信諾集團 (CI) 2013 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by for Cigna's second 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 conference over to Mr. Ted Detrick.

Please go ahead, Mr. Detrick.

Good morning, everyone, and thank you for joining today's call.

I am Ted Detrick, Vice President of Investor Relations, and with me this morning are David Cordani, our President and Chief Executive Officer and Tom McCarthy, Cigna's Chief Financial Officer.

In our remarks today, David will begin by commenting on Cigna's second quarter 2013 results and how our broad portfolio of differentiated solutions creates value for our customers and clients as well as provides us with several options for business growth in 2014 and beyond.

Next, Tom will review the financial results for the second quarter and provide an update on Cigna's financial outlook for 2013.

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 and earnings per share on the same basis as the principal measures 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 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 second quarter we recorded after tax charge of $24 million, or $0.08 per share, related to transaction costs associated with the previously announced pharmacy benefits arrangement with Catamaran.

And we reported a charge of these special items.

I would remind you that special items are excluded from adjusted income from operations in today's discussion of our second-quarter 2013 results and our full-year 2013 outlook.

Regarding our disclosures, our GAAP cash flow statement explicitly discloses in cash flows from operating activity the amount paid 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 are $803 million in the quarter representing 1.6 times our adjusted income from operations.

And finally, please note that when we discuss our full-year 2013 outlooks, it will be on the basis of adjusted income from operations and this outlook excludes the effects of any future capital deployment.

And with that, I will turn it over to David.

Thanks, Ted, and good morning everyone.

Today I will briefly review highlights of our second quarter earnings performance, then I'll discuss the current trends and opportunities we see in the global marketplace.

And I'll address how our ongoing investments coupled with execution of our focused strategy of go deep, go global and go Individual, continues to position Cigna to deliver attractive results in a dynamic and disrupted global environment.

Moving to the quarter, we delivered strong second quarter results in each of Cigna's ongoing businesses.

Our second quarter consolidated revenue increased by 8% to $8 billion.

We reported adjusted income from operations of $512 million, or $1.78 per share, which represents a per-share increase of 19% over the second quarter of 2012.

Relative to each of our businesses, our global healthcare business delivered strong performance across all of our markets.

We continue to deliver high quality medical outcomes and competitively attractive medical costs that directly benefit our customers and clients.

Within the global healthcare business our US seniors business remains well-positioned to deliver value and innovative solutions to our Cigna HealthSpring customers over the long term.

We delivered substantial revenue and earnings growth in our global supplemental benefits business, driven by recent acquisitions, ongoing organic growth and our ability to leverage our differentiated distribution capabilities.

And our group disability and life business had strong results as we continued to create value for our clients and customers through our productivity and return to work programs.

Our performance across the board underscores our focus on creating enduring value for our customers and clients and our ability to provide sustained, attractive results for our shareholders.

Now moving to the environment and outlook.

To date, by effectively our strategy, we are positioning Cigna to win in a rapidly changing marketplace.

Looking to the future, the global forces of change include well-documented disruptions that stem from economic, demographic, legislative and regulatory forces.

Most notably defined by an aging population, a rapidly growing middle-class, rising instances of chronic disease and affordability and access challenges for systems around the world.

Including the US, where we have an evolving healthcare system, which is confronting changing reimbursement levels and approaches and adapting to new exchange marketplaces.

All of these forces put additional pressure on the government, employer groups and individuals that purchase products and services as well as those who deliver and coordinate those services.

As we've discussed before, we are sharply focused on evolving our solutions to deliver differentiated value and on making ongoing targeted investments to ensure we are well-positioned for sustained growth.

Categories of our investments include enhancements to our portfolio of innovative solutions and tools, advancing programs designed to effectively connect with the evolving retail customer markets and making further progress in establishing ourself in important new geographies.

I'll provide just a few examples of the strategic investments and improvements we continue to make for the benefit of our customers, clients as well as our shareholders.

Relative to the expansion of our portfolio PDM Solutions, during the quarter we announced our long-term strategic partnering agreement with Catamaran to advance our pharmacy solutions.

Our unique partnership will enable our customers and clients to realize greater value through further improvements to clinical integration across medical care as well as pharmacy services, enhanced program affordability and leading technology that will accelerate innovation and customize solutions.

Relative to customer technology solutions, our customer navigation tools continue to expand.

Today we average more than 1.2 million monthly visitors to our myCigna customer website.

Nearly 0.5 million of these visits are from customers researching costs and quality information for doctors, specialists, hospitals and specific medical procedures.

These tools help our customers engage, get information and make more informed personalized decisions.

Relative to our geographic expansions, in the second quarter we expanded the reach of our global supplemental business with the continued rollout of new, individual Medicare supplemental products in the US.

This new product was released in an additional 17 states and as of today is available in 35 states.

In Turkey, since partnering with Finansbank in November of last year, we are now beginning to see encouraging results that are accelerating our ability to offer new solutions to support growth in this important and attractive market.

On the physician and healthcare delivery front the American Medical Association's National Health Insurer Report Card ranked Cigna highest among the seven leading commercial insurers for its low physician-related administrative costs demonstrating our continued investment in efficiencies that make it easier for our physician partners to work with us and focus on caring for their patients.

We are also pleased with the ongoing expansion of our Collaborative Accountable Care, or CAC, relationships.

Since forming the first of our CACs in 2008, we have delivered differentiated value relative to our triple aim, which is to improve clinical quality, customer satisfaction and affordability.

We continue to expand our CACs and now, combined with the customers of Cigna HealthSpring's physician engagement model, we currently support more than 1 million customers in these collaborative models.

In our more mature CACs we are seeing improvements in medical costs and care quality, which exceeds the market averages driven in part by implementation of embedded care coordinating programs where our nurses build relationships with our physician partners to help to coordinate the care programs for our customers.

By way of a specific example, at a recent ACO summit designed to share best practices our CAC partner, Jackson Clinic in western Tennessee, shared its success in improving medical cost trend by nearly 5% while further improving quality.

Our success included reducing by 50% the number of emergency room visits by frequent ER utilizers, driving over a 20% improvement in compliance rates for diabetic measures and 50% better compliance for adolescent well care.

So to summarize, we continue to make targeted investments in our platform of solutions, capabilities for an evolving retail market and expanding into new geographies all to position us for sustained growth in the future.

Now before addressing the balance of 2013 and touching on 2014, I want to offer a brief overview of our long-term outlook.

Over the next three to five years we continue to expect to deliver 10% to 13% EPS growth on average.

As noted earlier in my remarks, we've executed our strategy to position Cigna with differentiated capability in attractive markets including US health, US seniors, global employer, group disability and life and global individual businesses.

In US health we'll continue to focus on employers who value incentives and engagement-based programs and will seek to further leverage our transparent and aligned funding capabilities.

For US seniors, where 10,000 people are aging into Medicare every day, Cigna's differentiated physician partnership model positions us to excel over the long term.

In the global employer market, we have the largest network of healthcare professionals in the world and are well-positioned to continue to meet the needs of the growing globally mobile population.

In group disability and life, our business remains focused on improving productivity and presenteeism for the benefit of our clients and customers.

And the global Individual business will continue to leverage our leading marketing and distribution capabilities which will enable us to meet the expanding needs of the growing global middle class.

Taken as a whole we continue to see attractive growth outlook for Cigna over the long term.

Now, stepping back to 2013 and 2014, we've increased our outlook for 2013 again this quarter.

The strength of our second-quarter and our track record of effective execution of our strategy gives me confidence that we will achieve our full-year outlook.

Further, our broad portfolio of products with differentiated capabilities position in global markets with attractive growth potential, gives us confidence that we will deliver competitively attractive revenue and earnings performance in 2014.

And now to briefly summarize before turning it over to Tom.

We are pleased with our strong second quarter results.

They reinforce consistent, effective execution of our go deep, go global and go Individual strategy, which guides our 35,000-plus Cigna colleagues around the world who work each and every day to help our customers.

The combination of our core strategy, consistent execution, outstanding team and sustained investments and capabilities positions us well to deliver competitively attractive results for the remainder of 2013 and beyond.

And with that I'll turn the call over to Tom.

Thanks, David.

Good morning, everyone.

In my remarks today I will review Cigna's second quarter 2013 results and provide an update to our full-year outlook.

The quarter was highlighted by a few key accomplishments, specifically revenue and earnings growth across each of our operating segments, the announcement of our strategic arrangement with Catamaran to enhance our successful pharmacy business and quarterly earnings per share of $1.78 representing growth of 19% over second quarter 2012.

The quarter also benefited from favorable development in medical costs and disability reserves.

Overall, this quarter is another example of the effective execution of our focus strategy, and demonstrates the strong fundamentals of each of our operating businesses.

The strength of these results provides us with good momentum and confidence to increase our full-year financial outlook in 2013.

Now, moving to some specifics.

Second quarter consolidated revenues grew 8% over prior year to $8 billion driven by growth in our targeted market segments.

Second quarter consolidated earnings were $512 million representing 18% growth over second quarter 2012.

Regarding the segments, I will first comment on our global healthcare segment.

Overall global healthcare results were strong, particularly for our commercial business.

Second quarter premiums and fees grew 5% to $5.7 billion reflecting strong contributions from both our commercial and seniors businesses.

We ended the second quarter 2013 with 14.3 million medical customers representing year-to-date growth of 241,000 customers, or 2%, over year-end 2012.

Second-quarter earnings in global healthcare increased 10% to $403 million and were driven by favorable medical costs, strong revenue growth in specialty contribution and operating expense efficiency results.

Turning now to medical costs, we continue to deliver attractive medical costs and clinical quality for our clients and customers.

Medical costs also reflect a continued low utilization trend.

As a reminder, 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 second quarter 2013 medical care ratio, or MCR, was 78.7% on a reported basis, or 79.5% excluding prior-year reserve development.

In our seniors business, our second quarter MCR for Medicare advantage was 82.9% on a reported basis, or 83.3% excluding prior-year reserve development.

Across our commercial and seniors risk businesses, our second quarter earnings included favorable prior-year reserve development of $20 million after tax, compared to $17 million after tax in second quarter 2012.

We are pleased with the results of our medical risk businesses as they continue to reflect both a strong pricing and disciplined under-earning approach and continued effective medical management and physician engagement.

Moving to operating expenses, for the second quarter 2013 the total global healthcare operating expense ratio was 21.7%.

This ratio has improved over time reflecting our ongoing commitment to drive expense efficiency while maintaining strong service levels and continued funding of strategic investments.

To recap, we had a strong quarter in our 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 35% quarter over quarter to $613 million driven by contributions from our recent acquisitions, most notably Great American Supplemental Benefits and our Turkey joint venture as well as strong customer retention and business growth primarily from South Korea.

Second-quarter earnings in our global supplemental benefits business were $49 million representing a substantial increase over a depressed second quarter 2012.

For group disability and life, second quarter results were very strong.

Group premium and fees increased 10% over the second quarter of 2012 to $846 million and second quarter earnings in our group business were $104 million.

The quarters earnings included favorable claims experience in the disability book partially offset by unfavorable life claims.

The quarter also included a $27 million after tax favorable impact from a reserve study on our group disability business which compares with a $35 million favorable impact from a similar study in second quarter 2012 and a $14 million after tax favorable impact related to a higher discount rate for reserves as a result of the transfer into the group disability portfolio of higher-yielding assets previously supporting our run-off reinsurance business.

The results for our remaining operations totaled to and after-tax loss of $44 million for the second quarter of 2013 which is primarily interest expense in the corporate segment.

Turning to our investment portfolio, we are pleased with our results in the second quarter.

Our commercial mortgage loan portfolio is performing well.

During the quarter we completed our annual review of our $2.6 billion mortgage loan portfolio which indicated that there had been an improvement in the average loan-to-value ratio to 64% as well as improvement in the average debt service coverage ratios.

Our strong investment management capabilities, diversification of our investment portfolio and our disciplined approach to risk management continue to deliver solid results.

Overall, as a result of the continued effective execution of our strategy, our second quarter results reflect strong revenue earnings contributions from each of our ongoing businesses as well as significant free cash flow.

Now I will discuss our full-year 2013 outlook.

We now expect consolidated revenues to grow in the range of 9% to 11% over 2012.

Based on the strength of our second quarter results, we now expect full-year 2013 consolidated adjusted income from operations of approximately $1.8 billion to $1.9 billion.

This range is higher than our previous expectations and reflects strong underlying results in all of our businesses.

We now expect full-year earnings per share in the range of $6.25 to $6.65 per share which is an improvement of $0.20 to $0.25 per share over our previous expectations.

Consistent with prior practices, our outlook excludes any contribution from additional capital deployment.

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 $1.5 billion to $1.57 billion, an increase of [$15] million to $30 million.

This increased outlook for global healthcare primarily reflects second quarter favorable prior-year reserve development and favorable medical costs with overall low utilization relative to expectations.

I'll 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 full-year 2013 customer growth of approximately 1% to 2%.

Relative to medical costs, for our total US commercial book of business, we now expect full-year medical cost trend to be in the range of 5% to 6% which is 100 basis points lower than our prior guidance.

We now expect 2013 medical care ratio to be in the range of 81.5% to 82.5% for our US commercial guaranteed cost book of business which is 100 basis points lower than our previous expectations.

For our seniors business, we continue to expect our Medicare Advantage MCR for 2013 to be in the range of 82% to 83%.

Turning to operating expenses, we expect our total global healthcare operating expense ratio to improve approximately 50 basis points over 2012's full year ratio of 22.6%.

Now, moving to the other components of the outlook, for our global supplemental benefits business, we expect continued strong topline growth and now expect earnings in the range of $180 million to $200 million which is an increase of $20 million from our previous expectations and represents earning growth of 22% to 35% relative to full-year 2012.

Relative to operating expenses in global supplemental, we expect to increase our investment in product, distribution and geographic expansion to support growth in this segment during the balance of the year.

Regarding the group disability and life business, we now expect full-year 2013 earnings in the range of $280 million to $300 million an increase of $10 million over our previous expectations.

Regarding our remaining operations, we now expect a loss of $165 million in 2013.

So all-in, for full year 2013 we have increased our outlook for consolidated adjusted income from operations to a range of approximately $1.8 billion to $1.9 billion or $6.25 to $6.65 per share.

I would also highlight a number of items reflected in our outlook that impact our earnings pattern in the second half of the year relative to the first half.

Including, the absence of favorable first-half prior-year reserve development and increased -- expected increase in strategic spending in third and fourth quarter in global healthcare and additional spending to support growth in our global supplemental businesses.

Finally, while the net earnings impact of the Catamaran arrangement is expected to be immaterial in 2013, there is a lag in the timing of the incremental pharmacy savings benefits relative to the transition cost spending between the third and the fourth quarter of 2013.

This pattern of transition cost spending and other strategic spending could dampen third-quarter earnings by $0.10 to $0.15 per share.

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 $575 million.

During the period May 2 through July 31, we repurchased 3.3 million shares of Cigna's common stock for approximately $250 million.

Year-to-date we will repurchased 7.2 million shares of stock for approximately $500 million.

After considering all sources of parent company cash and setting aside $250 million to meet liquidity needs, we now expect to have approximately $1 billion available for cash -- capital deployment during the balance of the year.

Overall our capital position and updated outlook are strong and reflects the underlying performance of our operating segments.

And our capital deployment strategies and priorities remain unchanged.

Now to recap, our second quarter 2013 consolidated results reflect the strength of our global portfolio of businesses and a continued track record of effective execution of our focused strategies.

The fundamentals in our business remain strong as evidenced by our second quarter results which reflected attractive growth in revenue and earnings in each of our underlying businesses, the finalization of our strategic pharmacy benefits arrangement to deliver market-leading value to customers and continued targeted strategic investments which will enable us to sustain growth into the future.

Based on the strength of these results, we are confident in our ability to achieve our increased full-year 2013 earnings outlook.

With that, we will turn it over to the operator for the Q&A portion of the call.

(Operator Instructions)

Ralph Giacobbe, Credit Suisse.

Thanks.

Good morning.

Just want to start with the guidance, just understand a little bit better.

You've done sort of $350 million in earnings in the first half, kind of implies a $275 million to $315 million-type range for the second half.

I know you did $325 million last year and I think in previous calls you had suggested that second half was actually expected to be stronger than first half, at least within the global health.

So I know you provided some color but anything incremental to help us bridge that gap in terms of earnings being down compared to kind of sizable first half growth?

Well, it's Tom.

The first place I'd start is we're really pleased with the results in the first half of the year.

So again, based on those strong results we have increased our guidance.

As far as thinking about how the year progresses, you know the growth and pricing dynamics are largely locked in for the balance of the year.

We've got some normal pluses and minuses in the second half, we've got expected strength in PDP, we've got some pressure from high deductible claim costs for the last half of the year.

We also are anticipating favorable prior year reserve development or disability reserve study impacts in the second half of the year.

So all that factored income combined with the anticipated increase in strategic spending, leads us to believe that our full-year outlook looks pretty reasonable.

Have you quantified the strategic spending amount?

We really haven't.

We're talking about some ramp up in telemarketing or affinity partner relationships in our supplemental benefit business, some additional capabilities to support customer engagement in the US, but we really haven't quantified that for you.

Okay.

And then just my follow-up.

Any updated thoughts on the ASO business?

Obviously you've had good growth there over the last kind of couple years particularly moving down stream.

I guess any thoughts on the competitive landscape?

Are you seeing any more pressure there?

And then I guess in your conversations with employers do you get a sense of any greater shift beyond the norm into 2014?

Thanks.

Ralph, good morning it's David.

I would say macro, no seismic shift, broadly continued elevation in interest in what we call the more transparent funding mechanisms and ASO is highly transparent.

And so a continuation of that progress, as you know, greater than 80% of our total portfolio is in ASO.

And the reason why we believe you see more interest in it is the alignment of incentives.

So we're able to get the transparency with the employer as they're trying to get a more engaged wellness preventative care model with their employees and it works in a very positive way.

And we're seeing that traction throughout all of our segments.

On a final know you said downmarket so our select segment targets employers with 51 to 250 employees.

We continue to see great progress there as employers are seeing this as an attractive alternative.

What about the competitive landscape?

No broad change in the competitive landscape.

From a pricing standpoint maybe a little bit more competitive activity as some competitors who have previously not had ASO or self-funded downmarket beginning to explore those opportunities.

Which we expect it to transpire as that market unfolds.

Okay, thank you.

Thank you.

Josh Raskin, Barclays.

First question is on David.

I think you said 2014 you're expecting competitively attractive revenue and earnings growth so, does that just mean relative to your peers or do you expect absolute earnings growth next year?

And maybe within that following up on the last question, would you expect ASO national account membership to be up or down to start next year?

Good morning, it's David.

Two points.

No to 2014, we have not provided 2014 outlook or guidance so we're not providing you specifics.

You did hear me correctly in that we continue to indicate that we expect, because of the diversity and performance of our portfolio, that our 2014 results will be competitively attractive for both revenue and earnings.

But we have not yet provided specific outlook and guidance.

The reason why we expect that competitive attractive result is both the consistency of our execution and the positioning of our businesses that have very attractive growth outlooks such as our global portfolio of businesses, such as our US healthcare portfolio of business focused now on the ASO and the more transparent funding mechanisms.

As it relates to the second part of your question, for US national accounts at this point in time that's the part of the portfolio where we have reasonable visibility into so let me give you a little color there.

First and foremost we define that segment differently than the competition.

So, we define that segment as commercial employers with 5,000 or more employees that are multi-state.

Our definition tends to define it more narrowly.

Within that portfolio, as we've consistently talked with you about over the last several years, that defined employer group has net shrinkage in an employment base of 1% to 2% and has had because of the economic environment.

So, let me give you a little color.

From an RFP standpoint, our RFP volume for 2014 was down a bit relative to 2013 as we see more employers trying to assess the healthcare reform.

Second piece of interest, we had the same amount of finalist meetings to attend for 2014 as we did for 2013 so you can conclude that the quality of the RFPs or of the alignment with our value proposition was high.

Third, the percentage of our book of business that was out to bid for 2014 was also a little lower than 2013.

So, taken as a whole, while not complete yet, as we look to 2014 for national accounts, we'd expect our customer and client retention level to be up somewhat, to have a reasonable net sales outcome and then to have a net membership performance that's on or about the national average of that segment.

So think anywhere from minus one, minus two up to plus one from a range standpoint which is where we've strategically targeted that portfolio business to perform.

Okay.

That's perfect, that make sense.

You're seeing a little less activity I guess just broadly in front of reform.

And then maybe on Cigna 2014 on the Medicare Advantage front, I'm just curious, I'm guessing just based on your footprint and model that there's probably not going to be a lot of market exits.

I'd be surprised if there were.

But I'm curious if you are anticipating any market exits from competitors in some of your markets?

You tend to be a little bit more rural.

And wondering if we should be thinking about a period similar to sort of the early 2000s after the BBA where HealthSpring was a net share gainer in a meaningful way as competitors had trouble keeping up.

Is that consistent with what you're expecting or what you're seeing already?

Josh, it's David.

Time will tell.

We don't have to wait very long to get into the fall cycle to have clarity in terms of what that looks like.

But first and foremost stepping back, as we look to 2014 and as we've talked about before, make no doubt the environment is a disrupted environment.

That will impact both product offerings, price points of product offerings, market positions of competitors including ourselves and unfortunately some disruption for seniors.

We're seeking to minimize that for the benefit of our customers.

Secondly, our expectations are unequivocally to grow our customer base further in 2014 as we focus on our continued Go Deep strategy in those respective markets.

Specific to your point we will have some targeted market exits.

It will be small.

Think about -- right now we're thinking about that maybe 2% to 3% of our underlying covered lives.

And lastly to your point, we expect for both 2014 as well as 2015 there will be some disruption that's triggered from a market exit as this product line gets constrained based on the federal government's policy and we think that creates net opportunity for us relative to our level of focus.

Scott Fidel, Deutsche Bank.

Thanks, good morning.

First question, just interested now that you have over a year of integration booked with the HealthSpring and looking for around $1 billion of deployable capital in the back half of the year, just interested your updated thoughts on M&A at this point and whether you're honing in on any opportunities, either domestically or internationally, or do you think that capital deployment would be more biased towards share repurchases looking out over, let's say the next six to nine months?

Morning, Scott it's David.

So, first at a macro level our capital deployment priorities have not changed.

And just as a quick reminder, our number one objective is to make sure the underlying portfolio of businesses are properly sourced and capitalized.

And we run a well-capitalized business and subsidiary environment.

Second then is to evaluate and pursue on a targeted basis attractive M&A opportunities.

And third is to return excess capital to our shareholders.

Specific to your point around M&A priorities, broadly speaking our priority targets, the categories of our targets relatively speaking haven't changed.

We continue to be open to targeted opportunities that will further expand our already very attractive global portfolio.

Secondly, opportunistic relative to further expansion of our seniors footprint including capabilities that may assist us in the emerging duals marketplace.

And then finally, point three is expanding our retail, we call it not individual but retail based on portfolio's capabilities.

So we're open to that and we have platforms with which to integrate.

As Tom pointed out in his prepared remarks, the continued strength of our operating execution positions us with a very healthy amount of free cash flow for deployment this year and for consideration and we would expect to continue that strength of operations as we go forward.

But headline here is no change in capital deployment priorities.

Okay.

Then, just a follow-up question.

Just would interested in just an update on the environment for the international businesses.

Looks like performance remained very strong in the second quarter as measured by the global supplement business in particular, but clearly there's been some slowdown in some of the economies in emerging markets and in China.

And just interested if you're seeing any impact on demand from some of the international economic slowdown or do you continue to see continued stable and strong demand for your products?

Scott, it's David again.

So two specific businesses, as you know, we operate under a global notion.

First and foremost, and I'll comment on your specific question in a second, what we call the globally mobile population.

So comprehensive products and solutions offered to corporations, IGOs, NGOs and then on a target basis high net worth individuals who want a very comprehensive high service coverage around the globe.

We see continued demand and opportunity around that and as I referenced in my prepared remarks, we're able to leverage the broadest and largest delivery system portfolio in the world, a multicultural service environment, a multicultural clinical management environment and we see continued growth opportunity.

Specific to the business you referenced, our global supplemental benefit business, you're correct.

The global economy is challenged and we expect will be challenged.

Our model has us focused on the both emerging and recently established middle-class.

The outlook in our targeted markets there is quite attractive relative to the underlying economy.

Second point is key to our success is continued innovation of our products so understanding the needs of that population in innovating both products and distribution channel to match those needs and the headline here is we continue to see a very attractive outlook in our targeted geographies whether they be emerging, developing or developed countries for those targeted supplemental benefits.

Great.

And, David, would you just mind just within that flagging how the start up of the Turkey operations is progressing so far?

Sure.

And nicely done sneaking in a third question.

Turkey is a very attractive market, Scott.

As you look at the macro make-up of that market.

We did a two-step there.

We started with initiation of an organic footprint and then we were able to have a great opportunity for a joint venture with Finansbank.

I mentioned it briefly in my prepared remarks, but we're very pleased with the first year of progress there.

We're quite pleased with the first year of progress there.

That joint venture helps us accelerate an organic path very significantly and begin to accelerate innovation of new products and services.

Early, so you're always cautious in the early cycle, but growing and profitable with some very attractive opportunities for growth.

And the last comment I would add there is that government continues to be a bit innovative relative to making sure they're evolving policies to assist what the population needs.

So we have a positive outlook for that market.

Christine Arnold, Cowen.

Good morning.

Could you update us on efforts at the NEIC, CMS and other reports we've recently seen limiting small-group's ability to self-insure and how that might impact you going forward?

Christine, good morning.

It's David.

So, I think as you're going at the self-insured question for small group, specifically then you're going at the self insurance and the self-insurance cohabitating with stop-loss or catastrophic cover.

Exactly, they're trying to limit the attachment points.

Specifically, state activities, NEIC activities we continue to be highly and actively engaged on both work streams as you know, that's a core part of what we do across multiple business segments.

Couple headlines.

One, high support for in a very vocal movement amongst employers to ensure that those products and those services remain in the marketplace.

Because we're offering significant value in enabling employers to have aligned incentives and seeing meaningful movement and progress around prevention, wellness engagement and therefore improvements in health productivity and overall cost.

That's point one.

Two is from a Cigna standpoint, I'd ask you to remember that when you think about small employer or commonly defined as under 50, think about us as having a de minimis population there.

Thinking about that as a non-target.

So well less than 100,000 lives and when I mean well less, well less than 100,000 lives.

So that is not a target segment for us.

So, headline, highly engaged in the conversation to make sure you're illuminating how the programs work when responsibly and effectively designed.

Two, a very active voice from the employer landscape demonstrating the value.

And three, from an under 50 life or the small employer life that is not a target business for Cigna going forward.

Okay and then follow-up.

ASO yields looked a little bit light this quarter.

Was there some one-timers or some unusual things going on there that we should be thinking about?

Christine, it's Tom.

I'd think of that just as normal variability, nothing particular to point out.

Okay, thank you.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, great, thanks.

I guess this may not be a completely fair question for you, but it just feels to me like the tone from the Company is around MA for next year.

Although everyone still acknowledges the disruption that the rates are going to create, it seems like the tone has gotten a whole lot better over the last few months.

Is there anything in particular as you've evaluated the rates and your ability to respond on the rates that makes you felt a little bit better about your positioning and your ability to say with confidence you're going to be able to grow membership next year?

Any initial thoughts about the ability to maintain profitability while growing that membership next year?

Kevin, it's David.

So a couple different points in there.

One, just coming back to our macro point.

From our point of view, it is and will be a disrupted environment.

Two, our orientation around both our Go Deep geographic focus so what Cigna's historical orientation around that and HealthSpring's historical orientation are highly aligned.

And three, our ability to continue to partner effectively with physicians to deliver outstanding value.

When we take that picture together while disrupted, we believe that based on our prior performance both in disrupted environments we will grow covered lives.

We have a great value proposition in those targeted geographies.

The second point is your question is can you do so profitably?

The history of Cigna and the history of HealthSpring is to orient to make sure that books of business are sustainable and therefore profitable.

So we'll do it in a, I'll call it a shareholder responsible way, because we want to have long-standing relationships with our customers that are sustainable over a long period of time.

And we're pleased with the positions we are able to take in our respective markets relative to the disruption and obviously over the near-term we'll see the overall competitive landscape and the enrollment cycle will take place in the fall as we step forward.

But as we stand here today we expect to grow covered lives in our targeted geographies for 2014 for sure.

Okay.

And then just on the cost trend, 100 basis point reduction in cost trend in the quarter, is a pretty big move.

Can you just talk a little bit about what the main factors are driving that reduction?

Kevin, it's Tom.

Again we've been really happy with the competitively attractive results we've been able to deliver in medical cost trend for quite some time.

The improvement in the outlook is generally driven by lower outpatient utilization than previously expected and now we're kind of seeing all the key elements of trend kind of in the same mid-single-digit range for the year.

Okay, great, thanks.

Justin Lake, JPMorgan.

Thanks, good morning.

First question is on private exchanges.

Dave, can you give us a view on what you think the three-to-five outlook is -- three-to-five-year outlook is for this distribution channel and how you think it could impact your business going forward?

Justin, good morning.

So, relative to private exchanges, a couple points.

First, very early innings of evolution relative to private exchanges.

Secondly, there is a variety of offerings that are in the marketplace today that are formed for very different reasons.

Let me give you an example and then I'll address the core of your question.

So some of the private exchanges are designed to, from our point of view, improve the retail purchasing experience for individual employees or customers, that's positive.

Some are designed to do that and to further advance adoption of engagement incentive-based programs, et cetera.

And still some further are designed to shift risk from the employer more meaningfully to the employee.

Beyond that some of the exchanges are designed to be multi-carrier, some are designed to be single carrier, some are designed to be risk-funded some are designed to be ASO funded.

So my point here is one, it's early and two, they're not all created equal.

From our point of view what we're playing in many, many of the exchanges and positioned to play in many, many of the exchanges and as we've consistently done in the past we'll seek to partner and focus where we think we could work with others to create meaningful, sustainable value for clients and customers.

Last note I'd make here is we've designed, developed and will rollout in 2014 a proprietary exchange as well that's focused on employers who value both those incentive and engagement-based programs as well as packaged alternatives.

That will provide quite attractive flexibility from an employer to configure what they want and for an employee to configure what they value and lever that up against the right funding alternatives.

Really sophisticated multi-modal service capabilities as well as an attractive savings to come along with those intended dates and package alternatives.

Last piece you asked for a three-to-five-year horizon.

The best part I can give to you in a short answer here is this, like many parts of the healthcare marketplace, are changing and we are keenly focused on making sure we're engaged to be able to create value and this is an example of change and to my mind where some efficiency and transparency and choice can be brought into the marketplace.

And we have examples of how to play here both in the US as well as outside the US.

So we're actively engaged in the early innings here and we have some proprietary capabilities to play in the space as well.

Any thoughts on how big a market this is going to be or whether it's going to be full risk or ASO?

Justin, I don't think it would be constructive for me to theorize on some of those percentages given the early time frame.

I also don't think there are many credible third-party assessments relative to it.

I do think if you step back, though, and you think about just changing distribution environment, if you look at other industries you could point toward the broad category of changing distribution around choice and transparency and illumination of value as being a trend that many industries go toward.

We're comfortable in that environment, we're comfortable competing based on value and the totality of our business is really around knowing and understanding the customers' needs and offering the right choice and transparency.

But I can't give you a direct percentage to either of those categories at this point.

Okay and then so maybe my follow-up then will be David, you mentioned there is more competition downmarket in ASO.

Can you flesh that out a bit in terms of what is changing there and how it might impact your ASO growth going forward?

Sure.

An interesting way you framed that so you said maybe your follow-up will be so I guess you didn't like the comments on the private exchange.

(laughter) So I'll try to be very pin-pointed here, Justin, for your very fair question.

So what's transpiring you can see some competitors filing new product offerings, et cetera and very importantly we expect and expected that to transpire.

And for us to be successful we need to continue to innovate.

A couple pieces here; when you think about down-markets, so 100-life employer, 150-life employer and an ASO stop-loss offering, the entire delivery platform that you use to serve that employer is different than what you're going to use for a regional or a national [ifound] employer.

Your ability to produce on a monthly basis reports that are actionable and transparent for both the employer as well as the broker to understand how their money is being deployed and where the opportunities for improvement exist.

And then to be consultative, modifying communication plans, incentive programs, network modifications, clinical programs that's really the fundamental success that goes into this.

So, early on, candidly, more employer -- more competitor dialogue here actually creates more opportunity for us.

Because it lathers up the market even more significantly, and secondly so long as we continue to innovate off of our very attractive platform we see strong growth opportunities as we look to the future.

Matt Borsch, Goldman Sachs.

Maybe just picking up on that last topic.

What are you seeing at this point five months ahead of reform implementation in terms of the pace of ASO conversions?

Is this something that's meaningfully accelerating as employers look to make those changes ahead of implementation?

Good morning, it's David.

My headline answer to you would be no.

Now backing up from that, we had seen over the last several years a continued increase in demand for, interest in and adoption of the more transparent programs.

And that continues, but we do not see -- and remember we don't play under 50-life.

So my comments here are above 50-life employer.

We do not see an overnight sea change relative to the desire, demand or acceptability of the programs.

Rather we see a continued elevation in interest and awareness relative to employers and relative to brokers who are seeking to offer alternatives that are transparent and create value over time, and that's a very attractive position for us to see and be in.

Thank you.

I also wanted to just ask about the guaranteed cost side of the business in terms of the pricing that you're seeing there from competitors, whether that's evolved at all as we've moved through this year and maybe underlying cost trends have been pretty favorable throughout the industry.

And related to that, has it been a relatively smooth process on the guaranteed cost side of passing through the industry fee including the gross up to account for the fact that it's not tax-deductible?

Matthew, it's Tom.

So first on the first part of your question, we really haven't seen a dramatic change in the competitive environment on the guaranteed cost side again.

You can come up with an anecdote or two here or there, but generally conditions in that market segment have been consistent.

To the question on general pricing and the industry fee in particular.

As you know, we tend to have a pretty disciplined pricing and underwriting approach and the industry fee is another cost factor we built into our process and we understand the tax dynamics of it and we have included that in the amount we need to recover as we set our prices and expect that to continue going forward.

Thank you.

Ana Gupte, Dowling & Partners.

Thanks.

Good morning.

Just following up on the distribution questions that were being asked earlier and just more broadly beyond private exchanges this notion that you're moving more from group to individual.

Just wanted to get your thoughts on the growth opportunity in supplemental and voluntary benefits, specifically because you play globally and compete with players like AFLAC who are making noises about this and then on the life side it seems like Met and Pru and others are also pointing to this as a sizable growth story?

Ana, good morning, it's David.

Two comments; first, before I'll comment again the supplemental and voluntary, very important points.

Call it employer to individual, one piece I just want to highlight is when you think about the national accounts and in many cases the largest of the regional employers, in a lot of cases we're operating in a B to B to C relationship today already where we're one of choice.

Meaning we're a choice that's offered but not the only choice.

So to be successful you need to have a both a wholesale and retail experience that works and that has been increasing over time.

The positive of that is that enables us to evolve and hone some capabilities that are more retail-oriented.

Now more specific to your supplemental and voluntary comment, we do believe if you step back and you look at markets around the globe, and you look at change in the way, I'll call it comprehensive of the primary benefits are offered, you'd end up seeing a large and evolving supplemental or voluntary series of programs that exist.

And we think in the United States the growth of supplemental and voluntary, supplemental being sold direct to individual, voluntary sold to an individual but through an employer as an affinity or aggregator, we think that marketplace will grow.

Lastly, the combination of both our existing, I'll call it US set of capabilities around supplemental and voluntary, but our broad set of capabilities around product design, individual insights, direct to consumer distribution service capabilities that we're effectively able to apply in multiple countries and cultures around the world gives us an important set of capabilities to be able to level as this marketplace unfolds here in United States.

So we see that as an attractive opportunity.

So in light of this growth opportunity, I do get questions from people investing in the life side of the business.

Do you think your health players are positioned better or are the life guys positioned better or someone like yourself that plays in both and might you invest in some new distribution channels like private exchanges or carrier specific private exchanges so you can capitalize on that group?

Ana, I typically don't like to generalize so I would not say life players are better positioned or health players are better positioned.

A couple things I'd ask you to think about or at least the way I think about it, one is to be successful here we believe you're going to need deep and sustainable insights around the customers' current and evolving needs and the ability to subsegment and micro segment.

Because the ability to thrive over time and have long-standing supplemental and voluntary relationships, not just to push a product but to actually sell a highly valued product is going to be based upon that customer knowledge and those customer insights.

The second piece is the multiple distribution channels that work and meet the needs of those subsegments, that's what we do all day, every day outside the United States.

And then just teasing up against that some players will find themselves confronting massive channel conflict.

We see that outside the United States all day every day.

If you have a primary distribution channel that's oriented in one way when you try to bring up a different distribution channel up against that to meet a customer's needs you get massive channel conflict.

In the United States we are not labored by that in any way, shape or form.

Lastly, your tie back to investments.

When we talk about our priorities around investments the third category we talk about from an inorganic standpoint as well is additional retail -based capabilities.

And it underscores this, for example, as an evolving marketplace not limited to but this is an evolving marketplace.

So we'll leverage our non-US capabilities, our current US capabilities and we'll seek to augment that further going forward.

Thanks, that's helpful commentary.

AJ Rice, UBS.

Hi, everyone.

Thanks.

Maybe first just -- I know it's an area where you're more targeted and opportunistic, but any updated thoughts on how the rollout of the public exchanges under ACA is going?

Are you seeing more opportunities, less opportunities than you thought and any reaction to the initial data that's been available?

Good morning, AJ, it's David.

So, just a moment of backdrop and then specifically where we are.

As I think you know, at Cigna our history is that we've not played in both the under 50 life as well as the individual guaranteed cost market.

The relevancy of that is both A, we don't have to protect a legacy revenue or earnings stream and B, we don't have an old business model that has to be changed to a new business model, we can take a fresh look.

To that point, we run pilots for the last three years in ten different cities, to be able to test a variety of product distribution, service orientation programs and successfully we're able to take away some very good matchable earnings.

As it relates to the exchange marketplace, as I think you know, we sought to play in five states and then in a limited number of markets within those states.

As we look at our wrap and stack of our positioning for the subsegment of buyers we're seeking to go out, I think our headline would be no great surprises there and we're going to take a very focused cautious view in terms of the early on entree into the markets.

We do view that over time this may present an attractive growth opportunity that's sustainable, but currently taking a very focused and disciplined approach for 2014.

Okay.

And then very specifically maybe on the disability and life segment, I know last quarter you called out that you had some unfavorable experience on the disability claim side.

This quarter you're calling out that you had some favorable.

Maybe a little commentary around that.

And should on the reserve study benefit and also the discount rate assumption will that -- are you assuming that there's benefit from either one of those in the back half of the year as well?

AJ, it's Tom.

So again as you point out, the disability business has had a few ups and downs this year and this is a segment where we're really happy with the core capabilities we have.

We've got great productivity and return to work tools and a great team.

Over the last few years we've had the constraints of a difficult economy.

In the first quarter of this year you might recall we made some model changes that we thought would have some negative impact to disability results.

And in fact we reflected that in the first quarter results and the reserve changes -- special item reserve change in that quarter.

This quarter, we're really going through more of the normal process of assessing what the outlook for the business is and the reserve studies.

And also, seeing a little better metrics on the bread-and-butter claims indicators in disability that may be tied to some stability in the economy.

We tend to continue to have a model where we look for continued improvement and outcomes in this business.

And we do think about that when we set our outlook for the year, for example for the balance of the year and as we were coming into this year.

Now, sometimes those improvements show up in better operating results, current period operating results, sometimes those improvement show up through a reserve study impact looking back on claims we've already had an inventory.

So that's a little bit of the mischief and the timing of the group disability results.

But what the current outlook for group does kind of net all those impacts out, both the clay model changes in the first quarter, the somewhat improved dynamics in the disability results evident in the second quarter, plus some pressure from life claims that we're seeing right now dampening some of improvements in the last half of the year.

So all-in, all those factors are considered in our outlook for group.

Okay.

All right, thanks a lot.

Carl McDonald, Citigroup.

Thanks.

Interested in your thoughts on the sustainability of earnings, specifically in the experience-rated business.

I know you don't disclose a loss ratio for that product, but it does look like that's run at some pretty favorable levels in the first half of this year.

So I'd be interested in what you're assuming in second half and then also into 2014, given the dynamics of those contracts?

Carl, it's Tom.

As you point out we don't really give that level of detailed results, but just to respond to your general inquiry, there's really nothing mischievous going on in experience-rated.

That's a product that really hunts well for a segment of the market.

Again, it's customers that are willing to engage and expect to be able to invest in health improvement.

We've had great result there historically, don't really see any change in that prospect going forward.

So, I'm feeling pretty comfortable about where we are in experience-rated.

Okay, thank you.

Dave Windley, Jefferies.

Good morning, it's Dave [Stibler] filling in for Windley.

One quick clarification on your comment earlier about market exits and senior business.

I think it was representing 1% or 2% -- excuse me, 2% to 3%.

Was that of the total membership of plans that you're withdrawing from or is that kind of the net impact of how many of your members won't have access to another HealthSpring slash Cigna plan?

Dave, it's David.

We think about that as essentially disruption to the current aggregate MA-covered lives.

There are some other product alternatives we have that will be made available, but that's a disrupted number and you recall correct, it's 2% to 3% of the MA product in the overall portfolio.

Okay.

Can you size that, what -- of those 2% to 3%, how many will have another alternative plan?

For our planning purposes, we're -- that would be upside because it's hard for us to determine whether or not the other offerings will meet the needs of those specific customers.

But I think it's safe for you to assume that that 2% to 3% is a pretty firm estimate that we have in terms of disruption from the MA portfolio.

Okay, great.

And then my follow-up is you had talked about your CACs expanding, supporting over 1 million customers now.

Can you talk a little bit more about the things that we can watch for as you go forward?

What your targets are for that and then how many of your -- how much of your medical costs are running through that?

Sure, Dave, let me give you a little color relative to this because there's absolutely a lot of buzz in the market relative to the broader ACO movement and what we call our Collaborative Accountable Care relationships.

First and foremost we've been at this now for, believe it or not, six years in the commercial space and well over a decade because of the legacy HealthSpring in the MA space.

And our approach is to use this as a preferred -- ultimately a preferred network alternative in our Go Deep markets because it's proving to have the highest value by balancing access, accessibility, cost and quality.

We don't orient around it as a separate P&L or a separate technology initiative going forward.

As I indicated, we have over 1 million lives being serviced today.

We expect that to continue to grow significantly.

We have a meaningful number of collaboratives up and running, think in excess of 60.

And now really the focus is making sure that we're able demonstrate that the sustainability of those results for the benefit of our clients and customers we're driving the retention rates ultimately enabling the cross sell rates and enabling the growth in the respective markets.

Lastly, to your point, at this point we don't think it's helpful to try to estimate the aggregate medical costs flowing through because again we can have fun with numbers there, I could take all the chronic data and any chronic is being touched by those physicians and get you some pretty big numbers which we have.

I don't think they're actually helpful, but rather we see these as preferred networks in our Go Deep markets that are delivering, as I indicated even in the prepared remarks, meaningful cost improvement, as Jackson Clinic is demonstrating at 5% cost improvement, along with quality improvements.

And we see more opportunity going forward to continue to grow those for the benefit of both our MA customers as well as commercial customers.

Got it, thanks, guys.

Brian Wright, Monness Crespi Hardt.

Thanks, good morning.

In the global supplemental benefits what percent of the other geography is Turkey and is that a market that you could see as large as your Korea market?

Brian, it's Tom.

I'm not sure I could give you the exact percentage, maybe one of these guys can come up with it before we're done.

But it's in a start-up stage right now so it's not a meaningful -- it's not a huge contributor in the early stage but, as David has pointed out, we do view Turkey as a very significant contributor in the long run.

So we would expect that it could go -- grow to be a size to rival Korea over time.

Okay.

And then on another note in the MA, MLR in the quarter the year-over-year increase, is that basically most of that -- what percentage of that was planned to get to the minimum MLR kind of regs going forward?

Brian, it's Tom.

I would say most of it was of that design.

Again, I think you understood we had MLRs in some plans that were running well below the floors that we'll be dealing with and we had anticipated conscious program changes to increase the MLR.

Okay, thank you.

Chris Rigg, Susquehanna Financial Group.

Thanks for squeezing me in.

Just wanted to -- with regard to the pension funding and the amount of monies you're going to put into there this year, is that $1 billion available for capital deployment net of what you're going to contribute?

Or just any color what we should assume going for the rest of the year?

Chris, it's Tom.

Yes, so the $1 billion net available for capital deployment is net of all the other parent cash flow needs we would expect including interest expense and the pension plan contribution.

And as it happens the pattern of timing this year most of that $250 million pre-tax pension plan contribution hasn't been made yet, will be made in the last half of the year.

But the $1 billion of free capital available for deployment in the last half of the year is net of debt funding expectation.

Okay, great.

Thanks a lot.

Thank you, Mr. Rigg.

I will now turn the call back over to David Cordani for closing remarks.

Thank you.

So in closing I'd like to emphasize a few highlights from our discussion this morning.

We're pleased with Cigna's second quarter results which reflect strong revenue and earnings contributions from each of our ongoing businesses.

These strong results give me confidence in our ability to achieve our full-year 2013 earnings outlook.

We continue to make targeted investments in solutions and market expansion to support the sustained growth of our businesses and the combination of our clear strategy consists in execution and sustained investment and capabilities positions us well to deliver competitively attractive results in 2013 and beyond.

We thank you for joining us today for our call and your continued interest in Cigna and we look forward to our future discussions.

Ladies and gentlemen this concludes Cigna's second quarter 2013 results review.

Cigna Investor Relations will be available to respond to additional questions shortly.

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