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Operator
Thank you for standing by for Cigna's first quarter 2013 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 call 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 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 first quarter 2013 results and how our broad portfolio of differentiated customer solutions provides us with many avenues for growth in 2013 and beyond.
Next, Ralph will review the financial results for the first quarter and provide an update on Cigna's financial outlook for 2013.
We will then open the lines for your questions.
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, and earnings per share on the same basis, as the principal measures of performance for Cigna and our operating segments.
Any 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, on 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, and those risk factors are discussed in today's earnings release.
Now, before I turn the call over to David, I will cover a few items pertaining to our results and disclosures.
Regarding our results, I would note that in the first 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 $507 million, or $1.75 per share, related to our previously announced exit of the Run-off Reinsurance businesses, which was effective February 4, 2013.
The second special item was an after-tax charge of $51 million, or $0.18 per share, related to a regulatory matter within our Disability business.
I would remind you that the special items are excluded from adjusted income from operations in today's discussion of our first quarter 2013 results, as well as our full-year 2013 outlook.
Relative to our Run-off Reinsurance operations, our first quarter shareholders net income included an after-tax non-cash gain of $25 million, or $0.09 per share, related to the Guaranteed Minimum Income Benefits business, otherwise known as GMIB.
As a reminder, the results of our GMIB business are excluded from adjusted income from operations, and therefore, also excluded in today's discussion of our first quarter results, as well as our full-year 2013 outlook.
Now, regarding our disclosures, our GAAP cash flow statement explicitly discloses, in cash flows from operating activities, the amount paid in the quarter to Berkshire Hathaway in connection with our exit of the Run-off Reinsurance businesses.
Adjusting for this one-time payment, which we view as a cost to dispose of the Run-off businesses, operating cash flows for our ongoing businesses were at $670 million in the quarter, representing 1.3 times our adjusted income from operations.
Also please note that, when we discuss our full-year 2013 outlook, it will be on a basis of adjusted income from operations, which again excludes realized gains and losses on investment results, as well as special items.
It also excludes the effects of future capital deployment.
With that, I'll turn it over to David.
David Cordani - President & CEO
Thanks, Ted, And thank you, everyone for joining us this morning.
Today, I'll briefly touch on our first quarter performance.
I'll address how Cigna's strategy continues to create value for our clients, customers and shareholders in a dynamic and disruptive environment.
I'll also highlight how our global mix of businesses, differentiated capabilities and emphasis on our customers positions Cigna to continue to grow going forward.
Finally, I'll provide some brief comments on our expectations for the balance of 2013 and beyond.
Following my remarks, Ralph will discuss our financial performance in a bit more detail, and then we'll take your questions.
We were pleased with our first quarter results, which demonstrate a strong start to the year for Cigna.
Our performance was the direct result of continued effective execution of our strategy and the strength of our diverse portfolio of businesses.
Our first quarter performance was driven by our Commercial Healthcare and Global Supplemental businesses.
In Commercial Healthcare, we continued growing in our target markets by achieving strong customer retention, expanding our existing customer relationships and adding new customers.
We posted another quarter of high quality medical outcomes and competitively attractive medical costs for the benefit of our customers and clients.
In our Global Supplemental Benefits business, we delivered a healthy increase in revenue and earnings, reflecting solid customer growth, effective cost management and contributions from recent acquisitions.
Our Seniors business performed well, demonstrating the quality of our physician partnerships and the value we deliver to our customers.
The results in our Disability and Life business reflect the challenging economic and interest-rate environment we operate in.
Moving on to the specific financial results, our first quarter consolidated revenues increased by 21% to $8.2 billion.
We grew our Global Medical customer base by 277,000 people, or 2%, to more than 14.3 million Medical customers worldwide.
We reported adjusted income from operations of $497 million, or $1.72 per share, which reflects a per-share increase of 39% over the first quarter of 2012.
During the quarter, we further enhanced our financial flexibility through the exit of our Run-off Reinsurance business.
Our first quarter results are indicative of our leading Employer, Individual and Senior solutions and capabilities, which drove 17% compounded annual revenue growth and 15% per-share growth over the last three calendar years.
Looking ahead, companies and individuals alike will continue to demand health, well-being and security solutions that are of high quality and affordable.
We will also see ongoing changes in the way customers access healthcare and wellness solutions, whether through evolving Individual, Employer and Government based channels or emerging changes in public and private exchange models.
At the same time, needs of customers will keep evolving.
As populations age, chronic diseases become more prevalent, middle classes continue to grow and customers become increasingly engaged and well informed.
Cigna's sustained strategic investments and continued expansion of our portfolio of Employer, Individual and Seniors solutions capabilities positions us to continue to deliver differentiated value to our customers and clients in this dynamic global environment.
I'll now comment briefly on initiatives and investments we are driving for the benefit of our Employer clients, Individual customers and Physician partners.
From an Employer standpoint, Cigna recently helped to convene the first of its kind Global Healthy Workplace Summit, where Executives from nearly 30 countries participated in a dialogue of best practices for healthy, productive workplaces.
An example of shared learnings is that we are beginning to see best practices emerge globally, as employees in countries such as China and Indonesia extend the healthy habits they learn in the workplace to their communities and homes.
Additionally, it is clear that Employers continue to play a meaningful role in the health and productivity of their employees.
From a solutions standpoint, our consumer driven health plans, which leverage choice and transparency continue to grow and deliver attractive returns.
Our clients have lowered their costs by an average of 13% in the first year by choosing a CDHP, while simultaneously improving the overall health profile of their employees.
Cigna's customer base for these offerings increased by 26% in 2012.
For Individuals, we further strengthened our Individual market position and consumer engagement capabilities last quarter, through initiatives such as launching new first-to-market products for dementia in Taiwan and new critical illness programs in Korea.
In Turkey, we introduced new products to allow individuals to protect their own sense of security by helping them better save for healthcare and retirement needs.
We also launched the myCigna app, which gives our customers instant access wherever they are to personalized healthcare information to help them find a doctor, view their account balances and deductibles and research drug prices at 60,000 pharmacies, just to name a few examples.
We also continue to strengthen our partnership with physicians and healthcare professionals, through our ongoing expansion of our Collaborative Accountable Care or CAC initiatives.
We are now engaged in 58 CACs that cover 24 states, reflecting more than 10 new CAC relationships in the first quarter alone.
When taken together with HealthSpring's proven Physician engagement strategies, these programs create a sustainable model to improve health, access of care, affordability and patient experience.
We believe that this type of enhanced care coordination, anchored by strong physician partnership has, as demonstrated by HealthSpring, and will continue to yield superior results.
To further fuel our growth in this space, we continue to invest in our programs, which now support nearly 1 million Cigna customers across our Commercial and Seniors business, and we are collaborating with more than 23,000 doctors.
In summary, we have invested wisely in a portfolio of capabilities that enables us to effectively anticipate our customers' and clients' evolving needs, and successfully manage the Enterprise in an evolving, dynamic global marketplace.
Looking ahead for the balance of 2013, we will continue to build on our sustained track record of success, advancing our strategy to create differentiated value for our clients and customers, as well as our shareholders.
We are pleased with our first quarter results, and the strength of those results gives me confidence that we will achieve our increased 2013 earnings outlook.
Turning to 2014, there is no doubt that the finalization of the CMS guidance for Medicare Advantage for 2014 introduces significant change that will cause customer, market and earnings disruptions.
Having said that, our goal is to leverage our diverse, well positioned portfolio of businesses to continue to drive competitively attractive revenue and earnings performance for 2014 and over the long-term.
As you know, we continue to target earnings per-share growth of 10% to 13% on average, over the next three to five years.
Now, to summarize before turning you over to Ralph, our first quarter results are strong and represent sustained success in executing a clear, focused strategy.
At Cigna, we continue to succeed in a dynamic global environment, building on our strong track record of attractive financial results dating back to the introduction of our Go Deep, Go Global and Go Individual strategy in 2009.
Our Company remains grounded in customer centricity, with a commitment to putting the customer at the center of all that we do.
Our team of 35,000 strong, across the globe, continues to bring our differentiated value proposition to life each and every day for the benefit of our customers and clients.
Lastly, the combination of our clear strategy, consistent execution and sustained investments positions us for continued competitively attractive results as we look to the future.
With that, I'll turn the call over to Ralph.
Ralph Nicoletti - CFO
Thanks, David.
Good morning, everyone.
Today, I will review Cigna's first quarter 2013 results and our increased outlook for 2013.
We've had a very strong start to the year, demonstrating the strong fundamentals of our businesses, as we continue to build upon our excellent track record.
I'd like to highlight several key accomplishments, specifically, another quarter of strong top-line and customer growth; quarterly earnings per share of $1.72, representing growth of 39% over first quarter 2012; and strengthening our financial flexibility through the successful exit of our Run-off Reinsurance businesses.
The strength of our first quarter performance provides us with solid momentum for the balance of this year and confidence in our increased outlook.
First quarter consolidated revenues grew 21% to $8.2 billion, driven by growth in our targeted markets, as well as an additional month of HealthSpring revenues.
First quarter consolidated earnings were $497 million, representing 38% growth over first quarter 2012.
Regarding the segments, I'll first comment on our Global Healthcare segment.
Overall, Global Healthcare results were strong, particularly for our Commercial business.
First quarter premiums and fees for Global Healthcare grew 20% to $5.8 billion, reflecting strong contributions from both our Commercial and Seniors businesses.
We ended first quarter 2013 with 14.3 million Global Medical customers, growing by 277,000 customers, or 2% over year-end, with solid growth in Commercial and Seniors.
First quarter earnings grew 44% to $427 million and were driven by revenue growth, primarily due to strong ASO customer growth and specialty penetration and an improved operating expense ratio.
Turning now to Medical costs, we continue to improve the health outcomes for the benefit of our customers, driven by our effective engagement with physicians and delivering value based solutions for our clients and customers.
Our Commercial Medical trends are among the lowest in the industry, and given that nearly 85% of our US Commercial customers are in ASO funding arrangements, our clients directly benefit from these favorable medical cost results.
Regarding Medical Care Ratios, in our US Commercial guaranteed cost business, our first quarter 2013 Medical Care Ratio or MCR was 77.6% on a reported basis, or 80.3% excluding prior-year reserve development.
In our Seniors business, our first quarter MCR for Medicare Advantage was 84.3% on a reported basis, or 84.7% excluding prior-year reserve development.
The flu season resulted in elevated medical and pharmacy costs for our Seniors population and impacted our Medicare Advantage MCR by approximately 100 basis points.
Across our Commercial and Seniors risk books of business, our first quarter earnings included favorable prior-year reserve development of $48 million after-tax, compared to $41 million after-tax in the first quarter of 2012.
Moving to operating expenses, for the first quarter, the total Global Healthcare operating expense ratio is 20.7%, which is a significant improvement over the first quarter 2012 expense ratio.
This reflects leverage associated with our continued customer and revenue growth, realization of benefits of cost saving initiatives and timing of investments and new capabilities in the quarter.
We would not anticipate this operating expense favorability to carry through the full-year, as we expect our investment related spending to ramp up over the first quarter levels over the remainder of the year.
To recap, we had a strong start to 2013 in Global Healthcare business on all key metrics.
Now, I will discuss the results of our Global Supplemental Benefits business, which continues to deliver attractive growth and profitability.
Premiums and fees grew 36% quarter-over-quarter, driven by strong customer retention and new customer growth, as well as contributions from our recent acquisitions, most notably Great American Supplemental Benefits.
First quarter earnings in our Global Supplemental Benefits business, were $55 million, representing a 28% increase over first quarter 2012, and reflects business growth, favorable operating expenses, product mix and favorable claims experience.
Relative to operating expenses, it's important to highlight that we continue to invest in product, distribution and geographic expansion within this segment.
For Group Disability and Life, first quarter results reflect the impact of a challenging economic environment.
First quarter earnings in our Group business were $49 million, which were primarily impacted by unfavorable claims experience in the Disability business.
Results for our remaining operations, including Run-off Reinsurance, Other Operations and Corporate, totaled to an after-tax loss of $34 million for the first quarter of 2013, consistent with our expectations.
Turning to our investment portfolio, we are pleased with our results in the first quarter.
We recognized net realized investment gains of $93 million after-tax, coupled with a strong net investment income result.
These net realized investment gains were primarily related to disposition of investment assets associated with our exit of the Run-off Reinsurance business.
Overall, as a result of the continued effective execution of our strategy, our first quarter results reflect strong revenue and earnings contributions from our ongoing businesses, as well as significant free cash flow.
Now I'll discuss our outlook for 2013.
We expect to continue to deliver strong financial performance based on focused execution, leveraging our diversified portfolio of businesses with multiple sources of growth and continued effective capital deployment.
We continue to expect consolidated revenues to grow in the range of 8% to 12% over 2012.
We have increased our outlook for the full-year 2013 consolidated adjusted income from operations to be in the range of approximately $1.74 billion to $1.87 billion, or $6.00 to $6.45 per share.
This represents an increase of $0.15 per share over our previous expectations.
Consistent with prior practices, our outlook excludes any additional contribution from additional capital deployment and any additional prior-year reserve development for the balance of the year.
I will now discuss the components of our 2013 outlook, starting with Global Healthcare.
We now expect full-year Global Healthcare earnings in the range of approximately $1.47 billion to $1.56 billion, an increase of $35 million.
This increased outlook for Global Healthcare, primarily reflects the first quarter favorable prior-year reserve development and continued effective execution.
Additionally, I would note a variety of items that partially offset this favorability in our full-year forecast, including the expected increase in strategic spending in the second half of the year, as well as the impact of sequestration.
I will now summarize some of the key assumptions reflected in our Global Healthcare earnings outlook for 2013, starting with our customer base.
Regarding Global Medical customers, we continue to expect 2013 customer growth of approximately 1% to 2%.
Relative to Medical costs, for our total US Commercial book of business, we continue to expect full-year medical cost trend to be in the range of 6% to 7%, which reflects an expectation for an increase in medical services utilization during 2013.
We now expect the 2013 Medical Care Ratio to be in the range of 82.5% to 83.5% for our US Commercial guaranteed cost book of business, which is 100 basis points lower than our previous expectations, driven by favorable reserve development in the first quarter.
For our Seniors business, our Medicare Advantage MCR for 2013 continues to be in the range of 82% to 83%.
Regarding operating expenses for 2013, we continue to expect our total Global Healthcare operating expense ratio to improve by at least 50 basis points over 2012's full-year ratio of 22.6%, recognizing that the balance of the year has an increased level of investment in growth initiatives and enhanced capabilities relative to the first quarter.
Now, moving to other components of our outlook, for our Global Supplemental Benefits business, we continue to expect strong top-line growth and earnings in the range of $160 million to $180 million.
I would note that the first quarter earnings are elevated relative to the remainder of the year, due to the timing of operating expenses related to ongoing investments in our growth initiatives and better than expected claims experience, which we expect to normalize over the balance of the year.
Regarding the Group Disability and Life business, we continue to expect full-year 2013 earnings in the range of $270 million to $290 million.
Regarding our remaining operations, that is Other Operations and Corporate, we continue to expect a loss of $160 million for 2013.
So all in, for full-year 2013, we have increased our outlook for consolidated adjusted income from operations to a range of approximately $1.74 billion to $1.87 billion, or $6.00 to $6.45 per share.
This represents an attractive outlook coming off a very strong 2012.
Now moving to our 2013 capital management position and outlook, overall, we continue to have good financial flexibility.
Our subsidiaries remain well-capitalized and are generating significant free cash flow to the Parent, with strong return on capital in each of our ongoing businesses.
We ended the quarter with Parent Company cash of approximately $620 million.
During the first quarter, we repurchased 1.6 million shares of Cigna common stock, and we subsequently repurchased an additional 2.3 million shares through May 1. Year-to-date, we have repurchased 3.9 million shares of stock for approximately $250 million.
Additionally, as of April 18 of 2013, we completed the payment of the Reinsurance premium to Berkshire Hathaway, in connection with our transaction to exit the Run-off Reinsurance businesses.
After considering all sources and uses of Parent Company cash, we now expect to have approximately $1 billion to $1.1 billion available for deployment during the balance of the year.
Overall, our capital position and updated outlook are strong and our capital deployment strategy and priorities are unchanged.
Now, to recap, our first quarter 2013 consolidated results reflect the strength of our differentiated portfolio of Global businesses and the continued track record of effective execution of our focus strategy, with strong growth in our targeted customer segments.
The fundamentals in our business remain strong, as evidenced by our first quarter results, which reflected attractive growth in revenue, customers and earnings, with the opportunity for excess cash deployment, the successful exit of our VADBe, GMIB businesses and the completion of payments to Berkshire Hathaway and continued targeted strategic investments, which will enable sustained growth into the future.
Based on the strength of these results, we are confident in our ability to achieve our increased full-year 2013 outlook.
With that, I will turn it over to the operator for the Q&A portion of the call.
Operator
(Operator Instructions)
Scott Fidel, Deutsche Bank.
Scott Fidel - Analyst
First question, just wanted to follow-up on Medicare and see if you can give us your estimated all-in rate impact for 2014, from the final rates, including the industry fee?
Then just talk about the effects of the risk adjustment model changes that you're expecting on HealthSpring.
If you can flag any particular markets, where you expect to see more impact from that?
David Cordani - President & CEO
Scott, good morning.
It's David.
Just maybe a backdrop comment and then I'll address the rate specifically, because I think it comes into your risk adjustment point.
As a note, first, as I noted in my prepared remarks, the 2014 rate adjustments, make no doubt about it, are disruptive and will be disruptive to the marketplace.
Specific to our model broadly, we believe that the HealthSpring model continues to be a winning approach in the marketplace and it's positioned for ongoing success, largely due to your ability to partner effectively with physicians and work around health engagement and care coordination on a go-forward basis.
We think this improvement is the only sustainable way to really improve health and lower healthcare costs and generate a level of affordability.
So, now to put that in context of the rate impact, your question about risk adjusters and the like.
For us, as you would imagine, the rate impact varies by market.
You could think about the average of that being in the mid single-digits.
That excludes the industry tax.
So that's the rate impact excluding the industry tax; obviously, you know what the industry tax looks like.
On a prospective basis, when you think about the capabilities we have -- we have two large sets of capabilities.
One, on average, a richer or more comprehensive benefit offering in our respective markets that we targeted because of the efficiency of our portfolio.
So, a little bit more latitude to work within those benefits and make adjustments and still have a competitively differentiated benefit.
Then the physician partnership, to work with those physicians to get to the best efficiency and quality outcome for the benefit of their patients, our customers, as we work forward.
Scott Fidel - Analyst
Okay.
David, just to confirm -- so the variability that you're citing was sort of mid-single-digit down versus, let's say, industry peers, ex the industry tax, at maybe more like 3% or so.
Is that variability mostly off of the risk adjustment model impact?
David Cordani - President & CEO
Scott, time will tell obviously as the final rates convert to benefit offerings in the market.
But, I would say, again, my numbers are mid-single-digit on average, and our view of the peer marketplace is in more of the 4% to 5%.
So you might argue there's 1 point plus of different.
I would not benchmark to your notion of a 2.5 point or 2-plus point difference.
You could argue that is largely the result of both geographic variability, and then secondly, the efficiency of our program and effectiveness around the risk adjusters having a little bit larger bite out of it.
Scott Fidel - Analyst
Got it.
Okay.
Then, just my follow-up question.
Just wanted to shift gears and just ask about the outlook for ASO conversions in 2014.
Just hearing a lot of market feedback about increased interest in converting to ASO.
Particularly just in the Select segment, what type of growth pipeline you expect to see as a result of this, since that's a particular area of the market where we're just hearing a lot of interest in ASO for 2014.
David Cordani - President & CEO
Scott, specifically to ASO, we're self-funded.
As you know, the bulk of our Corporation's US business is in self-funded, think 80% to 85% of the business each day.
As it relates to broad themes, we see a continuation of the broad theme from the last three or four years to just continued openness and a positive appetite for ASO.
So we don't see it as a sea change by any stretch in imagination.
In the Select segment, to your specific point, which we define as employers with 51 to 250 employees, give or take, we've seen continued positive appetite there as well.
So, positive momentum, strong portfolio capabilities and increased openness and receptivity in the market for that.
If you look back to our growth results, our Regional segment and our Select segment results continue to be outstanding from a retention, business expansion and new business growth, and we would expect that to continue.
Scott Fidel - Analyst
Okay, thanks.
Operator
Justin Lake, JPMorgan Chase.
Justin Lake - Analyst
First question on 2014.
In your prepared remarks, you talked about your confidence in being able to attract -- grow at attractive rates over the next several years.
But specifically, you had previously communicated confidence in the ability to grow earnings next year.
I'm curious if you can give us an update on your thoughts here.
David Cordani - President & CEO
Sure, Justin.
Good morning.
As you commented in my prepared remarks, we feel as though the positioning of our diverse businesses will enable us to deliver competitively superior in both revenue and earnings growth in 2014 and beyond.
We remain committed to our long-term EPS growth objective of 10% to 13% on average per year.
As you know, we've been able to deliver that over the prior years.
Specific to 2014, given the disruption that the Medicare rate environment has introduced and our need to see how those rates convert to offerings in the market through the second quarter and then the offerings going to the third quarter, we think it's early to comment relative to 2014 outlook.
But I think the most important headline is we're confident that we're positioned to deliver a competitively superior result in 2014.
Justin Lake - Analyst
So, if Medicare Advantage is clearly the area of disruption, can you delineate what you're thinking in terms of membership growth versus margins?
David Cordani - President & CEO
Specific to MA, Justin?
Justin Lake - Analyst
Yes.
David Cordani - President & CEO
So, I'll be careful in terms of my comments, because the competitive realities will play out over the next several months.
But, let's just step back and use a little context here.
As we've discussed in the past, whether you look at HealthSpring's history or Cigna's history, both organizations have been disciplined in terms of focus in geographies, as well as discipline for sustainable growth.
So, within that environment, you should assume that there's a bias towards sustainability, so there's a bias toward a balanced margin outcome.
Having said that, in the disruptive environment we're going to be in, we think 2014 and arguably 2015 is going to present some meaningful, both organic and inorganic, growth opportunities.
We remain open to the positive growth story, because the HealthSpring platform is positively positioned to deliver both today and in the future.
Justin Lake - Analyst
Okay, great.
If I can just ask my follow up, again on Medicare Advantage, more specifically around this new risk score model.
There's been discussions that in certain markets, the rate decline is going to be much more significant than mid-single-digits because of the risk score model.
Can you talk about how that flows through to your capitated Physician groups in terms of the ability to cut benefits versus your taking margin declines and then obviously the capitated group getting a percentage or premium.
How much of it does the capitated Group take there and how does that kind of affect their view on the Medicare Advantage business?
David Cordani - President & CEO
Justin, just a moment of backdrop then on the risk coding, and then a little bit of direction how our model works there.
First, just to put it in context, we should think about the risk coding as indicative of the level of both physician engagement with their patients and then active care coordination.
So, said otherwise, the more effective either a medical home care coordination or accountable care organization would be, you would have a more engaged, a more actively managed population and the risk coding would be higher.
That's a dimension of success, right?
You have a much more actively managed organization.
Put that in context of what might transpire.
Take a diabetic, which is quite prevalent in the case of Seniors.
In a fee-for-service model, the doctor is really not incented to do all the preventative care measures, to do all the care coordination, et cetera.
So it tends to be more uneven.
In a coordinated model like we have, you have active monitoring of the diabetic patient's blood sugar levels, proactive exams relative to retinal exams, LDL-cholesterol, assessing kidney functionality.
As a result, you get to a much better quality of life for the individual, a better physician/patient outcome that works through and a better overall cost profile.
So that's the backdrop.
Specific to your question, in the model we have, we have a good partnership model with physicians, bluntly, to make sure that we get the right, sustainable costs and the right sustainable value outcome in our respective markets.
The body of work we're going through right now, as you would expect, is to ensure that our net benefit positioning and cost positioning for 2014 has an eye on, not only toward 2014, but 2015 and 2016.
So that's an area where we're pleased with because we're working with our physician partners to get that outcome.
We're not working against physicians in a contracting way, but we're working in a very transparent way.
That process is unfolding as we sit here today.
Justin Lake - Analyst
Got it.
Thanks.
Operator
Josh Raskin, Barclays.
Josh Raskin - Analyst
Didn't hear a PBM discussion or update there.
I think you guys have been talking about first half.
So, two months to go, maybe any color there?
David Cordani - President & CEO
Sure, Josh.
Good morning.
Maybe we were just waiting for your question on the PBM, since there's always a lot of interest.
As you know, as we've said in the past, that business continues to perform well.
We've talked about that, the service proposition, the clinical quality proposition, the medical trend outcomes that it's delivering and of course the earnings for us.
As we have talked before, the scale addition presented by HealthSpring presented us an opportunity to evaluate a variety of alternatives.
Just to make sure we have the right context, those alternatives are all focused on either maintaining or further enhancing our service proposition, maintaining or further enhancing our clinical quality outcomes, strengthening our positioning for ongoing innovation, because the constant here is an environment of change.
Then further improving both affordability and value for our clients and customers and earnings for ourself.
The specific update I give you is, our team is making very good progress and we are on track relative to our internal timelines [dug], to work through our body of work here.
Josh Raskin - Analyst
That timeline, as you expressed earlier, was by midyear, right?
Is that fair?
David Cordani - President & CEO
Correct.
Josh Raskin - Analyst
Okay, right.
I'm going to change that.
Then just as I look at the guidance, obviously you took your numbers up slightly less than what -- just the favorable development in the healthcare segment was.
You bought back a little bit of stock.
So, there is probably some offset to that.
I'm curious, is it just around discretionary investment spending?
Or is there any sort of quantification of other items that you guys are expecting to be headwinds?
I think you said sequestration now is in guidance.
I thought that was previously in guidance, but just want to make sure I got that right.
Ralph Nicoletti - CFO
Hi, Josh.
It's Ralph.
Yes.
To your point, we feel good about our outlook.
It primarily reflects the benefit of the prior-year development that we experienced in the quarter.
We clearly had planned investments behind capabilities and further growth in the balance of the year, which did come through in the first quarter, as we expected.
But we do see it coming through the balance of the year.
So our guidance reflects that.
To your latter question on sequestration, as we went into the year and talked about our guidance, we did contemplate within the outlook range, that occurring.
Our current guidance also contemplates the impact of sequestration as it flows through, starting in the second quarter.
Josh Raskin - Analyst
Is there any way to size those investments?
Are they higher than what you had thought, three months ago?
Ralph Nicoletti - CFO
No.
I would say not higher than what we thought three months ago, if you step back on our operating expenses overall.
It's important to point out, we've consistently improved our operating expense ratio, while continuing to invest behind the business, behind growth.
As I noted in my remarks, we expect to improve our ratio by at least 50 basis points, off of the 22.6% that we ended in 2012.
So, nothing unusual there.
We're marching to the plan that we had going into the year.
Josh Raskin - Analyst
Perfect, thanks.
Operator
Matt Borsch, Goldman Sachs.
Matt Borsch - Analyst
So, could you maybe talk about the outlook for 2014?
Not specifically, but if we think about outside of the Medicare Advantage business, should we think about 2014 being kind of a normal year, given that you don't really have impact on your existing business from the Commercial and Medicaid side of health reform?
Or are there other angles that we should be thinking about ahead of that?
David Cordani - President & CEO
Matthew, good morning.
It's David.
So relative to 2014, again, most importantly, we believe that we will continue to deliver competitively attractive both top-line and bottom-line results.
I think broadly the way you frame it is a healthy way to frame it.
When you think about our business portfolio and you look at the sustained success, for example, in our US Commercial business around the Regional and the Select segment, that's sustained power that could be used to drive our results.
Our Global Individual business, the strength of our cash flow and improved financial flexibility, that has built over the last three years and further enhanced by the successful exit of our Reinsurance business.
All of those are positives.
You highlight the number one disruptor or headwind.
So, I think the way you're framing is a very healthy way.
Matt Borsch - Analyst
Maybe as my follow-up, if I could ask about your US Disability business.
Just maybe frame the outlook there in light of the first quarter negative claims experience you had.
Ralph Nicoletti - CFO
Sure, Matt, it's Ralph.
Again, overall, continue to be pleased with the Group segment in terms of the margins and returns in the difficult economic environment.
We are on track to reach the guidance range.
We did see some claims volatility in terms of size of claims in the first quarter, which we expect would more normalize over the period of the year.
We're also expecting to continue to see operating improvements, which we've been doing over the last several years, and that factored in our outlook as well.
Matt Borsch - Analyst
Okay, great.
Thank you.
Operator
Ralph Giacobbe, Credit Suisse.
Ralph Giacobbe - Analyst
Just going back to MA.
Can you all give us a sense of what percentage of earnings MA represents at this point for the Company?
Ralph Nicoletti - CFO
Ralph, it's about 15%.
Ralph Giacobbe - Analyst
Then just in terms of the follow-up, maybe talk a little bit about cost trends you saw in the quarter.
It sounds like flu had more significant impact on your Seniors book.
Any impact on the Commercial side?
Maybe just talk generally about utilization, what you're seeing within specific categories and cost trend relative to that 6% to 7% that you mentioned for the quarter.
Thanks.
Ralph Nicoletti - CFO
Sure, Ralph.
A few questions in there.
First, let me start on the Commercial side.
Then I'll come back on the Senior side a little bit.
Overall, as the quarter came in, it came in line with our expectation, certainly on the Commercial piece.
A little bit more elevated in the Senior side because of the flu impact in the first quarter, but in line with our expectations.
Our trend projection does reflect a slight uptick from the first quarter, where we were more on the lower end of that range of 6% to 7%.
But we project a slight uptick as we move to the balance of the year.
In terms of the kind of pieces there, I would say no real changes to the historical mix of the different utilization patterns within the trend.
Then on the MA side, on the Medicare Advantage side, as I mentioned, we did get the impact from the flu in the first quarter.
Some of that was partially offset by prior-year development that we did see in the quarter.
I think it's important to note that as we entered the year, we expected to move our loss ratios up a little bit to position ourself for the new MLR guidelines in 2014.
Ralph Giacobbe - Analyst
Okay, great.
If I could squeeze one more in.
Maybe just an update on where you stand with exchanges, how much you think you'll participate at this point and how your rate negotiations are going with providers and what rate you expect.
Thank you.
David Cordani - President & CEO
Ralph, it's David.
I think your question really goes toward the 2014 public exchange environment.
As you know, we do not have an under-50 Life Employer block of business to protect and we don't have a material Individual block of business.
As such, we're able to look at this market through a fresh lens.
We've been running pilots in a finite number of markets over the last three years to learn and be prepared for this change.
Looking to 2014, we have a bias to participate.
We've done the work and continue to do the work to participate.
That bias to participate is quite sharply focused on a limited number of markets.
When we think about markets, we think about MSAs.
Obviously, you're state engaged, but we think about MSAs within the states because of localization.
Finally, to the notion of your question, when we think about rates, we're also orienting our offerings against those markets where we both deem an attractive environment exists and we have our most innovative, collaborative Accountable Care relationships.
Because we think the better way to win on a more sustainable basis is, again, working with the physicians as opposed to against them in terms of pounding back and forth our rates.
So, limited number of markets, biased action, highly focused work being done.
In those MSAs will be where our most sophisticated or innovative collaborative relationships are in place today.
Ralph Giacobbe - Analyst
Okay, thank you.
Operator
(Operator Instructions)
Christine Arnold, Cowen.
Christine Arnold - Analyst
You said a bunch of times that you feel you have a lot of financial flexibility.
I heard organic and inorganic Medicare Advantage opportunities, kind of hinting at potential for acquisitions and MA.
As you look at your portfolio, where do you see compelling opportunities from an M&A perspective, recognizing they are probably smaller tuck-in acquisitions?
David Cordani - President & CEO
Christine, good morning.
It's David.
What I referenced before, you're correct.
Our financial flexibility is quite strong; Ralph noted in his prepared remarks, in excess of $1 billion -- $1 billion to $1.1 billion.
Two, we meaningfully improved our financial flexibility post the Berkshire transaction.
So you're correct from that standpoint.
Two, we indicated that we believe that this CMS rate environment will create meaningful disruption in the marketplace in 2014 and 2015, and that will create disruptive opportunities for growth both organically and inorganically.
On the organic side, important to note, we are on track relative to our organic market expansion activities that started in earnest as soon as we closed the HealthSpring transaction.
We've had good planning, good execution, et cetera, and that's on target.
All is we're indicating is that we have a go-to platform that we could integrate, as you put, acquisitions into, we have the financial flexibility and we have a model that has been proven successful in its ability to integrate.
Beyond that, you should not read anything more into my comments.
Christine Arnold - Analyst
Okay.
Then finally, on exchanges.
How are you viewing private exchanges for the large and midsize employers?
Do you see them gaining traction?
Are you interested in participating?
Or do you view them as kind of a threat to the shift to ASO that we've been seeing?
David Cordani - President & CEO
Christine, it's David again.
So, relative to private exchanges, first, let's have a little shared context here.
There's a lot of early movement in this space.
So we're early in the cycle.
Within that, private exchanges are coming up to serve a variety of purposes.
For example, having an improved retail purchasing experience for Individual customers, we think that's a positive.
For example, elevating the level of engagement and transparency related purchases, we think that's a positive at an Individual level.
There are some that are actually moving forward to share more economic burden or risk with Individual consumers, potentially orienting against the defined contribution model.
We think that could be a winning strategy, so long as the individual is engaged and participative and understands what they're getting involved in.
So point one is early in the cycle and a lot of different models unfolding.
The second point is you should think about us as having a lot of experience dealing in an environment of choice.
When you think about our larger case-size business, we're used to dealing in a choice environment in the industry, where we typically call it slice, where you have a B2B2C relationship, and you're needing to market and present your offering for an Individual choice.
We are participating and expect to continue to participate in some of the offerings that are in the market.
As we have been in the past, we'll be quite focused in terms of those offerings, where we believe the designs are designed to be sustainable and where we could add value and win on a go-forward basis (multiple speakers).
Christine Arnold - Analyst
Okay.
Just to clarify a question on the last comment you made on Individual.
Are you able to compete in just MSAs or do have to compete statewide?
What's the risk that you get members in areas where you don't have the competitive cost structure?
David Cordani - President & CEO
So Christine, I think your question is now bouncing back to the public exchanges.
Christine Arnold - Analyst
Yes.
David Cordani - President & CEO
We -- first and foremost, we have demonstrated over the last almost four years that in our chosen Go Deep markets, we have a fully competitive cost structure.
Our medical trends have been outstanding.
Our client and customer retention rates have been very, very strong.
So we feel good about that.
Secondly, healthcare is local.
Healthcare is extraordinarily local.
In the Individual market, it will be even more localized.
So we believe our ability to focus on key MSAs in key markets is going to be a winning strategy on a go-forward basis.
Christine Arnold - Analyst
Thanks.
Operator
Kevin Fischbeck, Bank of America Merrill Lynch.
Kevin Fischbeck - Analyst
Just wanted to go back to the MA rate for a second.
You guys have previously outlined a plan of entering two to three new markets per year.
I just wanted to see what, if any, impact this MA rate had on those plans either for 2014 or for out years?
David Cordani - President & CEO
Good morning, Kevin.
It's David.
You're correct.
We had outlined as part of the acquisition, both the opportunity and potential for entering new markets.
I referenced earlier, that body of work is on track.
The team has done an extraordinary good job in terms of both prioritizing markets -- the good news is there's ample market opportunity -- then focusing on the markets where we think we have the biggest opportunity to go forward.
There's no doubt, as I said before in prepared comments, in 2014, rate environment changes the profile across-the-board, whether you're looking at a new market entree or an existing market.
Having said that, we believe our model of partnering with physicians presents an opportunity for sustainability, and we're looking at this journey more than a 2014 environment.
So, we're on track relative to our activity there.
Kevin Fischbeck - Analyst
Okay.
Then just on the share repurchase side.
I just think it's interesting.
It looks like the average share price is about $64, which implies that you were buying your stock back after the final MA rate.
I don't know -- obviously, it creates some headwinds to 2014.
But I don't know if we should be taking that as a signal as far as your optimism and your outlook going forward hasn't changed a whole lot or whether the decision of share repurchase is more a reflection of other uses of cash available, as far as maybe deals that look like they're in the short-term.
So we shouldn't be reading too much into that.
I don't know if you have a perspective or a comment there.
Ralph Nicoletti - CFO
Kevin, it's Ralph.
First, obviously feel very good about our position and our ability to grow the business over the long-term.
I think very important.
Then as we look at our capital management priorities, they've essentially remained unchanged.
As we looked at the window of time here in the short-term, we felt that deploying some of the excess capital to share repurchase was the best interest of the shareholders.
Kevin Fischbeck - Analyst
All right.
Thanks.
Operator
Ana Gupte, Dowling & Partners.
Ana Gupte - Analyst
My question is about your two portfolios in the Seniors business and the competitive disruption that you talked about specifically, on Med Advantage and Medicare Supplement.
Are these segments that buy into each of these products distinct and separate based on either income level or age or other demographic characteristics?
Or is there some fluidity across?
In light of the 2014 rate headwinds, is the disruption just likely to be limited to share shifting among MA players?
Or would you see some reversion back to Med Sup despite the significantly higher monthly premium on that?
David Cordani - President & CEO
Ana, good morning.
It's David.
Relative to your first question, in terms -- I think you're looking at the demographic kind of economic profile and buying pattern profile, the difference between MA and Med Sup, I'm going to make a macro statement -- but averages are dangerous -- and then try to sharpen it down.
Macro average statement, the answer is yes.
Then, you've got to cut down to local markets.
I think as you know, what you'd see is your MA penetration is dramatically higher and more mature in urban and suburban areas, with a broader delivery system configuration.
So you have two things -- one, you have a little different demographic profile between your typical MA and your Med Sup buyer.
Two, you have a market bias where MA is more vibrant in certain geographies; therefore, in other geographies, Med Sup is, largely speaking, the only alternative for Individuals to fill in to get the fee-for-service offering.
Fast forward, that to your secondary question, the simple answer is time will tell.
Time will tell relative to the value propositions that are put on the table in the competitive landscape as it relates to benefit richness and the comprehensiveness of benefits.
Now, it's important to note, as you think about MA -- stepping back broadly, this is not a Cigna statement, but broadly -- MA participants, about 14 million Seniors today, tend to be highly satisfied if you look at national satisfaction data, extremely highly satisfied relative to their programs, relative to alternatives.
Secondly, MA participants on average have a bit lower income level than MA in totality.
So, you have a highly satisfied population and they're going to be looking at the level of disruption that's presented to them.
So time will tell; the level of benefit offering and richness will be a meaningful determiner in terms of whether or not people view a shift to fee-for-service and buying a Med Sup makes sense.
But you have a highly satisfied population.
Then, finally, from a Cigna standpoint, we have deep blocks of business in key geographies, where there are deep relationships with physicians and a lot of coordination with individuals.
So, we would expect to have less than average disruption because of that depth of relationship.
Ana Gupte - Analyst
I'll take that to mean, based on the satisfaction, the income level, which is slightly lower, and the market-specific preferences, that there's likely to be much less disruption than say, the BBA, compared to what we've seen for 2014.
Then a follow-up on that is, no one is really talking about it too much, but there is discussion around the budget deal in Congress and the need to put in a long-term fee fixed solution.
Maybe get rid of the sequester.
I think the administration had a proposal around a Med Sup or reducing the -- combining the part A and B into combined deductible and putting a surcharge into Med Sup.
So let's just say, firstly, are you having such discussions or any dialogue with DC on that?
Secondly, let's just say this happens in the fall.
Then what are the ramifications of that?
David Cordani - President & CEO
Ana, I'm going to answer the first part of your question.
Just so you know, I'm not going to answer the second part of your question.
On the first part of your question, we have been, we are and we will continue to be very actively engaged in DC, on both sides of the aisle relative to sustained program design, et cetera.
We feel passionate around sustained evolution of programs, be they Commercial, be they exchanges, be they Medicare, be they duals, et cetera.
It is an important part of what we think our responsibilities are.
So we are and will be actively engaged in the dialog, as you referenced, relative to the potential for an AB combined deductible.
Having said that, I don't think it's healthy to speculate what the possibility of outcomes are, given the inner workings of Washington.
I'd leave that to your speculation and your debate in terms of the potential and the timing of that.
Ana Gupte - Analyst
Thanks, David.
Appreciate the perspective.
Operator
AJ Rice, UBS.
AJ Rice - Analyst
First question I guess, relates to the comments about operating expense ratio improvement, the 50 basis points.
Obviously, you can get that improvement through just leverage in the business or there can be specific initiatives that are designed to get that.
I would assume that you have investments that you're making, as others are talking about, in preparation for 2014, maybe not as much as some of the others.
But can you just sort of comment on those three factors and how they play into your objective to get to 50 basis points improvement?
David Cordani - President & CEO
Morning, AJ.
It's David.
I think you framed it nicely.
First, if you look back over the last several years, we've committed to and we have delivered consistent improvements to our expense ratio, And we're pleased with that.
In addition to that, we've committed to and we've executed continued, highly focused strategic investments.
So you're not seeing a big change in our strategic investment profile, for example, in advance of the public exchanges or otherwise.
We continue to target investments within the organization.
Obviously to your point, as we successfully grow the franchise, there is revenue leverage opportunity that presents itself.
I'll end with a for example -- for example, last year, we talked to the investor community about a series of targeted investments we were incurring in the early portion of 2012 that would yield substantive benefits to our expense ratio in the second half.
Those were technology-related initiatives, vendor specific, cutover transpired, those were very targeted.
Beyond that, you'd see ongoing efficiency exercises to help us get the productivity gains we need to be able to continue to reinvest going forward, and you should expect us to continue to generate that on a forward-looking basis as we invest back in ourselves.
AJ Rice - Analyst
Okay.
Then my other question would be related to international.
It's sort of open-ended.
In the prepared remarks, you mentioned a few areas of strong performance, but -- I know in the press release you cite, particularly, South Korea.
Can you comment on any areas that were particularly strong in the quarter and any areas that might be challenges worth at least highlighting?
David Cordani - President & CEO
It is David again.
Well, the international operation, you think about our Global footprint, there is a couple portfolios of business there.
One that both I and Ralph highlighted is the Global Individual Supplemental business is performing extremely well.
Within that portfolio, I wouldn't highlight any one area; I would reinforce the fact that within the delivery of those results, we're continuing to invest in product.
We'll continue to invest in distribution channel innovation.
We'll continue to invest in new market entrees, such as Turkey, which is up and running, as well as India.
That's one section of the portfolio.
The second section of the portfolio, which is part of our Global Healthcare business, really focuses on the globally mobile population needs, and that performed in line with our expectations in the first quarter, so I wouldn't highlight anything there.
AJ Rice - Analyst
Okay.
Thanks a lot.
Operator
Dave Windley, Jefferies.
Dave Windley - Analyst
So following on AJ's last one.
In the earlier days of kind of evaluating ACA, Cigna talked about its ability to, say, import some of the distribution innovation out internationally into the US for Individual market, say HIX distribution.
Coming at that market, that exchange market, in a slightly different way, is that still in the thinking?
I haven't heard you talk about that.
David Cordani - President & CEO
Sure, Dave.
It's David.
Thank you.
Simple answer is yes.
So when you think about our Global Individual Supplemental business, that business is a direct Individual distribution infrastructure where we sell direct to Individuals, targeted offerings based on sub-segmentation and needs based on life status.
We deliver those products or solutions through a variety of distribution channels, historically, telemarketing; today, telemarketing, Internet, direct response TV, bank assurance or other affinity channel delivery.
It's fueled by a large cadre of, I'll call them, marketing statisticians, product and distribution resources.
We have been and continue to leverage those resources within the Company.
Lastly, the pilots I referenced earlier in a prior question.
So we've run three years of pilots back here in the United States.
It's manifested -- round numbers, 200,000 Individual primary lives.
Those are driven, aided by these distribution resources outside the United States, as we're just trying to leverage those learnings.
We think that gives us a nice advantage as we look to our target markets going forward.
Dave Windley - Analyst
Okay.
Then, switching gears to your network development or physician partnering strategy.
You've got your HealthSpring capabilities.
Then you have -- prior to HealthSpring had already embarked on your CAC strategy.
I guess I'm wondering how those have, say, maybe melded together, if you can provide us any metrics or any milestone or signposts as to how many markets you've expanded to beyond the HealthSpring markets, what your target is and over what time frame.
David Cordani - President & CEO
Sure, Dave.
So, contextually, Cigna started down this path on or around 2008.
We stood up eight collaboratives, different models with the objective to learn.
By the way, you continue to learn as you go forward.
Fast-forward to today, we have just shy of 60 up and running.
They span approximately 23, 24 states, touching 23,000 physicians.
Between the HealthSpring Seniors lives and the Commercial lives, we are approaching 1 million lives at our touch.
So, significant growth.
The exciting part is, you're seeing coming out of those collaboratives, a lot of what HealthSpring was able to prove in the Seniors population, higher level of engagement, higher level of clinical coordination, higher level of medication compliance for chronics, et cetera.
As a result, higher satisfaction for both the patient or customer as well as the physician and then improved costs.
So, we believe that there's a tremendous opportunity here as we go forward.
Looking to the future and I think we profiled this a little bit at our I-Day, we have essentially a map of the country, and by MSAs, our objective is that over the course of the next year, you're going to see another significant tranche of growth in the pipeline for new collaboratives, these rather rich that are in front of us today.
Dave Windley - Analyst
Imbedded in that question, if I could -- your approach has not included owning that primary care physician layer in any way.
Is that -- does that continue to be your expectation or strategy?
David Cordani - President & CEO
Dave, I appreciate that.
To be clear, we have some ownership positions today.
But our preferred approach -- to your point, our preferred approach is to partner.
Then in markets that are critical where we don't believe we can have the right partnership opportunities, we are both willing and capable of owning.
So, that's the way you should look at us.
Dave Windley - Analyst
Okay, thank you.
Operator
Peter Costa, Wells Fargo.
Peter Costa - Analyst
Your fastest growing business was actually Medicaid, this quarter.
I believe that's held out from HealthSpring in one of the targeted areas that they had.
Do expect to continue to focus on growing the Medicaid business going forward, particularly given your strong financial flexibility that you have right now?
David Cordani - President & CEO
Peter, it's David.
Mathematically, I'm sure you're correct, but you're doing a percent change off of a de minimis base if you go to another number that has a large percentage change.
Stepping back, to the broader frame that you put forward, we've been really clear relative to Medicaid.
Base Medicaid, if you will, is not an area broadly from a national footprint that we deem to be a strategic priority.
In our focus Go Deep markets, where we believe we have an opportunity to differentiate value is around the care coordination for the high-risk population.
We could deem those as the dual eligibles, high-risk population cohorts, et cetera, where the care coordination, care management physician partnership models work.
So there is an initiative underway with early traction in Texas relative to that.
But we need to look at all these as early generation initiatives, where we need to partner with the states to be able to deliver value.
As well as an early win in Illinois for us on a very targeted basis.
But you should look at that as a small nucleus within our Company and a highly focused nucleus today.
However, an openness to grow in areas and in key Go Deep geographies where we could focus on the high-risk population.
Peter Costa - Analyst
Great.
Then just looking at your balance sheet for a moment.
You still have a very large real estate portfolio.
With the Reinsurance business relatively gone from your sort of forecasting here in terms of going forward, do you think you'll be taking down that real estate asset based on the duration of those, relative to the duration of the rest of your portfolio?
Ralph Nicoletti - CFO
Peter, it's Ralph.
I guess to the question on a broader basis, we'll always look at our investment portfolio relative to our liabilities and ensure that we're matching our assets and liabilities and duration.
So, as the portfolio mix changes, we'll make adjustments, not necessarily in any one asset class.
But we'll take a look on a broader basis across all asset classes.
So I think over time, you could see the overall investment portfolio mix shift, but it will be in line with managing our overall liabilities.
David Cordani - President & CEO
Peter, it's David.
I would just make an add to that.
It's important to put Ralph's comments, which are absolutely correct, in the context of a little bit of Cigna history here.
We have a deep expertise in this area that has proven tremendous returns and tremendous sustainability to the returns.
So you have a core competency there within our organization.
To Ralph's point, there's fungibility, but we should think about that as a level of expertise that has delivered sustained results year-in, year-out, decade-on, decade-out, in areas of headwinds and areas of tailwinds, which is why it's an important aspect that Ralph points through we'll use within our portfolio.
Peter Costa - Analyst
Terrific.
Thank you.
Operator
Sarah James, Wedbush.
Sarah James - Analyst
One of your peers recently talked to a slow multi-year ramp for the exchanges, where your one might be more Medicaid and Medicaid-like than Commercial for the industry as a whole.
So how do you think about the pace of your growth opportunity in the public exchanges?
While on that topic, how prevalent would narrow network products be in your strategy and how is that influencing where you ended up in the spectrum of pricing with providers?
David Cordani - President & CEO
Good morning, Sarah.
It's David.
We're in for an environment as we step into 2014 as a country of disruption in a variety of ways.
Exchange is one of those that just -- the nature of dealing with change.
From a Cigna perspective, our message has been very clear.
Again, as you know, we don't have a book of business that we need to protect here.
We have new opportunities to focus on.
We intend to act.
We've taken discrete action with the Company.
We intend to be highly focused.
From a business standpoint, you should expect us to have kind of a controlled ramp as the level of market change unfolds, so we're in position to deliver on the promises for the new customers we'll be serving, learn from that and innovate off the base of it.
I'm not sure, to be blunt with you, whether or not it's going to be Medicaid biased or non.
You could make an argument that there's a good value proposition there because the size and shape of the federal subsidies gets meaningful once you go below 250% of federal poverty level.
But the buying behavior for somebody at 250% of federal poverty level is probably going to be a bit different than somebody at 150% of federal poverty level.
That's where the localization and the customer knowledge comes into play.
As it relates to narrow network, I think the whole notion of transparency and choice is going to be mission-critical.
We don't think about it as a narrow network for narrow network's sake.
We think about it as, how do you get the highest value network configuration for the sub-segment you're going after?
What's factored into our bias, Sarah, very importantly here is where are our collaborative accountable care relationships.
Think about it, is the Cigna or the HealthSpring model most mature.
How can you use those partnerships, locked arm in arm with the physicians, to get the best value proposition for individuals?
So yes, you could argue that the network will be a little bit more narrow.
But it won't be a traditional narrow network picking based on price.
It will be picked based upon collaboration and total cost outcome and total value.
Sarah James - Analyst
So we can think about maybe the markets that you do go into being built off of the areas where you do have those collaborative care models?
David Cordani - President & CEO
Absolutely correct.
Sarah James - Analyst
Then the follow-up question here is just on a clarification on the one-time items in the quarter.
Could you quantify any impact from sequestration delay and discuss what the $51 million regulatory matter was on the Disability book?
Ralph Nicoletti - CFO
Sure, Sarah.
It's Ralph.
First, on the sequestration impact, that isn't reflected in our special items.
That's in our ongoing results.
As I mentioned previously, that was contemplated in our outlook range that we have and it remains there.
That's outside of special items.
Regarding the $51 million after-tax special item, that is related to our Disability business and a regulatory review that we underwent regarding claims handling procedures.
We reached an agreement in principle on handling long-term Disability practices.
As a result, we took a $51 million charge that's really retrospective, in terms of impact.
Then, going forward prospectively, we expect the effect of these claims processes and practices not to have an impact on our margins over time as the industry adopts the new procedures.
Sarah James - Analyst
Just to clarify on sequestration, you had built in the fact that there was sequestration, or that there was a delay expected into guidance?
I'm just trying to understand if there is any difference in how the timing was.
Ralph Nicoletti - CFO
Sarah, to be clear, we factored in our original guidance in our current guidance a range of outcomes within sequestration, within our outlook range.
What we're seeing is the result of the actual sequestration coming in at the lower end of the range that we contemplated given the timing.
Sarah James - Analyst
Thank you.
Operator
Chris Rigg, Susquehanna.
Chris Rigg - Analyst
Just wanted to come back to the cost trend.
Where -- you had net favorable development of the current quarter.
Where did the actual trend for 2012 shakeout?
Can you just remind us how things progressed last year?
I guess the heart of what I'm trying to get to is just how much of an acceleration you guys are actually expecting in utilization at this point over the latter three quarters of the year, relative to kind of where you are right now?
Thanks.
Ralph Nicoletti - CFO
Sure, Chris.
It's Ralph.
First, let me start with 2012, largely what we saw is in the prior-year development, we finished closer to about 5%, on an overall trend for the year.
The shape of that was largely somewhat favorable in the first quarter.
We did see some escalation in the second quarter.
That began to moderate over the balance of the year.
So there was some shape to it.
As we move into this year and look at our first quarter in our trend projections, we've guided to 6% to 7%.
We are on the lower end of that range in the first quarter.
We are expecting a slight uptick from there, overall as we move through the balance of the year.
That's why we're holding our projection to 6% to 7%.
Chris Rigg - Analyst
Okay.
Then just one last one on the PDP MLR in the quarter.
I guess all other things being equal, I would've thought by adding in HealthSpring for an additional month that would have exert downward -- or upward pressure on the ratio, but it actually came down.
Is there anything notable there?
Whether it's regard to just a quarter?
Or sort of benefit designs?
Any color there would be helpful.
Thanks.
Ralph Nicoletti - CFO
Chris, I would just say nothing unusual there at all.
It's just there is a seasonal pattern to PDP.
We record a higher loss ratio in the early part of the year.
That's essentially what you're seeing.
Operator
I will now turn the call back over to Mr. David Cordani for closing remarks.
David Cordani - President & CEO
Thank you.
In closing, let me just emphasize a few highlights from our discussion today.
We are pleased with our first quarter results, which demonstrate a strong start to the year for Cigna.
Our performance was the direct result of the effective execution of our strategy and the strength of our diverse portfolio of businesses.
Looking ahead, we believe companies and individuals alike will continue to demand health, well-being and sense of security solutions that are both high-quality and affordable.
Cigna's sustained strategic investments and continued expansion of our portfolio of Employer, Individual and Senior solutions and capabilities positions us to continue to serve our customers and clients in this dynamic global environment.
Lastly, the strength of our first quarter results has positioned us to increase our 2013 earnings outlook.
We thank you for joining us and your continued interest in Cigna and look forward to our future discussions.
Operator
Ladies and gentlemen, this concludes Cigna's first quarter 2013 results review.
Cigna Investor Relations will be able 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 reported conference by dialing 1-800-944-3380 or 1-402-220-3015.
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We will now disconnect.