therefore we needed to make a conscience decision of how we wanted to grow that.
And we've been very clear that we are thoughtful around making sure that we properly think through all scenarios that are in front of us relative to how we'll manage the PBM capabilities for Cigna as well as for HealthSpring which is now part of CIGNA.
The final note I would make is, we understand that a PBM is made up of a bunch of different parts, mail order, retail, formulary management, et cetera.
And we have a keen understanding of all those parts.
The good news is, we have a high performing asset.
It's a growing asset.
And we have a large growing asset within HealthSpring, both of which have an opportunity to create a lot of value for both our customers and shareholders going forward.
- Analyst
Okay, that's helpful.
Thank you.
Operator
Sarah James with Wedbush.
- Analyst
Thank you.
In the past, you've talked about cost trends benefiting from collaborative care models with hospitals.
And with the HealthSpring acquisition, you had the opportunity to view things from the other side with captive clinics and improved understanding as you come to the negotiation table, as well as adding more members.
So post these benefits from HealthSpring, how are you seeing unit cost increases developing versus past years, and how impactful do you think this has been on your enrollment growth or enrollment growth as it pertains to next year?
- President and CEO
Sarah, it's David.
An important topic in a pretty rapidly evolving space, as we noted in prepared remarks, before we get to HealthSpring within CIGNA, we now have 42 collaborative accountable care organizations which is our approach to alignment up and running for the benefit of our commercial customers.
Within that portfolio, which started back in 2008, we see some meaningful improvement in both service and clinical quality, as well as some cost improvement for the benefit of our clients and customers.
You're right to note that HealthSpring has well in excess of a decade of great experience around physician partnership.
That's been a net beneficiary to the Medicare Advantage population that they serve today.
Serve very well, and have continued to grow over time.
As we look to the future, as we noted in our prepared remarks, partnering with physicians is a key part of the equation.
It's a key part of the equation because it's the means in which you improve clinical quality, and you take relative costs out of the system and deliver more value.
We're passionately committed to this, and we've seen enough proof points both through the HealthSpring model as well as to our model to indicate that there's significant opportunity going forward.
Lastly I would say from a CIGNA results standpoint, we're just at the early, early, early stages of seeing some of that come through which is why this is so exciting as an opportunity to further generate quality and cost improvements that then convert over to benefit for our clients and customers.
So more to follow on this.
- Analyst
Okay.
And just to clarify that last point there, if it's still in the early phases, is it too early to quantify how it may be impacting 2013 cost trends maybe from a unit cost side?
- President and CEO
Yes, Sarah for Cigna, so if I come back to the commercial population.
If I take an individual client experience that has a lot of concentration in the collaborative accountable care, you see some phenomenal results in clinical quality, service results and in overall cost trends.
So you could see low single digits.
You could see zeros in terms of cost trends when you take a well designed benefit structure along with the collaborative accountable care.
The size of the coverage of our 12.5 million lives versus the number of lives that are going through these programs today, tell you that it's muted in the averages that we talk about.
But our approach in go deep is localized.
So in those local geographies where those programs are running and with those employers that have a high concentration, the results are outstanding.
And we would expect to see more and more momentum.
But to date, the aggregate numbers that Ralph walked through have a modest, modest, modest contribution because it's still a small part of the overall average.
That's why we're excited about the future.
- Analyst
Thank you.
Operator
Thank you, Miss James.
And I will now turn the call back over to Mr. David Cordani for closing remarks.
- President and CEO
Thank you.
In closing, I want to emphasize just a few key points from today's discussion.
We delivered attractive revenue growth in each of our ongoing businesses, and exceeded earnings expectations.
Our customer base grew, demonstrating the unique value we offer and our ability to retain and expand and acquire new clients and customers in our targeted segments.
We continue to increase our strategic investments in targeted markets and customer segments, while strengthening the value we offer customers and clients by further developing our differentiated capabilities in customer centricity, physician engagement, and consultative distribution.
And based on our third quarter results and momentum we've gained through the first nine months of 2012, we're once again increasing our full year outlook for both earnings and capital available for deployment.
We thank you for joining us on our call today, and we look forward to our future discussions.
Operator
Ladies and gentlemen, this concludes Cigna's Third Quarter 2012 results review.
Cigna Investor Relations will be available to respond to additional questions shortly.
A recording of this conference will be available for 10 business days following this call.
You may access the recorded conference by dialing 1-866-434-5265 or 1-203-369-1007.
No passcode required.
Thank you for participating.
We will now disconnect.