信諾集團 (CI) 2013 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Ladies and gentlemen, thank you for standing by for Cigna's third quarter, 2013 results review.

  • (Operator instructions) We will conduct a question and answer session later in the conference.

  • (Operator Instructions) As a reminder, ladies and gentlemen, this conference including the question and answer session is being recorded.

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

  • Please go ahead Mr Detrick.

  • Ted Detrick - VP of IR

  • 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 third quarter, 2013 results.

  • He will then discuss how our diversified portfolio of businesses coupled with the differentiated capabilities, position us well for sustained future growth.

  • Finally, David will conclude his remarks by making some brief observations about our expectations for 2014.

  • Next, Tom will review the financial results for the third quarter, and provide an update on Cigna's financial outlook for full year 2013, we will then open the line 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 accounting principles generally accepted in the United States, otherwise known as GAAP when describing its financial results.

  • Specifically, we use the term labeled, adjusted income from operations and earnings her 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, in our remarks today we will be making some forward looking comments.

  • We will 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.

  • Finally, please note that when we discuss our full year 2013 outlook, and discuss our expectations for 2014, it will be on the basis of adjusted income from operations.

  • In addition, our comments regarding both outlook and expectations for earnings per share, will be on a basis which excludes the effects of any future capital deployment.

  • With that I'll turn the call over to David.

  • David Cordani - President and CEO

  • Thank you Teddy and good morning everyone.

  • Today I will briefly discuss our financial performance from the third quarter, and review our outlook from the remainder of 2013.

  • Then I will address how our clear strategy and consistent focused execution across our portfolio of diversified businesses, continue to drive differentiated value for our customers and clients.

  • And attractive financial results for our shareholders.

  • I'll also highlight how our differentiated capabilities position us to continue to deliver attractive growth, and finally I'll provide some brief observations on our positioning for 2014.

  • I'll start with some highlights from the quarter.

  • Our focused execution of our strategies delivered strong third quarter results in each of Cigna's business segments, continuing our momentum for the first half of the year.

  • Our third quarter consolidated revenue increased by 10% totaling $8.1 billion.

  • The reported adjusted income from operations of $536 million or $1.89 per share, which represents a per share increase of 12% over a strong third quarter of 2012.

  • Turning to each of our business segments, our Global Health Care business again performed well this quarter, with continued favorable medical costs and disciplined operating expense management in a commercial business, partially offset by some pressure in Medicare Advantage results.

  • We reported strong contributions from our global supplemental benefits business, while making as expected, increased investments to position us for sustainable future growth.

  • In our group disability life business we delivered solid results and again, grew our book of business.

  • Our attractive consolidated revenue and earnings results extend our momentum from the first half of this year, and give us confidence that we will achieve our increased full year 2013 outlook.

  • Stepping back from our operating results and evaluating the market environment, we believe Cigna is positioned through our strategy of going deep, going global, and going individual.

  • To reach more customers in a personalized manner and to further improve affordability and critical quality.

  • Specifically, our strategy is helping us capitalize on some of the dynamics we are seeing in today's global marketplace including employers as well as individuals, looking for affordable healthcare solutions, an increased focus on transitioning to payment systems based on performance and value, rather than volume, and the continued emerging growth of the middle class around the world.

  • Beginning with the pursuit of affordable healthcare solutions, at Cigna we seem to engage and incent individuals in their health and wellness as well as the active management of acrotic and acute health conditions.

  • We then seek to leverage our leading physician partnerships where the focus is on differentiated clinical and service quality, as well as improved affordability.

  • We added nine new collaborative accountable care relationships in the third quarter, which underscores the priority we are placing on these programs, and the progress we are making in this critical area.

  • This brings us to a total of 75 collaborative accountable care relationships nationwide.

  • At the same time our move to further strengthen our PBM, which will further improve affordability is progressing well.

  • This puts us on track to deliver additional client flexibility in 2014, all while providing attractive shareholder returns.

  • In addition to these changes that focus on affordability and quality, we are also seeing market changes that focus on expanding access to insurance.

  • As you know this is unfolding if the form of both public and private exchanges.

  • The public healthcare exchange marketplace went live on October 1. At Cigna we have maintained a very selective approach to the first phase of the public exchange opportunity.

  • We are participating, we are in the best position to bring the greatest value to our customers.

  • As our go deep strategy suggests, we are sharply focused, as such we are participating in five states.

  • In these markets our relative product and price positioning is consistent with our initial expectations.

  • Relative to the private exchanges, the marketplace is in the very early stages of development and from our point of view, we expect a continued evolution of these models over time.

  • In fact we believe the private exchanges may create attractive sustainable opportunities for some employers, who view them as a way to get their employees more engaged in their healthcare programs.

  • At this early stage of development we have chosen to participate in many of the first generation private exchanges.

  • As we look to the future, we believe the best long-term outcomes will be delivered in an environment where both employees and employers are engaged to improve health and productivity, while seeking to leverage the most efficient positioning gauge and models.

  • When you consider this initial stage of evolution, and our differentiated health, wellness and physician engagement programs, as well as our proven direct to consumer engagement and marketing capabilities, that we have developed and deployed around the world, we believe the private exchange marketplace gives Cigna a potentially attractive opportunity over the long-term.

  • Turning now to how our strategy addresses our growing imperative for payment systems based on performance and value rather than volume, here we are referenced our significant progress in our CACs in the commercial market.

  • Now with 75 programs in place.

  • Another example is Medicare Advantage, where our focus remains on driving differentiated care coordination, outstanding customer service, as well as lower overall costs.

  • Fueled by value based rewards for physicians and healthcare system.

  • To that end today, approximately 75% of our Medicare Advantage customers are currently in a lined physician model to pay for value.

  • Our focus on ongoing patient service and clinical quality, improvement is underscored by our meaningful improvement in our 2014 Medicare Advantage stars ratings.

  • We are pleased with our progress based on the updated ratings.

  • We now expect about 40% of our Medicare Advantage customers to be in four star or better plans.

  • In addition, we are one of the few five star rated plans nationally, which is the only five star plan in Florida.

  • This rating enables customer enrollment year round, which is a significant competitive advantage.

  • This improvement can be partially attributed to our physician engagement model that we work physicians for the commitment to the triple aim goal which is to improve health outcomes, delivering greater value for customers, and driving better patient engagement and experience.

  • Positioning now to the global markets, we are pleased with the results of our focused execution of our go global strategy.

  • At Cigna we are capitalizing on the evolving global market dynamics, where the middle class is growing and as such, their needs are expanding.

  • We are effectively reaching new customers through market leading customer insights and marketing capabilities, combined with innovative distribution strategies.

  • Our carefully built relationships with affinity partners around the world, are helping us to reach customers with our innovative products.

  • As of today, we have more than 150 affinity partnerships and we are positioned to grow further.

  • For example in Thailand we recently deepened our partnership with Tesco, becoming the only insurance company to offer health and accident products to Tesco Lotus' super-stores, our leading customer centric retailer.

  • In China, Cigna and China Merchants Bank just celebrated the 10th Anniversary of our successful joint venture, and we are off to a good start with Cigna Finans, our joint venture partnership in Turkey.

  • These partnerships all bring valuable health, life and other solutions to serve the rapidly growing middle classes in these countries.

  • Consistent with our go deep, go global and go individual strategy.

  • Now looking ahead, grounded into the performance of our diverse portfolio businesses, which continues to deliver a track record of strong earnings and growth, I'm confident that we will achieve our increased full year outlook for 2013, and carry this momentum into 2014.

  • Specific to 2014, we expect it to be a challenging year.

  • With the implementation of new laws and regulations, and evolving distribution and care delivery models.

  • In this environment, we have positioned ourselves with a diverse portfolio of businesses and differentiated capabilities.

  • In 2014, we expect consolidated revenue and earnings growth over our increased 2013 outlook.

  • It is important to note that we will achieve this differentiated result, while we continue to invest for the long-term.

  • I would also remind you that our future expectations include the impact of any potential prior year reserve development, or future capital deployment.

  • We plan to provide detailed 2014 guidance during our fourth quarter call.

  • Over the long-term we continue to see a competitively attractive growth outlook for Cigna.

  • Now to briefly summarize before turning it over to Tom, Cigna's third quarter performance marks another quarter of strong top and bottom line results for our business.

  • This continued strong performance is driven by the contributions of our more than 35,000 colleagues, serving our customers around the globe.

  • Your successful execution of our strategy and leveraging our differentiated capabilities, across our diverse portfolio businesses in key global markets, we believe we are well positioned to deliver competitively attractive results for 2014, and over the long-term.

  • With that, I'll turn the call over to Tom.

  • Tom McCarthy - CFO

  • Thanks David.

  • Good morning everyone.

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

  • I will also provide an update on progress that we have made to improve our financial flexibility, which is one of our strategic priorities.

  • The quarter included strong revenue and earnings performance in each of our operating segments.

  • Quarterly earnings per share of $1.89, representing growth of 12% in the third quarter of 2012, and continued effective deployment of capital.

  • Overall, the quarter reflects continued focused execution of our strategy, and demonstrates the strong fundamentals 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.

  • Third quarter consolidated revenues grew 10% over prior years, to $8.1 billion driven by growth in our targeted customer segments.

  • Third quarter consolidated earnings were $536 million representing 10% growth over the third quarter of 2012.

  • Regarding segment results, I will first comment on our global healthcare segment.

  • Overall, global healthcare reported another good quarter, with continued strong results in our commercial business, and some pressure in seniors.

  • Third quarter premiums and fees grew 7% to $5.7 billion, we ended the third quarter with 14.3 million medical customers, representing year to date growth of 255,000 customers.

  • Third quarter earnings in global healthcare were $424 million, and reflect strong revenue growth in specialty contributions, operating expense efficiencies, and attractive medical costs.

  • Third quarter results were also impacted by a favorable tax adjustment, offset by strengthening of a litigation accrual.

  • Turning now to medical costs, we continued to manage medical costs effectively and deliver strong clinical quality for our clients and customers.

  • Medical costs also continue to reflect low utilization trends.

  • 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 costs results.

  • Regarding medical care ratios, in our US commercial guaranteed cost business our third quarter 2013 medical care ratio or MCR was 82.9%.

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

  • In our seniors business, our third quarter MCR for Medicare Advantage was 85.5% on a reported basis, or 86.2% excluding prior year reserve development.

  • This elevated Medicare Advantage MCR is due to a combination of revenue pressure and increased claim severity.

  • Across our commercial and senior risk businesses our third quarter earnings include favorable prior period reserve development of $20 million after tax, of which $9 million related to prior years.

  • Moving to operating expenses, for third quarter 2013, the total global healthcare operating expense ratio was 21.8%, 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 another strong quarter in our global healthcare business.

  • Now I will discuss the results of our global supplemental benefits business which continues to deliver attractive growth and profitability.

  • Premiums and fees grew 29% quarter over quarter to $644 million, driven by contributions from our recent acquisitions, most notably Great American Supplemental Benefit Center, Turkey Joint Venture as well as strong customer retention and new business growth.

  • Third quarter earnings in our global supplemental benefits business were $39 million, reflecting attractive profitability and as anticipated, are increased funding of strategic investments for future growth.

  • The group disability in life third quarter results were strong.

  • Group premiums and fees increased 9% over the third quarter of 2012 to $848 million, third quarter earnings in our group business were $92 million, reflecting stable results within our disability book of business, partially offset by unfavorable life claims.

  • The quarter also benefited from $26 million after tax of favorable impacts from reserve studies, which compares to a $5 million favorable impact from reserve studies in the third quarter of 2012.

  • For our remaining operations, results totaled to an after tax loss of $19 million for the third quarter 2013, and include the benefit of a $14 million after tax gain associated with an IRS examination.

  • Taken as a whole, our third quarter results reflect strong revenue and earnings contributions from our ongoing businesses, as well as significant free cash flow as a result of the continued effective execution of our strategy.

  • Now I will discuss our full year 2013 outlook.

  • We now expect consolidated revenues to grow in a range of 10% to 11% over 2012, based on the strength of our third quarter results, we now expect full year 2013 consolidated adjusted income from operations in the range of $1.9 million to $1.96 billion.

  • This range is higher than our previous expectations and it reflects the strong underlying fundamentals in our businesses.

  • We now expect full year earnings per share in a range of $6.70 to $6.90 per share, which is an improvement of $0.25 to $0.45 per share over our previous expectations.

  • 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 $1.575 billion to $1.625 billion, an increase of $55 million to $80 million.

  • This increased outlook for Global Health Care primarily reflects the effect of favorable medical costs, as well as improved operating expense efficiencies.

  • 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%.

  • Relative to medical costs, for our total US commercial book of business, we now expect full year medical cost trends to be below 5% which is at least 50 basis points below the midpoint of our prior guidance.

  • We now expect the 2013 medical care ratio to be approximately 81% for our US commercial guaranteed cross book of business, which is 100 basis points lower than the mid point of our previous expectations.

  • For our seniors' business, we now expect our Medicare Advantage MCR for 2013 to be approximately 84%, which is 150 basis points higher than the midpoint of our previous expectations, reflecting the revenue pressure and increased claim severity that I noted earlier.

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

  • Now moving to the other components of our outlook, for our global supplemental benefits business, we expect continued strong top line growth and now expect earnings in the range of $185 million to $195 million.

  • Which represents earning's growth of 25% to 32% relative to full year 2012.

  • Regarding the group disability and life business, we now expect full year 2013 earnings in the range of $290 million to $305 million, an increase of $5 million to $10 million over our previous expectations.

  • And regarding our remaining operations, we now expect a loss in the range of $150 million to $165 million for 2013.

  • So all in, for the full year 2013, we have increased our outlook for consolidated adjusted income from operations to a range of $1.9 billion to $1.96 billion, or $6.70 to $6.90 per share.

  • The updated EPS range also reflects our year to date share repurchase activity.

  • Specifically, during the period August 1 through October 30, we have repurchased 6.4 million shares of Cigna's common stock for $500 million, bringing our total year to date share repurchase to 13.6 million shares or $1 billion.

  • Now moving to our 2013 capital management's position and outlook, overall, we continue to have good financial flexibility.

  • Our subsidiaries remain well capitalizes and are generating significant free cash flow to the parent, with strong return on capital in each of our ongoing businesses.

  • I would remind you of our capital deployment strategy and priorities, which have not changed.

  • These priorities are providing the capital necessary to support of our ongoing operations, pursuing M&A activity with a focus on acquiring capabilities and scale to further grow in our target areas of focus, and after considering these first two items would return capital to shareholders primarily through share repurchase.

  • We ended the quarter with parent Company cash of approximately $500 million.

  • After considering all sources and uses of parent Company cash, and setting aside $250 million to meet liquidity needs, we now expect to have approximately $500 million available for capital deployment at year end.

  • Overall, our capital position and updated outlook are strong and reflect the sustained performance of our operating segments.

  • Now I would like to spend some time talking about progress on one of the goals we identified in the strategic framework we launched in 2009.

  • As you recall, our Go Deep Go Global Go Individual strategy is supported by three strategic pillars, focusing our portfolio of businesses, improving our strategic and financial flexibility, and pursuing new growth opportunities.

  • One key aspect we identified for improving our financial flexibility related to our pension plan and its funding.

  • As part of our strategic framework, we implemented a multi-year plan to address the under funded position in our pension plan.

  • We first froze the pension plan and beginning in 2011, started to make annual pretax contributions of approximately $250 million, which was well in excess of the statutory minimum requirements to address this under funded balance.

  • Our plan was to make these excess contributions over a three to five year period.

  • Based on contributions made to date, a continuation of the equity market's strong performance, and increases in interest rates during 2013, the funded status of the pension plan has continued to improve.

  • Assuming these trends persist through year end 2013, we expect the funded status of the plan to improve significantly over last year, and intend to reduce the amount of our annual pension plan contributions going forward, while still meeting the statutory contribution requirements.

  • This will create additional free capital available for deployment in 2014, for the benefit of shareholders.

  • We will outline the impact of this decision as well as our 2014 capital management plan on our fourth quarter earnings call.

  • Now, to recap the quarter, our third quarter 2013 consolidated results, reflect the strength of our global portfolio of business and a continued track record of focus execution of our strategy.

  • The fundamentals in our business remain strong, as evidenced by third quarter results that reflect attractive financial performance in each of our operating segments, an increase in our full year 2013 outlook and continued effective deployment of capital.

  • Based on the strength of these results, we are confident in our ability to achieve our full year 2013 earnings outlook and as David indicated we expect to carry this momentum into 2014.

  • In addition, we believe our diversified portfolio of businesses, with differentiated capabilities, are well positioned to deliver long-term growth in revenue and earnings.

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

  • Operator

  • (Operator Instructions)

  • Scott Fidel, with Deutsche Bank.

  • Scott Fidel - Analyst

  • First question just interested if you could give us more insights into some of the MLR pressure experienced by HealthSpring in the quarter and maybe just tease out how much of that was revenue pressure related to sequestration as compared to some of the claims pressure that you cited?

  • And if there were any particular geographies or products that were impacted by the claims pressure in the quarter, and then just finally as you think about sort of the 3Q performance how you feel about the bids that HealthSpring submitted for 2014?

  • Tom McCarthy - CFO

  • First again the competitive basis matters here you do recall that we are anticipating an increase -- or have been anticipating an increase in the Medicare Advantage MLR going into this year based on repositioning for the health reform effects.

  • But the elevated result this quarter as you point out is from a combination of revenue and pressure, including the impact of sequestration and a revenue true up reflected in the quarter, and I'll get to that in a minute.

  • And some increased claim severity.

  • As it relates to the revenue true up, some of that related to the full year accrual for revenue due to CMS.

  • So an adjustment in the quarter for the full year accrual and that accounted for about 150 basis points of the elevated third quarter MLR.

  • On the claim severity side, that really reflects a higher cost per claim.

  • So it's not the number of claims, or unit cost per se but a higher cost per claim due to the more complex conditions in treatments, and again we are actively working to address those issues, regarding your comment on the bid, we are confident we have, through our engaged position model, we have the levers in the tool kit to manage this dynamic in 2014.

  • Scott Fidel - Analyst

  • Okay I had a follow-up question on the initial outlook for 2014, the fact that you are expected to grow off of a meaningfully improved base for 2013.

  • You have had a couple of competitors come out and talk more about the potential for flattish or modestly down earnings or maybe 2014 being sort of flattish as a floor.

  • Help us think about what you think are the key differentiating drivers of the better relative outlook is it better performance that you are expecting in the healthcare business?

  • Or do you think it reflects the fact that you have a different business mix here you know with international and group insurance as well?

  • David Cordani - President and CEO

  • Morning Scott, it is David.

  • (Inaudible) So let me tease out your question relative to 2014.

  • Fortunately as you note we are quit pleased in the fact that we are on track have a very strong 2013, the backdrop of the 2013 results that will carry into 2014 are really the strength of our diverse portfolio businesses and our consistent focused execution.

  • As we looked to 2014 I noted in the prepared remarks, our expectation is that we'll grow revenue and earnings and to be clear, we exclude any impact of reserve development or capital deployment in that.

  • You should think about that being driven by the strength of our ongoing organic growth, some additional contributions from the further strengthening of our PBM and then the additional operating efficiencies that we have been able to garner each year, that goes across all of our lines of business, including the international businesses.

  • And then there are some structural headwinds, what we'll be able to offset those structural headwinds because of the diverse portfolio of our businesses.

  • The final note I would give you is both given the strength of our 2013 as well as some of those industry structural headwinds, at this point we indicate that we will expect to grow earnings as well as then obviously EPS, but probably earnings at a lower rate than our 2013 growth rate more a historical run rate, nonetheless a positive results leveraging both the diverse portfolio of our businesses and our consistent execution.

  • Scott Fidel - Analyst

  • Thanks.

  • Operator

  • The next question comes from Justin Lake, with JPMorgan Chase.

  • Justin Lake - Analyst

  • First just a follow-up with 2014.

  • As I think about you know some of the headwinds and tail winds, can you talk a little bit about I calculate about $0.50 of headwind just from a lower tax rate, the prior period development that you probably won't put into guidance et cetera, and then you have the PBM offsetting it.

  • You mentioned some of the other drivers so one are those two $0.50, in kind of one time items benefiting this year $0.25 in the PBM for next year, and then are those right, and can you talk specifically about 2014 on Medicare Advantage given you have taken off the MLR here, how much of a head wind should we expect that to be on MLR and EBIT versus 2013?

  • David Cordani - President and CEO

  • As we noted in our prepared remarks we'll provide comprehensive and more complete guidance for 2014 on our fourth quarter call.

  • Let me give you a little bit more color in terms of how to think about it.

  • First you are correct consistent with our policy, we don't project any reserve development and through our results you can see where our favorable reserve development has been for this year [$70 million] after tax plus, extract that from the consideration, you can make your own estimate on the taxes.

  • Two other headwinds we point to is one, you referenced Medicare we're not going to go through details of that, we'll go through details of that in the fourth quarter, but it is an important headwind that, over the long-term, we feel very confident on, but it's an important headwind.

  • We'll be able to offset that in our portfolio.

  • Finally, an item I would draw your attention to, as I think you know, the implementation of ACA requires a sunsetting of a line of business, specifically limited benefits, that will have a down tick in term of our business from an earnings contribution standpoint next year.

  • That's also fully contemplated in our expectations.

  • When you take all of those headwinds together, including our assumption that we're not projecting the favorable reserve development on a go forward basis taking all that into consideration, we'll still be able to grow organic earnings in 2014 of a strong base and that is something we are excited about.

  • Justin Lake - Analyst

  • That is really helpful.

  • Am I right in thinking that EBIT contribution from Medicare Advantage expected to be down and can you tell us what you think -- can you give us an idea of how to size that limited benefit headwind?

  • David Cordani - President and CEO

  • Sure.

  • Just direction because we don't talk about that second component that often, just in round numbers thinking about $25 million, $30 million after tax for the limited medical benefit business, so you can put that into context, and again in the seniors business we'll talk more comprehensively.

  • I think the headline I'd ask you to take away from that is first as Tom noted, we feel good about the bid position we have for 2014, we know we have the leverage to be able to manage this business.

  • We are quite confident over the long-term that the engaged physician model, the engaged individual beneficiary model is a sustainable model and is something we will both grow from a covered life standpoint in 2014 then grow both lives and earnings thereafter, but 2014 is a pressure year for that line of business from a margin standpoint.

  • Justin Lake - Analyst

  • If I could just go follow-up on the private exchanges, just want to get your commentary David in terms of the trajectory here of what you expect over the next three to five years let's say in the active employee market specifically?

  • And then talk about your positioning and what you think the potential impact to your benefits business could be over time?

  • Thanks.

  • David Cordani - President and CEO

  • Well done in term of sneaking in a third question.

  • Relative to the private exchanges as noted in the prepared remarks, first we are in the very early stages of this.

  • Important to note and as you know, based on your question, there are multiple different versions of private exchanges today.

  • Single carrier, multi-carrier, self-funded, risk based on the changes retiree active businesses et cetera.

  • Taking a step back, early stages, so long as those exchanges are able to create sustainable value from employers and individuals we think there is a growth opportunity, we're playing and positioned to play in many of them today but most importantly we are confident that we have the capabilities both the health engagement and network capabilities as well as the diverse funding mechanisms, and consumer engagement capabilities to play in any one of those alternatives to the extent they demonstrate the ability to create sustainable value.

  • So premature to give you a long-term projection, we think we will be part of the future distribution model and we're positioned to play in a variety of those as they evolve over time.

  • Justin Lake - Analyst

  • Thanks.

  • Operator

  • Josh Raskin, with Barclays.

  • Josh Raskin - Analyst

  • Thanks good morning.

  • Just a follow-up on the third quarter Medicare Advantage MLR.

  • You know, I think about the 300 basis points, so your MLR was up 550 basis points year over year, in the second quarter it was 250.

  • Sequestration has been in all of that and I think you mention 150 bps from the claims severity.

  • So I'm just trying to figure out just on a sequential basis what exactly deteriorated so much in the third quarter, and maybe some color as to where or why these more severe claims are coming in?

  • Tom McCarthy - CFO

  • Josh it's Tom.

  • So again, the impacts you noted are right, the dynamics, the level of impact and the severity impact and the level of impact again depending on the comparison you're making.

  • Sequestration is an impact but obviously not sequentially.

  • The number that you picked up there the 150 basis point impact is related to the revenue an additional revenue adjustment booked in the quarter for the full year result, and the balance roughly would relate to the claim severity item.

  • Josh Raskin - Analyst

  • Got you.

  • So 150 is the some sort of risk adjustment true up or something like that and then another 150 is the severe claims?

  • Tom McCarthy - CFO

  • Yes, ballpark-ish those are.

  • Josh Raskin - Analyst

  • I guess just any clarity thought on those claims, we just haven't seen that from any of the other companies talking about these high severity cases, so I'm just curious if you think there is any root cause to that or if there is any geographic sensitivity to it et cetera?

  • Tom McCarthy - CFO

  • A number of drivers but I wouldn't want to call out any one in particular, but you can be assured that our team is focused on improving that result both into the fourth quarter and into next year.

  • Josh Raskin - Analyst

  • Follow-up just on the private exchanges, could you talk specifically about your experience in 2013 with these exchanges you know, how you feel as though your results are and then specifically to the AON exchange which my understanding as the majority of the active enrollees for 2014 at least at this point and your decision not to participate on that exchange?

  • David Cordani - President and CEO

  • Josh it is Dave.

  • Good morning.

  • As I noted before, early stages is the limitation of the private exchanges, to the first part of your broad question, therefore our experience is somewhat limited.

  • There is small pockets of experience in a variety of exchanges as I indicated in the prior questions, there are some single carrier multi-choice exchanges that we have experience on, there is multi-carrier alternatives that we have experience on, there's ASO experiences and then there's some risk based experiences that we see.

  • Important to note, as I indicated before, we have the capability to play under any of the configurations, we have chosen to date to focus in the areas where our customers and our target customers seem to have the highest level of interest.

  • And to date that has been our customers have indicated that they have the highest interest in incentive and engagement based programs that have pooled or bundled purchasing, a high level of transparency and that is where we focused.

  • The value we are delivering is quite strong as indicated with our further improvement with our medical cost results, however as we look forward to the extent that changes and other models are delivering more attractive value, we have the capability to play there on a go forward basis.

  • The options are open for us and the capabilities are on hand to play on any one of those configurations should they prove to have a sustainable result for the benefit of employers and customers.

  • Josh Raskin - Analyst

  • Was there something specific David I guess around the AON exchange that did not create that level of attraction or opportunity for you that you are not participating next year?

  • David Cordani - President and CEO

  • Josh I don't think it is helpful to go into an individual exchange example.

  • Maybe I would ask you to just step back and think about everything we've done over the last four years has been driven by focus.

  • Our go deep strategy has us focusing, so essentially as we listen to the voice of our customers, our customers and the orientation of what our customers are seeking to purchase, was oriented around other alternatives today, so we focused our resources to date on other scenarios.

  • To the extent the needs and demands of our target customers evolve we'll evolve by focusing our energy.

  • But I would ask you to think about it that way.

  • We are not trying to be all things to all people, we are trying to focus on the needs of our customers and deliver differentiated results and both our 2013 results and our projected 2014 results show that we'll continue to grow in keeping that level of focus.

  • Operator

  • Matt Borsch, with Goldman Sachs.

  • Matt Borsch - Analyst

  • I was hoping maybe you could address the outlook for January enrollment.

  • And maybe along with that comment on the pricing environment you are seeing on the risk side and an update on your progress getting the industry fee and related tax impact reflected into commercial pricing?

  • David Cordani - President and CEO

  • Matthew, it is David.

  • Little bit of color.

  • So in terms of looking into January enrollment as you expect at this point in time, we have a better view in terms of what we historically call national accounts in a less complete view in the regional and the select segment.

  • Let me give you some color on national and then take the opportunity to give you a little bit of color on the overall relative to third growth.

  • The last time to make the comment relative to the position of the tax on the pricing standpoint.

  • Relative to national accounts, to remind you we define that a little differently than everybody else.

  • Those are commercial employers with 5,000 or more employees in a multi-state.

  • So we define it a bit more tightly.

  • That segment of the population the employment base is shrinking in the 1% to 2% range.

  • That is our view of that target segment.

  • Our objective it is to maintain share and continue to penetrate those engagement and incentive based buyers and for 2014, we would expect to achieve that.

  • Our pipeline of new business opportunities was down a little bit, as I indicated on the prior quarter call.

  • Our pipeline of our opportunities that were out to bid was also down somewhat.

  • Taken all together, our national account results will be year over year equal to slightly improved for 2014.

  • If you look at our commercial book of business in total, at this point we'd expect our commercial book in total to be about the same year over year, when you adjust for the known run off of the limited benefit business that I made reference to before, you can think about that as about 1% of covered life that went off in 2014.

  • Commercial in total about the same year over year, strong retention across our portfolio of businesses, some reasonable good new business growth and overall that is going to contribute to a nice revenue result as Tom mentioned, we have strength in 2013 and we expect more strength in 2014.

  • I'll ask Tom to make a comment on the industry fee.

  • Tom McCarthy - CFO

  • First on the overall pricing dynamic, really no change from the market pricing dynamic seems to be traditionally -- typically rational The occasional pockets of accelerated competitiveness, but no major turn to call out.

  • On the industry fee in particular, as you know we tend to have a disciplined pricing underwriting approach, and the industry fee is another cost factor we have built into our process, and we have included it in the amount we need to recover, to adjust for the fee in our pricing and so far we seem to be encouraged by the results there.

  • Matt Borsch - Analyst

  • If I could just one follow-up here.

  • On the commercial trends.

  • Are you seeing the continued bias to self insuring in the middle market in particular?

  • Has that accelerated because of the industry fee on the fully insured side?

  • Or vice versa?

  • Are you seeing any inroads from the private exchange fully insured model offsetting that to some degree?

  • David Cordani - President and CEO

  • Matthew it is David.

  • Two comments relative to the buying trends.

  • First before I get to the funding mechanism, I would submit to you just a continued intensity of focus on proven wellness programs, prevention programs, consumer engagement programs.

  • A high level of interest in what the industry may call higher performance networks we call them our collaboratives or engaged physician networks.

  • As it relates to funding mechanism.

  • We have seen just a continuation, I wouldn't attach it to any one item.

  • We have seen a continuation of interest demand and attractive and more transparent funding mechanisms.

  • So take that as the self funding mechanism.

  • We have just seen a continuation of that.

  • And for 2013 and as we look into 2014 we see no material impact of you know, drain off from that demand from a guaranteed cost standpoint.

  • Operator

  • The next question from Ralph Giacobbe, with Credit Suisse.

  • Ralph Giacobbe - Analyst

  • There has been some movement in the ASL, market in national accounts.

  • Was maybe hoping you could talk about that segment specifically just the competitive landscape and what is going on there and along those lines can you maybe talk about the profitability of lives by segment?

  • Again we've seen some movement in national accounts whether it be swapping carriers or moving risk so with seemingly with little if any financial impact.

  • Is it fair to say a profit per life is much lower in a national versus a middle market or select account?

  • David Cordani - President and CEO

  • Ralph good morning, it is David.

  • A couple of comments here.

  • First, my prior comment as we look to 2014, on an all in basis adjusted for the again known sunsetting of the limited benefit business we expect our commercial customer performance to be about the same year over year, so that's on an all in basis.

  • As it related to national accounts, again we define it a little bit more narrowly than some of the competitors, so those commercial employers with 5,000 or more employees that are multi-state our current outlook is for a slight uptick in performance or improvement in performance year over year.

  • Driven mostly by retention, so the sales results are consistent but it's mostly in improvement in retention.

  • So you can look at our book of business, there's always going to be a put and take here and there.

  • Book of business is about the same across the franchise with a little uptick in the national accounts.

  • I'll give you a little directional color on your profitability question, the primary drivers of profitability are long-term relationships where you are delivering sustainable value for your client and customer.

  • You'll earn the right to expand the relationship from our point of view with Military multiple products and services.

  • The specialty portfolio, the health improvement, the prevention, the wellness are critical parts of our business strategy.

  • Said otherwise, we seek to not sell a stand alone ASO funded relationship as an example.

  • To that end, the penetration across selling rate is the highest down market in the select segment and the package solution works in the most intense light and the lightest up in the national accounts segment.

  • General rule of thumb, you can conclude that as you go from the largest sized account and segment down to the medium and smaller size, all other things remaining equal, profitability dials up somewhat but that's largely driven by further penetration of the specialty business.

  • Final comment for Cigna, as you look at our performance, our revenue our profitability our profit per life and our retention performance suggest that we are managing that quite well, and we are delivering good value back to our clients as evidenced by the retention rate and the continued success we are having.

  • Ralph Giacobbe - Analyst

  • That is helpful.

  • Just my follow-up, obviously we have had a couple of years of lower cost trend.

  • I know coming into this year you priced your book for I think 6% to 7% trend can you give us a sense at all of what you expect and maybe priced going into next year?

  • Thanks.

  • David Cordani - President and CEO

  • It is David again.

  • We'll provide detailed guidance at the end of the fourth quarter.

  • We are not going to give you the specific numbers.

  • You should assume though that consistency of our approach so we will in our pricing, to our best estimate of medical cost trend and the medical cost trend out look.

  • We are taking a basic assumption of somewhat of an uptick in utilization as we had last year to the extent that, that plays out.

  • We will have priced that into our book of business.

  • To the extent that doesn't play out we will be reporting back on the results in 2014.

  • But on the fourth quarter call we'll give you the specifics.

  • Just anchor it in the fact that we are pricing at our underlying cost level that we are projecting for 2014, which includes somewhat of an uptick in cost pressure.

  • Ralph Giacobbe - Analyst

  • Thank you.

  • Operator

  • Next question from Christine Arnold, with Cowen.

  • Christine Arnold - Analyst

  • Good morning, thank you.

  • Could you speak to your, I'm just trying to -- I know you are not getting into specifics on Medicare Advantage.

  • But could you speak to your bidding strategy and how that 75% in collaborative care arrangements represents a lever and some of the other levers that you are using to offset some of the pressure?

  • And then the full year accrual in MA that we saw this quarter, was that in fact a risk adjustment accrual?

  • David Cordani - President and CEO

  • At a macro level and as we talked before, the bidding strategy for our Medicare book of business has been consistent, consisting with what health (inaudible) philosophy has been in particular HealthSpring, and similar philosophy, and that is a price to have a sustainable set of relationships with the clients and customers.

  • You want to avoid large wild undulations in the rate shop or otherwise, and you want to have long-term sustainable relationships.

  • Taking that forward we took our position to price our book of business of 2014, and our new business offerings MSA or on a market by market basis, to our best estimate of what would create a real value proposition for beneficiaries both existing and prospective as well as a reasonable balance of margin knowing there's a lot of disruption.

  • The specifics that I think you are going at, we do have the lever and the lever is an engaged physician model with incentive and risk sharing and reimbursement sharing with the physicians.

  • That is a very important level because the physicians are engaged with us in our dialogue in terms of how we are configuring our value proposition for 2014 in this case, and those physicians want to work with us jointly arms locked to make sure we get the best possible value proposition in place.

  • So it is a very collaborative operation that happens market by market.

  • Our expectation right now based on our look at our pricing, the product attributes market by market as the competitive data comes out, broadly around the country we are pleased with how we are positioned from a product and price standpoint.

  • Of course there are going to be puts and takes by market, but if you take the national position we have in our key markets we are pleased with our position for 2014 and we would expect to grow our Medicare Advantage cover lives in spite of some margin pressure given all the industry change that we're confront in 2014.

  • Tom could I ask you to reclarify the revenue item?

  • Tom McCarthy - CFO

  • First Christine, you asked about the general leverage, so there is the physician engagement model, I'd also point out for the other obvious one, benefits adjustments.

  • I would also point out we have a number of markets where we're still in the early stage of focusing on the physician engagement model, and in fact another level for 2014 is more focus on those markets where those models are in the earlier stages of development.

  • And as David said overall, lots of positive things to mitigate the impact.

  • We are still expecting margin pressure in Medicare Advantage in 2014.

  • To your second more specific point, yes that adjustment is largely related to risk adjusters.

  • Christine Arnold - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Kevin Fischbeck with Bank of America.

  • Kevin Fischbeck - Analyst

  • Great thanks.

  • I was wondering if you know you talked about some of the headwinds into 2014.

  • Can you talk about some of the tail winds that you are looking for that gives you confidence in that you will deliver earnings growth on top of the higher guidance for this year obviously the PBM would be one area?

  • But anything else that you would highlight has given you confidence for growth next year?

  • David Cordani - President and CEO

  • Kevin good morning.

  • It is David.

  • I would highlight three items.

  • First I would just highlight is organic growth.

  • We expect to again grow revenue and grow revenue at an attractive level.

  • What is behind that?

  • What is behind that is in the core medical business.

  • Some customer growth, two further expansion of our specialty business, three, continued growth of our group insurance disability asset, and lastly, continued attractive growth of our global business.

  • So organic growth would be one, two would be the point you raised.

  • The further strengthening of our PBM, will create a tail wind for us and third I would highlight, we now have a track record of continued prudent operating efficiency leverage in the franchise, so that would be a contribution as we are going through 2014, all the while we continue to invest back in the franchise for the long-term.

  • So those would be the three primary tail winds I would highlight for you.

  • Kevin Fischbeck - Analyst

  • Okay follow-up question, I guess back onto the private exchanges.

  • I think Aetna on the conference call talked about movement of ASO, back to risk as being something that would increase profitability of membership four to five times.

  • I understand where their math is coming from.

  • Do you see that same opportunity?

  • I wasn't sure if your focus on stop loss as a supplement to the ASO business might change the dynamic and how you thought about shift from ASO back to risk?

  • David Cordani - President and CEO

  • Sure Kevin, it is David.

  • Give you a grounding point and then how we think about it.

  • The grounding point is, to be clear, we have the ability to offer ASO, ASO with stop loss, shared return and risk alternatives in the market we do every day.

  • For example in the select segment, a segment that is going very nicely for us and has proven the ability to grow on a consistent basis, we frequently will put in front of a client and a prospective client an ASO stop loss alternative side by side with a risk alternative.

  • And in a consultative fashion get to the right outcome for that client at that point in time.

  • So as Tom would like to say, sometimes we are a bit agnostic.

  • We want to get to the right solution for the employer and we want to have the capabilities to be able to deliver a good value for the client as well as a fair return from a shareholder standpoint.

  • With that said, I would submit to you that not speaking about the competitive landscape but speaking about it from a Cigna landscape, our success in terms of having a vibrant portfolio of specialty businesses, and the ability to package solutions and deliver an overall proposition, has prevented an environment where our ASO profitability is quite attractive, so I wouldn't look at a similar leverage point as you move between a simple ASO stripped down ASO business versus a risk piece of business.

  • And then finally I feel compelled to state the obvious, the capital efficiency needs to be taken into consideration under any of those scenarios.

  • Clearly we take that into consideration because we underwrite risk business every day in our Company.

  • I think it is a little bit of a pause to say you are just going to lineup a profitability pro life.

  • So, one we have the ability to do this today, two we do it shoulder to shoulder every day and three our success in terms of packaging solutions whether it is in an ASO proposition or risk proposition gives us confidence that we'll be able to thrive under either of those scenarios going forward.

  • Kevin Fischbeck - Analyst

  • Okay great thanks.

  • Operator

  • Chris Rigg, with Susquehanna.

  • Chris Rigg - Analyst

  • Thanks for taking my question.

  • Just wanted to come back to Medicare Advantage quickly here just to clarify.

  • Is the claims pressure across-the-board?

  • Or is it isolated to a handful of plans or a region or any color as to what you are seeing there would be helpful.

  • Tom McCarthy - CFO

  • Chris it is Tom.

  • I wouldn't call it across the board but I wouldn't call it isolated either.

  • It's in a number of markets, some a little more intense than others.

  • And again we are working aggressively to address the problem right now.

  • Chris Rigg - Analyst

  • And again, is it in one sort of bucket of utilization inpatient, outpatient, pharmacy or is it again just across-the-board?

  • Tom McCarthy - CFO

  • Yes, it is generally in the facility costs.

  • Chris Rigg - Analyst

  • Okay.

  • Okay.

  • And then just real quickly here, on the disability and life business it looks like it is stabilized from relatively low level of profits in the first quarter, rebounded in the second and third quarter, now it looks like you are expecting not to drop back off in the fourth quarter.

  • Is there something to highlight there?

  • Tom McCarthy - CFO

  • No, again.

  • I take you back to the headlines first.

  • You have kind of picked up on the overall headlines, in the group results, this business has been performing really well in a challenging environment.

  • The reporting dynamics on that business are a little different from what you are used to in our core healthcare business.

  • There is variability in results due to the nature of the business, so really what we are talking about is some normalization across the year to a good result.

  • Chris Rigg - Analyst

  • Okay thanks a lot.

  • Operator

  • The next question from Peter Costa, with Wells Fargo.

  • Peter Costa - Analyst

  • Can you quantify the impact of the health insurance fee and the premium tax fee the per member fee in terms of the mid-year enrollments?

  • What is going to be the headwind for next year?

  • What is the earnings impact of that this year I guess is the question?

  • Tom McCarthy - CFO

  • Peter it is Tom.

  • You know, that is an estimate of course.

  • But right now we would estimate that as kind of a $0.10 EPS headwind going into 2014.

  • Peter Costa - Analyst

  • It seems like on a virtually weekly basis we are getting more and more things that look like they are causing the risk pool on the exchanges to get worse whether it be the delaying the employer mandate or the website not working, or the change in terms of how you know the ability for hospitals perhaps to pay premiums for enrollees.

  • Maybe going forward the cost sharing subsidies not being -- or becoming susceptible to the sequester cuts, or even a delay in terms of the individual mandate if that happens or an extension of the time frame to sign people up.

  • What's your -- when does this become too much in terms of making the risk pool to sick to the point where you guys decide to step away from the exchanges all together?

  • David Cordani - President and CEO

  • Peter, good morning it is David.

  • You paint an interesting picture.

  • But as you step back, putting it back into the Cigna context, as you know, Cigna historically has not had a meaningful small employer under 5,000 employer or individual guaranty cost book of business.

  • Therefore, we are not forced to take action to protect the portfolio of businesses, as you know from our prior conversations, we have sought to test the market over about a three-year period of time with the new benefit offerings, distribution strategies.

  • And then we stepped in on a very focused basis in five states, working with physician collaboratives to offer solutions that we think offer a very good value and can be sustainable.

  • So, the important one is, we are very focused for 2014 in the limited number of markets.

  • With our physician partnerships in hand in those markets.

  • Our expectation is that we're in the very early innings and when you're in the very early innings of anything, it is going to be rocky.

  • We are going to maintain a very sharp focus.

  • And as we have consistently said, we have cautioned to not to look at this opportunity, for at least our Company.

  • As a watershed moment for revenue or earnings contribution 2014, or 2015.

  • It may present a long-term opportunity, and we want to be in position to do that.

  • But we are running our business at the core of the franchise needs to be able to deliver and it will for 2014 both revenue and earnings growth.

  • Despite the challenges you just articulated for that early emerging marketplace.

  • Operator

  • Carl McDonald, with Citi group.

  • Carl McDonald - Analyst

  • Wanted to see if we could come back to the underlying earnings base for 2013, so I can back out all the positive things that you have disclosed come up with $0.50 to $0.55.

  • But it also seems like every quarter there is a handful of negative things that you don't disclose, you talked about the unfavorable life experience this quarter the strengthening of the litigation reserve.

  • Just interested if you have a view relative to your $6.80 to $6.90 guidance?

  • What we should think about as being the underlying earnings number for 2013?

  • Tom McCarthy - CFO

  • It is Tom.

  • I'm not sure it is going to be really helpful to get into the nits and nats of that.

  • As you point out, some of the items end up being more fully discussed and some of the items end up being you know just kind of in the run rate.

  • The results in the quarter pretty clear, this is a strong quarter and the last few quarters have been strong quarters and fundamental results we have had consistent better than expected operating expenses, consistent better than expected medical costs in commercial, disability results over the course of the year, despite some of the ups and downs of the reserve studies, have been good for the year, and we continued to show really strong results in supplemental benefits and revenue earnings.

  • This quarter did have a couple of favorable impacts in it.

  • But overall, good fundamental results are driving the quarter's results.

  • David Cordani - President and CEO

  • Carl it is David just add to Tom's point.

  • When you take that together, you take our all in reported number for 2013, and our revised upward outlook for that, we are committing to be able to grow our earnings base and grow revenue base going into 2014.

  • Tom and I highlighted a few of the items that you can view as -- I'm thinking about differently in a prior comment, Tom just commented on the industry fee headwind that's created we have the run off of a line of business that I commented may be up $25 million, $30 million.

  • We have had favorable medical costs in the reserve development, those were all chunks that you could model out.

  • I think the headline here you need to step back and look at is, 2012 is a very strong year, we grew off the base of that in 2013, we continue to grow 2013 throughout the course of the year.

  • And our expectations despite all the moving parts, albeit the rate of growth from a percentage basis will be a bit smaller than our historic run rate, we are going to be able to grown earnings into 2014 as well and we are very excited about that.

  • Carl McDonald - Analyst

  • Thank you.

  • Operator

  • Thank you Mr. McDonald the next question comes from Dave Windley, with Jefferies.

  • Dave Windley - Analyst

  • Hi, thank you for taking the questions.

  • I wanted to start on capital if I could.

  • I'm guessing that your priorities for capital deployment are probably very similar to what they have been in the past.

  • If not, I'll let you elaborate.

  • But I am curious, your comment about reducing contributions to the pension, would you expect to have more capital for deployment?

  • And if so, would you be more interested in deploying that for acquisitions?

  • Has your appetite been renewed there?

  • Or should we expect perhaps more share repurchase with that capital?

  • Thanks.

  • Tom McCarthy - CFO

  • David, Tom.

  • I mean you started with the conclusion, you are right.

  • Our capital deployment priorities haven't changed.

  • Our first priority is to fund organic growth, second is to seek M&A opportunities that fit with our strategy, and then we return capital to shareholders primarily through share repurchase and again I wouldn't -- we wouldn't change those priorities and I wouldn't try to foreshadow activity in one area or the other.

  • Again we'll be very closely focused on what aligned with our strategy.

  • To your more specific comment on the pension plan, yes, I think you have drawn the right conclusion there, over the last few years, targeted $250 million pre-tax, to fund the pension plan.

  • And that consciously funded above the minimum requirement.

  • In 2014, it is likely -- and we do have to wait until we get to year end and see how market conditions are then in the final reporting on the plan, but it is likely we would transition to a minimum funding approach which, in 2014, would likely mean about $100 million pre-tax contribution to the plan instead of $250 million.

  • Dave Windley - Analyst

  • Okay.

  • Very good.

  • Thank you.

  • And then apart from a lot of the healthcare comments here, I wondered if there were any particular I'll call them hot spots?

  • Some of your other businesses international, ex patriot, et cetera, that are worthy of note in regard to, maintaining or accelerating growth in some of those other segments?

  • David Cordani - President and CEO

  • David, it is David.

  • You used the term hot spot so I'm taking a connotation of caution.

  • The only thing I would draw your attention to is that, as noted in our prepared remarks, we continue to invest in even on an accelerated basis in the third quarter our global supplemental benefit business, but wildly for the portfolio we feel quite good.

  • The track record of revenue growth, earnings growth and customer based expansion, and the other lines of businesses is quite strong and we expect to continue that and we are taking the steps to further accelerate investments that we think are prudent in all of our businesses.

  • Dave Windley - Analyst

  • Very good.

  • I actually did mean good things, so thanks for the answer.

  • Operator

  • The final question comes from AJ Rice, with UBS.

  • AJ Rice - Analyst

  • Thanks, hello everybody.

  • First specific question on the PBM, you referred to that as one of the positives for next year.

  • I know when you originally announced the deal you guys said that transition costs would come first and it would be about a $0.10 to $0.15 drag in the third quarter before it swings positive or neutral in the fourth.

  • I want to just confirm that, that is what you are seeing and is the transition going about as you gauged it in the summer when you announced the deal?

  • Tom McCarthy - CFO

  • It is Tom.

  • So to that specific point on the quarterly dynamics the pre tax spending was actually a little less than we expected in the third quarter, but we are still on track in the overall plan and we still expect little net impact overall in 2013.

  • So really, comfortable with where we are headed on that project right now.

  • AJ Rice - Analyst

  • Okay and just broadly signing nine new collaborative care relationships, I wondered with the dynamic of right on top of the rollout of the exchanges, et cetera, what is the dynamic of your discussions with providers around these collaborative care relationships?

  • Has it changed any in the last 6 to 12 months, has it received more or less opportunities, are you seeing I guess competition for other people trying to put these together as well as you?

  • Has that changed in any way?

  • David Cordani - President and CEO

  • AJ good morning it is David.

  • First just by way of a backdrop comment here, remind you that we started and we set up our first collaborative back in 2008.

  • We set up eight of them, a variety of different models.

  • So we have been at this for awhile is a first point.

  • Second with the 75 up in operation on the commercial side plus having 75% of our Medicare Advantage customers in physician engagement model, we are well in excess of 1 million lives that are experiencing these services today on a dedicated or comprehensive basis.

  • As it relates to the market dynamic, you should think about it as a market dynamic of increased demand not stable or decreased demand from physician and delivery system partners.

  • (inaudible) describe any change in that, the intensity is upticked in terms of what I'll call the facility integrated systems on top of what has been the physician organization, so more demand increasing in the physician space as well as now increasing in the integrated facility base.

  • Your reference is to more competition, this is an area that everybody is talking about.

  • There is a lot of activity.

  • I would submit that our team is extremely well positioned as we have been at this awhile.

  • From a Medicare standpoint the HealthSpring team has been out there for well over a decade, with a very proven track record and from a commercial standpoint we have now touched five years of experience here, so a good outlook for the future to continue to grow this.

  • What is most important is, at the end of the day, are you able to deliver a differentiated result for your client and customer?

  • And the exciting part here is that from a commercial standpoint, we could point to improved results, better medication compliance, better clinical engagement, lower medical costs that are passing through.

  • And that is a positive from the sustainability standpoint.

  • AJ Rice - Analyst

  • Okay.

  • Thanks a lot.

  • Operator

  • Thank you Mr. Rice.

  • I would now like turn the call back over to Mr. David Cordani for closing remarks.

  • David Cordani - President and CEO

  • In closing, I'd like to underscore just a few points from our discussion this morning.

  • Cigna's third quarter results reflect strong revenue and earnings contributions from each of our ongoing business segments.

  • Particularly our track record of strong financial results and our momentum from the first half of the year.

  • We are confident in achieving our increased full year earnings outlook for 2013.

  • Looking ahead, we expect to grow revenue and earnings in 2014 over our increased 2013 outlook, and this excludes any future reserve development or capital deployment.

  • We continue to deliver our Go Deep Go Global and Go Individual strategy to leverage our capabilities around customer insights, consulted (inaudible) and physician engagement to guide us through an evolving and disruptive environment.

  • We thank you your participation today and for your continued interest in Cigna and we look forward to our future conversations.

  • Operator

  • Ladies and gentlemen, this concludes Cigna's third quarter, 2013 results review.

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

  • A recording of this conference will be available for 10 business days following this call.

  • You may access the recorded conference by dialing 1.800.947.6314 or 1.203.369.3981, no passcode is required.

  • Thank you for participating, we will now disconnect.