信諾集團 (CI) 2013 Q4 法說會逐字稿

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  • Operator

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

  • (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.

  • - VP of IR

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

  • I am Ted Detrick, Vice President of Investor Relations.

  • With me this morning are David Cordani, our President and Chief Executive Officer; and Tom McCarthy, Cigna's Chief Financial Officer.

  • In our remarks today, David and Tom will cover a number of topics including Cigna's full-year 2013 financial results, as well as our financial outlook for 2014.

  • 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 our 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.

  • 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.

  • In our remarks today we will be making some forward-looking statements, including statements concerning our outlook for 2014 and future performance.

  • These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

  • A description of the risks and uncertainties is contained in the cautionary note in today's earnings release and in our most recent reports filed with the SEC.

  • Before turning the call over to David, I will cover one item pertaining to our financial results and disclosures.

  • In the fourth quarter, we recorded an after-tax charge of $40 million or $0.15 per share for severance and other costs associated with a series of actions we are taking to improve our organizational efficiency.

  • We reported the charge as a special item.

  • As described in today's earnings release, special items are excluded from adjusted income from operations in today's discussion of our 2013 results.

  • As a reminder, please note that when we discuss our earnings outlook for 2014, it will be on the basis of adjusted income from operations.

  • In addition, our outlook for earnings per share for 2014 exclude the effects of any future capital deployment.

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

  • - President and CEO

  • Thanks, Ted.

  • Good morning, everyone.

  • Thank you for joining today's call.

  • First I'll discuss Cigna's full-year performance and highlights for our 2013 results.

  • Then I'll address how we continue to meet the needs of our customers and clients in an ever-changing marketplace.

  • Next Tom will provide detail on the performance of the fourth-quarter and full-year for 2013, as well as provide the specifics for our outlook for 2014.

  • Then Tom and I will answer your questions before I leave you with just a few closing comments.

  • I will begin with some highlights for the year.

  • Our strong full-year 2013 results extend an outstanding track record of financial performance, and marks Cigna's fourth consecutive year of competitively attractive financial results.

  • All of our business segments contributed meaningfully to our results for the year, with each segment delivering earnings and revenue growth.

  • For the full-year 2013, consolidated revenue increased by 11% to $32.4 billion, with each business segment delivering double-digit growth versus 2012.

  • We reported adjusted income from operations for the full year of $1.93 billion or $6.79 per share, which represents a per-share increase of 13% over 2012.

  • It's important to note that 2013 was a year of strategic accomplishments for Cigna, as well.

  • First, our transaction to transfer our run-off reinsurance business which improves our financial flexibility.

  • Second is our further improvement of our PBM capabilities, which enhances pharmacy offerings for our customers and clients, while providing a platform and infrastructure to drive accelerated innovation.

  • And provides attractive financial benefits for both our customers and shareholders.

  • Third we continue to deepen our global footprint through meaningful progress in important growth markets, including Turkey, India and China.

  • Fourth, we advanced our capital health through a strengthened balance sheet and significant free cash flow from our businesses.

  • Overall these results and accomplishments were driven by focused and effective execution of our strategy.

  • Turning to 2014, we expect Cigna will deliver tentatively attractive earnings and revenue growth.

  • Tom will elaborate further on our outlook in a few moments.

  • But first I will address how we view the global environment we are operating in this year.

  • We anticipate that disruptive market forces, changing client and customer needs and a variety of headwinds will continue to create a challenging marketplace.

  • Both developed and developing countries are confronting significant change and disruption, including an aging population, growing middle class, rising chronic disease levels, and affordability pressures for all.

  • Our industry also continues to operate in an active legislative and regulatory environment, one that includes uncertainty around Medicare Advantage reimbursement levels, cost pressure resulting from reduction in hospital reimbursement levels due to government cuts, implementation challenges in public exchanges, change in reward structures for physicians and hospitals, and globally health systems attempting to rebalance the public-private relationships as they seek to ensure sustainability of their social programs.

  • With these trends and uncertainties in mind across our segments and key markets, we have built our capabilities to be able to adapt and deliver ongoing success.

  • Cigna's businesses have the strategic direction, focus and core capabilities to anticipate, adapt and win in the global markets.

  • Our clear strategy of Going Deep, Going Global and Going Individual continues to guide our Company around the world.

  • By executing this strategy in our target markets, and in new ones where we see opportunities, our capabilities are delivering differentiated value for our customers, clients and shareholders.

  • Our strategy enables us to improve Individual health and productivity, engage with physicians to drive quality health outcomes and affordability, and support our customers with products and services that provide them with much-needed sense of security.

  • To continue to succeed in these global markets there are three key areas we continue to invest in to ensure ongoing value creation.

  • These areas are customer insights and engagement, consultative distribution, and physician partnership models.

  • Insights give us deep knowledge that allows us to identify the right micro segments, and match the distribution channels that best meet our customers' preferences.

  • When combined with our consultative distribution capabilities, analytical insights give Cigna the unique ability to bring our customers personalized solutions through their channel of choice.

  • These include selling through brokers and consulting channels for employers of nearly all sizes in diverse geographies; selling through intermediaries including Affinity partners; selling to individuals directly through telemarketing, Internet distribution and direct response marketing; and selling through our new proprietary private exchange capability where we tailor benefit programs for the needs of employer, clients and brokers, and provide greater choice and personalization for our customers.

  • In addition, relative to the evolving private exchange market, we have chosen to participate in those exchanges which most closely align with our target client needs.

  • And, we are staying close to evolving program should they prove to deliver differentiated value.

  • Our third key area is care delivery and physician partnership capabilities.

  • Here we are delivering superior health and productivity outcomes today in a local and personalized fashion.

  • And our innovation continues for tomorrow.

  • In 2013, we increased the number of customers benefiting from our collaborative relationships with physicians by 50%, or an increase of 400,000 lives.

  • We now have 86 collaborative Accountable Care initiatives up and running, which is up from 52 at the end of 2012.

  • Importantly, we are seeing positive cost and quality outcomes for our customers.

  • Additionally, we continue to receive feedback from healthcare professionals that Cigna 's approach to these initiatives is differentiated in the market.

  • Our approach, which harnesses aligned incentives, specific actionable information, and care extender's, such as health coaches and case managers, is highly leverageable in a rapidly changing marketplace.

  • In addition, our global network of doctors and hospitals, coupled with our localized health management and coordination resources, positions us to offer innovative solutions in our targeted markets around the world.

  • Now, looking ahead, we recognize that change is constant and change will continue at an accelerated pace.

  • At Cigna we have demonstrated our ability to effectively anticipate and adapt to change.

  • We will continue to grow by retaining, expanding and adding new customer and client relationships.

  • More specifically, in 2014 we expect to grow our US and global healthcare businesses, as well as our global supplemental business.

  • When coupled with the continued strength of our disability and life business, this will more than offset the market disruption and repositioning pressure of our US seniors business.

  • Finally, our ongoing strong capital position affords a significant deployment opportunities to further build customer and shareholder value.

  • Based on our focused strategy, diversified capabilities, and differentiated portfolio of businesses, we expect to continue to deliver competitively attractive and sustainable long-term EPS growth of 10% to 13%, on average, all while continuing to invest back in our Company.

  • Now to briefly summarize before turning it over to Tom, Cigna's strong financial performance in 2013, marks the fourth consecutive year of earnings and revenue growth for our Company, and provides a good foundation as we step into 2014.

  • We have significantly advanced our capital health through a strengthened balance sheet and free cash flow.

  • We recognize that global markets will continue to be disrupted.

  • In this environment of ongoing change, we will successfully execute our focus strategy and leverage our differentiated capabilities in customer insights and engagement, consultative selling and physician partnership.

  • All with the objective of delivering differentiated value for our customers and clients.

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

  • - CFO

  • Thanks, David.

  • Good morning, everyone.

  • In my remarks today I will review Cigna's 2013 results and provide our outlook for 2014.

  • We had a strong year in 2013, with earnings and revenue both growing by 11% over 2012, and earnings per share growing 13%.

  • These results represent a fourth consecutive year of strong revenue earnings and EPS growth, while also continuing to make significant strategic investments in capabilities across all our businesses.

  • Some other key highlights regarding our 2013 results include strong revenue and earnings growth in each of our business segments, despite a disruptive market environment, most notably in Medicare Advantage; enhancement of our pharmacy business arrangement with Catamaran; the strengthening of our balance sheet through the successful exit of the run-off reinsurance business and our pension fund de-risking plan; and continued strong free cash flow generation with $1 billion returned to shareholders through share repurchase.

  • While there was some pressure on our fourth-quarter results, the strength of our overall 2013 performance provides us with a solid foundation for growth in 2014.

  • Now moving to operating results.

  • Our full-year consolidated revenues grew 11% to $32.4 billion, driven by contributions from each of our segments and growth in our targeted markets.

  • 2013 earnings were $1.93 billion, which represents growth of 11% over 2012.

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

  • Overall, our global healthcare results for 2013 were solid.

  • 2013 premium and fees grew 9% to $23 billion.

  • Full-year earnings were approximately $1.6 billion, representing growth of 6%, driven by strong revenue growth in specialty contributions, operating expense efficiency, and attractive medical costs in our commercial business, partially offset by revenue and medical cost pressure in our seniors business.

  • Turning to medical costs, our customer and physician engagement capabilities continue to deliver differentiated value for our clients and customers.

  • Our medical trend outlook has improved throughout the year, and we delivered competitively attractive results.

  • For our total US commercial book of business, full-year medical cost trend was below 5% for 2013.

  • Since nearly 85% of our US commercial customers are in ASO funding arrangements, they directly benefit from these favorable medical cost results.

  • Regarding medical care ratios, in our US commercial guaranteed cost business our full-year 2013 medical care ratio, or MCR, was 81.5% on a reported basis, or 82.3% excluding prior-year reserve development.

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

  • Our fourth-quarter 2013 guaranteed cost to MCR was higher than prior year.

  • Some of this increase was anticipated due to the impact of business mix and broker fee changes continuing into the fourth quarter, and some from large claim activity and modestly increased utilization in the quarter.

  • While on the high-end of our expectations this result is within the normal range of variability we expect for this business.

  • In our seniors business, our full-year 2013 MCR for Medicare Advantage was 84.8% on a reported basis, or 85.2% excluding prior-year reserve development.

  • This is higher than we had expected.

  • The elevated Medicare Advantage MCR for full-year 2013 reflects revenue pressure driven by government reimbursement levels, as well as higher medical costs.

  • The claim pressure in the fourth quarter of Medicare Advantage MCR is a continuation of what began earlier in 2013.

  • This pressure is not improving as we had expected.

  • While we continue to focus on opportunities to improve medical costs for our seniors business we expect to see pressure into 2014, and have reflected this impact in our 2014 outlook.

  • Moving to operating expenses, for 2013 our total global healthcare operating expense ratio, excluding special items, was 21.7%, which is a 90 basis point improvement over the 2012 expense ratio.

  • We accomplished this result while continuing to fund strategic investments.

  • Overall we had a solid year in our global healthcare business.

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

  • Premiums and fees in 2013 grew 27% over 2012, driven by contributions from our recent acquisitions, most notably Great American Supplemental Benefits in our Turkey joint venture, as well as strong customer retention and new business growth.

  • 2013 earnings in our global supplemental benefits business were $183 million, representing a 24% increase over 2012, and reflecting attractive profitability while we continue to fund strategic investments for future growth.

  • Fourth-quarter results included some modest claim increases in our Korea operations due to seasonality and additional funding to enhance distribution capabilities.

  • For group disability and life, full-year results were strong.

  • Group premium and fees increased 10% over 2012 results.

  • 2013 earnings in our group business were $311 million, an increase of 11% over 2012, primarily driven by lower disability loss ratio and higher net investment income.

  • For our corporate and other operations, results totaled to an after-tax loss of $134 million for full year 2013.

  • Overall, our 2013 results reflect revenue and earnings growth from each of our business segments, as well as significant free cash flow as a result of the continued effective execution of our strategy.

  • Turning to our investment portfolio, for 2013 we recognized net realized investment gains of $141 million after-tax, coupled with a strong net investment income result.

  • Overall, we continue to be pleased with the quality and diversification of our investment portfolio.

  • Now I will discuss our outlook for 2014.

  • While 2014 will be a disruptive and challenging environment, we expect to continue to deliver differentiated value for our customers and clients, and, as a result, strong financial performance including revenue and earnings growth for our shareholders.

  • This is based on effectively executing our focused strategy, leveraging our differentiated global capabilities, and capitalizing on the multiple sources of growth in our diversified portfolio of businesses.

  • For full-year 2014, we expect consolidated revenues to grow in the range of 4% to 7% over 2013.

  • We expect full-year 2014 consolidated adjusted income from operations to be in the range of $1.9 billion to $2 billion, or $6.80 to $7.20 per share.

  • Consistent with prior practices our outlook excludes any contribution from additional capital deployment as well as any prior-year claim development.

  • Before reviewing more specifics for the year I will comment briefly on the organizational efficiency plan we implemented during the fourth quarter.

  • As Ted mentioned, we reported a special item charge of $40 million after-tax related to the actions we are taking across our global operations, including actions to implement our pharmacy strategy.

  • We estimate that these actions will yield annual after-tax savings of approximately $45 million going forward, with expected savings of $30 million after-tax in 2014.

  • The impact of these actions has been factored into our 2014 guidance.

  • I will now discuss the components of our 2014 outlook, starting with global healthcare.

  • We expect full-year global healthcare earnings in the range of approximately $1.58 billion to $1.64 billion compared to our 2013 results of $1.57 billion.

  • Excluding 2013 prior-year claim development of $77 million after-tax, this represents growth of 5% to 9% in 2014.

  • This outlook reflects continued benefits from organic revenue growth, specialty contributions and operating expense efficiencies, partially offset by continued pressure in Medicare Advantage.

  • This also includes our updated view of the annual enrollment period results for both Medicare and the public exchange business.

  • I'll now summarize some of the key accomplishments reflected in our global healthcare earnings outlook for 2014, starting with our customer base.

  • Regarding global medical customers, we expect 2014 customer growth of 1% to 2% after adjusting for the impact of the limited benefits business exit due to the ACA legislation.

  • Relative to Medicare Advantage, after taking into consideration the impact of market exits, we expect modest growth overall during the course of 2014, with essentially flat customer growth in January.

  • Turning to medical costs, our 2014 outlook assumes some increase in medical utilization versus current levels, and this increase has been reflected in our pricing.

  • For our total US commercial book of business we expect full-year medical cost trends to be in the range of 5% to 6%.

  • For our US commercial guaranteed cost book of business we expected the 2014 medical care ratio to be in the range of 80% to 81%.

  • This range is lower than our 2013 results and reflects strong medical cost management and ACA legislation impacts.

  • For our seniors business, our Medicare Advantage MCR for 2014 is expected to be in the range of 84% to 85%.

  • This range reflects expected revenue and medical cost pressure in 2014.

  • Regarding operating expenses, our 2014 global healthcare operating expense ratio is expected to be in the range of 22.5% to 23.5%.

  • This range includes approximately 130 basis points due to the impact of the industry fee and taxes.

  • Overall, we expect full-year 2014 global healthcare earnings to be approximately $1.58 billion to $1.64 billion, which we believe is a competitively attractive result.

  • Now moving to the other component of our outlook, for our global supplemental benefits business, we expect continued strong top-line growth, and expect earnings in the range of $195 billion to $215 million.

  • This represents earnings growth of 7% to 17% when compared to 2013, and is consistent with our long-term growth expectations.

  • Regarding the group disability and life business, we expect full-year 2014 earnings in the range of $305 million to $325 million compared with the strong 2013 result of $311 million.

  • Regarding our remaining operations, that is other operations and corporate, we expect a loss of $175 million or 2014.

  • So, all-in, for full-year 2014, we expect consolidated adjusted income from operations of $1.9 billion to $2 billion, or $6.80 to $7.20 per share.

  • This excludes the impact of any future capital deployment for prior-year claim development.

  • Overall, this result represents a competitively attractive outlook in a disruptive market environment, and underscores the benefit of our diverse and differentiated portfolio of businesses.

  • Before moving on, I would note that we believe our 2014 earnings outlook will follow a different quarterly pattern this year for a number of reasons.

  • These include absence of $48 million of after-tax prior-year claim development in the first quarter of 2013, which translates to $0.17 on an earnings-per-share basis; the impact of sequestration and ACA-related factors; startup costs for business expansion; and the timing of some expenses.

  • As a result, we expect first-quarter earnings in 2014 will be lower than the prior year's first quarter.

  • Now, moving to our 2014 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 a strong return on capital in each of our business segments.

  • Our capital deployment strategies and priorities have not changed.

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

  • Regarding free cash flow, during 2013 we repurchased 13.6 million shares of stocks for approximately $1 billion.

  • We ended the year with Parent Company cash of approximately $760 million.

  • For full-year 2014 we expect subsidiary dividends of $1.6 billion, driven by a strong performance in each of our business segments.

  • After considering all sources and uses of Parent Company cash, and setting aside $250 million to meet liquidity needs, our outlook implies we would have approximately $1.8 billion available for capital deployment in 2014.

  • During the period from January 1 through February 6 we repurchased 2.6 million shares of Cigna's common stock for $225 million.

  • This amount is included as part of the $1.8 billion available for capital deployment.

  • Overall, our financial position and 2014 capital outlook remains strong.

  • The strong margins and high returns on capital from each of our businesses, coupled with the strength of our balance sheet, means that we will continue to generate significant free cash flow to deploy for the benefit of shareholders.

  • During our third-quarter call we also discussed the progress we have made in improving our financial flexibility regarding the funding of our pension plans.

  • Based on 2013 contributions, the equity markets strong performance, and an increase in interest rates during the course of the year, the funded status of the pension plans has continued to improve.

  • As of December 31, 2013, the unfunded liability of our pension plans has improved $1 billion over year end 2012.

  • And the pretax unfunded liability is now approximately $600 million.

  • As a result, we expect to contribute $100 million pretax to the pension plans in 2014, which is a significant reduction from prior years.

  • This increases the free capital available for deployment in 2014 and has been contemplated in the capital outlook highlighted earlier.

  • Now, to recap, our full-year 2013 consolidated results reflect the strength of our diversified portfolio of global businesses and the continued track record of effective execution of our focused strategy.

  • Our 2013 performance provides a solid foundation for 2014, highlighted by differentiated capabilities that create value for our customers and clients, competitively attractive growth in revenue and earnings, continued targeted strategic investments to enable sustained growth into the future, and continued strong free cash flow.

  • While we expect the continued disruptive market environment we are confident in our ability to achieve our full-year 2014 earnings outlook.

  • And with that we'll turn it over to the operator for the Q&A portion of the call.

  • Operator

  • (Operator Instructions)

  • Matthew Borsch, Goldman Sachs.

  • - Analyst

  • Yes, I'm just hoping you could give us more elaboration on the trend pressures on both the commercial and Medicare Advantage side, maybe just starting with which one is more concerning to you.

  • It sounds like Medicare Advantage because that is what you expect will persist to some degree into 2014.

  • But correct me if I'm wrong.

  • - President and CEO

  • Matthew, good morning.

  • It's David.

  • Let me start with, I'll call it, the framing of Medicare, and then ask Tom to give you a little bit more insights on the commercial because they're two very different dimensions.

  • First, with the Medicare loss ratio into context, as you recall, we entered the year with expectations that our medical care ratio for Medicare Advantage would go up, as we price for and position to book for adoption of ACA.

  • In addition to that, last quarter we talked about the revenue pressure that continue to mount for the Medicare Advantage portfolio tied to sequestration, risk adjusters, et cetera.

  • And we started to see the impact of a bit of uptick in medical cost.

  • That carried on through the fourth quarter.

  • And from our assessment it's most notably seen in facility-based costs.

  • As you know, that's inpatient- and outpatient-based costs.

  • We see that manifesting itself a bit differently in our model.

  • We operate three different model in our portfolio -- the integrated care delivery model, where we have either owned or tightly aligned delivery system, the highly engaged physician models, and then the less engaged physician models.

  • While the impact of this facility elevation is taking place in many geographies, the impact driving the variance is different.

  • So a higher variance in the less engaged models, a lower variance in the integrated models, if you will.

  • We have projected forward, now, that the impact of those medical cost pressures will carry into 2014.

  • There's a variety of actions we can talk about later that we're implementing to address.

  • But we've taken the step forward and said until we see otherwise the impact of those medical cost pressures will continue into 2014.

  • We factored that into your outlook, and, still, with the diversified portfolio we have, we're still able to grow earnings.

  • I'll ask Tom to comment now about the guaranteed cost and the commercial loss ratio because that's a different dimension.

  • Tom?

  • - CFO

  • Matt, again, on the commercial MCR, if you step back, the fundamentals of our commercial results for the year were very strong.

  • Over the course of the year we continued to improve the outlook for the GC MCR, basically reflecting the very good overall medical trend management we've had for the year.

  • We ended up with a very strong medical cost trend for the total year.

  • In the fourth quarter we did see some increased variability due to both the large claims and some increased utilization.

  • So, we did end up on the high range of the expectations for the quarter.

  • But, as you said, more in line with what we might expect for the performance on that business.

  • And I would point out, we previously commented, there is the potential for some uptick in results and utilization there, so not quite a surprise.

  • In addition to the fact that we have a relatively small guaranteed cost block, this variability we see as more in line with expectations versus the experience we saw in Medicare.

  • - Analyst

  • Just one clarification there.

  • When you talk about facility-based costs on the Medicare side, do you mean more utilization or unit cost?

  • - President and CEO

  • Matthew, it's David.

  • It's less utilization.

  • So, the way we think about it, it's a combination of mix of services causing an increase in either cost per admit or cost per episode of care.

  • So, it's manifesting itself more in terms of, I'll call it, the billing aspect as opposed to the utilization aspect.

  • - Analyst

  • Or the acuity?

  • Is that a fair word to use?

  • - President and CEO

  • I'm going to say, Matthew -- yes, but.

  • So if it's acuity, I think if clinicians were here they would say -- are the acuities of diagnosis spiking up.

  • I have to say we don't have the data to say that.

  • The costs per episode of care are going up, and we see the impact of that in many geographies.

  • But we don't see the one-for-one in terms of the acuity or the, I'll call it, severity of illness changing one-for-one with that.

  • - Analyst

  • Got it, thank you.

  • Operator

  • Chris Rigg, Susquehanna Financial Group.

  • - Analyst

  • Good morning.

  • Thanks for taking my question.

  • Just wanted to come to the corporate and other expenses.

  • If I look at the guidance for the full year and what you had implied for the fourth quarter, it looks like those costs for the full year came in meaningfully below what you were looking for, particularly in the fourth quarter.

  • Can you help us understand what might have changed relative to what you were looking for in 3Q?

  • Thanks.

  • - CFO

  • Chris, it's Tom.

  • I'd say the corporate results actually ran favorably through the whole year in 2013, including some tax items.

  • And, really, what's reflected in the outlook for 2014 is return to a more normal year.

  • - Analyst

  • Okay.

  • So, is it fair to say it was about a $23.5 million to $29.5 million delta relative to what you were guiding for in 3Q?

  • - CFO

  • I think we gave a range in 3Q.

  • It was a little better in the quarter but not -- that sounds a little high to me but somewhere in that range.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Justin Lake, JPMorgan.

  • - Analyst

  • Thanks, good morning.

  • First, I just want to go back to the Medicare Advantage cost, specifically because I know your book is pretty heavily capitated, so I'm somewhat surprised at the magnitude of the MLR increase year over year.

  • Can you walk us through that in terms of how much the actual core MLR had to be changing in order to have this flow through given your capitation agreements?

  • And then, also, as you look out to 2014, given the MLR you've guided to in Medicare Advantage of 84% to 85%, plus the tax, the typical SG&A, can you give us an idea where the MA margin will sit under that MLR?

  • - President and CEO

  • Justin, it's David.

  • Let me start.

  • First, you used the term capitation so I'm going to use a different term.

  • We have aligned physician relationships with all more shared risk relationships.

  • So, capitation tends to be a full risk transfer as opposed to a shared risk.

  • But stepping back and following your logic, to my prior comment, what we've seen is the facility cost pressure is in multiple geographies.

  • The performance or variance that we're experiencing is different.

  • So, to your point, in the less engaged or the less aligned reimbursement models, we're seeing more variability or more of a financial impact.

  • In the most aligned models we're seeing less variability and less impact.

  • So, you're seeing the impact of -- your term, capitation; I'll use risk alignment.

  • Additionally, as we looked into 2014 from a growth standpoint, our net either new business adds or new business deletes were stronger in the integrated markets or the highly aligned physician markets, as opposed to the less integrated or less physician aligned.

  • So we see that variability playing through.

  • But the macro point here is that the facility-based cost pressure is in multiple geographies.

  • As it relates to 2014, the headline is, this and our outlook and projection will create margin pressure or a decrement to Medicare Advantage margin 2014 relative to 2013.

  • And even with that, taken into as a whole with the diversification of our business, we're able to grow earnings in 2014.

  • - Analyst

  • What I was trying to get to on the margin question, David, is just understanding what do you think the core margin of this business is longer term.

  • And where does that fit in 2014 versus that longer-term target?

  • Obviously with the thinking that 2015 is also going to have some pressure.

  • So are we at baseline where you're probably going to pass most of the costs through to the beneficiary at this point, or get more efficient, or do you feel like margins have further to potentially fall given the rate pressures that we're looking at?

  • - CFO

  • Justin, it's Tom.

  • Again, in the long term, we continue to see this business as a mid-single-digit pretax margin performer.

  • Obviously the pressure we've talked about in 2014 will be below that.

  • And as you pointed out, a flattish loss ratio doesn't get us to our target margins given the introduction of the industry fee in 2014.

  • So, I don't think we're prepared to quantify exactly where we'd end up in 2014 but it will be below our long-term expectation for the business.

  • - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Scott Fidel, Deutsche Bank.

  • - Analyst

  • Thanks.

  • I was hoping you could give us an update on some of the metrics around the exchange business so far, the public exchange, in terms of how much enrollment have you seen so far, and some of the indicators on the risk mix.

  • Then just more broadly whether you expect the exchange business to be profitable or unprofitable in 2014.

  • - President and CEO

  • Good morning, Scott, it's David.

  • As for the public exchange, as you recall, we've been open but highly focused.

  • Meaning, open to the marketplace but highly focused.

  • So, to remind you, we're in five states and a limited number of specific markets within those states.

  • At a macro level, our experience to date has been in line with a lot of the headlines you've seen and we've seen, with the lower overall additional adoption rate, therefore lower covered lives, and a bit older base.

  • To put it in context, about half of the business we put on for January 1 came through the exchange.

  • About half of the business, or slightly less than that, came through off exchange.

  • As it relates to the makeup of the business, think about the majority of our on-exchange business being in the Silver plan.

  • Think about a little variability in terms of the mix versus our assumption in terms of a little older mix relative to the population.

  • Those who bought on exchange, about 75% of them were subsidy eligible.

  • And then, finally, to the last piece of your question, we assumed for this portfolio of business that this will not be a profit driver or moneymaker for us in 2014 at this point.

  • - Analyst

  • Okay, thanks for those details.

  • Then just a follow-up question on group insurance and then global supplemental benefits.

  • Do you just have an outlook for revenue growth for each of those segments for us?

  • - CFO

  • It's Tom, Scott.

  • I don't think we provide the specific details of revenue growth by segment.

  • But just overall, the commentary there, we're expecting continued growth in line with what we've seen lately in both of those businesses.

  • - Analyst

  • Okay.

  • Maybe Tom, to put it another way, do you think about top-line growth in those businesses in a similar trajectory as margins or earnings growth?

  • Or is there something on the margin side on either of those that we should be considering relative to top-line growth?

  • - CFO

  • Probably fair in relation to global sup.

  • In group, I'd remind you 2013 was a pretty strong margin year, so the revenue might grow a little faster than the after-tax profit in group next year.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Josh Raskin, Barclays.

  • - Analyst

  • Hi, thanks.

  • Good morning.

  • I wanted to ask, actually, on the private exchanges if you guys had any data or information around your experience?

  • I know, David, you said you're participating in several of them.

  • So, I'm curious if you have any updated data on how many lives, Cigna lives in 2013 moved into exchanges in 2014.

  • Then maybe how many you've gotten out of the private exchanges you're participating in 2014?

  • And what the mix of ASO and risk look like.

  • - President and CEO

  • Sure.

  • Good morning, Josh, it's David.

  • Just a moment of backdrop.

  • As we've said before, we view the private exchange environment is in the early stages of innovation.

  • These markets have the potential for creating sustainable models on a go-forward basis.

  • To date we've focused our energies on a number of the exchanges, and those that most closely align with the needs of our current and target clients.

  • Also, as you may have recently seen, we announced and launched our own proprietary exchange.

  • We made that public announcement this week.

  • Specific to your question, and as we anticipated, 2014 has a small impact for Cigna from a exchange standpoint, both inflows and outflows.

  • You can net them together and say there is a de minimis impact.

  • Think of tens of thousands of customers, not hundreds of thousands of customers.

  • With some new business adds and some losses in terms of the exchange, netting to a small number that is not a needle mover for our overall membership.

  • And slightly biased to the ASO but not limited only to ASO in terms of the movement in terms of how we're playing.

  • - Analyst

  • Okay, got you.

  • Then, just to clarify, I think you said Medicare Advantage membership you were expecting growth this year.

  • It looked like, just in the CMS data, and I know it's never complete for January runs, but it looked like you guys were down about 5,000 lives.

  • Did you say first quarter would be flat or the full year would be flat?

  • I'm sorry, I've forgotten it.

  • - CFO

  • Josh, you've put the puzzle pieces together correctly.

  • This is Tom.

  • First of the year flattish down 5,000 lives.

  • Full year we expect to grow modestly.

  • - Analyst

  • Okay, perfect.

  • Operator

  • Ralph Giacobbe, Credit Suisse.

  • - Analyst

  • Thanks, good morning.

  • I wanted to go back to MA.

  • Is it something you sense in the population you attracted that's driving the higher MLRs?

  • We haven't really seen it pop up to this point with peers.

  • And how would you get a better handle on it?

  • Then, along those lines, how should we think about the higher trend in the context of your 2014 bids?

  • And any sense at this point -- you talked about moderate growth.

  • There's been others in the industry that are going to grow significantly in terms of enrollment.

  • Any shot of churn as it relates to some of your existing?

  • And if you can give that gross versus term expectation, that would be helpful.

  • Thanks.

  • - President and CEO

  • Ralph, good morning, it's David.

  • Just I'll give you a little color on the multiple questions you have there.

  • First, as we noted before, we saw impact beginning to manifest itself in 2013 tied to facility base costs.

  • From our point of view, the pressure that's being put back on the hospital systems as it relates to reimbursement pressure from the government, we see that making it's way through the system, and most notably in Medicare.

  • As I noted before, not utilization but mix of reimbursement for the services, either per episode or mix of acuity in terms of the billing as it relates to the services.

  • On a go-forward basis, there's a number of actions that we're focused on driving in terms of our business to position us for 2015.

  • Having said that, we've taken a more cautious view of our outlook for the Medicare business and factored that into our outlook for 2014.

  • As it relates to the growth, the gross net lives, if I think about our growth for 2014 overall -- Tom just summarized it -- over the year we'll grow somewhat in Medicare Advantage.

  • A bunch of moving parts there.

  • We'll have organic growth in the first quarter of the year, offset by some strategic market exits.

  • We've also entered two new markets in 2014.

  • As we look at the makeup of our net losses and net gains, our growth profile is stronger in the integrated care delivery markets, as well as those markets that have the most mature physician engagement models.

  • And in some other markets that have less mature physician engagement models or less engaged physicians, we took a little bit more cautious approach relative to our product positioning in an effort to protect the margin and the sustainability.

  • Hence, we lost some lives there.

  • So, net, there's not a single churn answer.

  • It varies by market.

  • I'll ask Tom to expand on that.

  • - CFO

  • One other thing on that, Ralph.

  • Again, to the point of how are we feeling about the health of the business, given the modest growth, obviously there isn't much turnover in lives in our portfolio.

  • So we think we have a pretty good handle on that.

  • In fact, our outlook is, about 10% of our customers will be new to us.

  • And then you have to figure out the in and out of lives.

  • And that compares to about 12% last year.

  • So, very consistent with our long-term results.

  • - Analyst

  • Okay, that's helpful.

  • Then just one more quick one.

  • You've done a lot over the last 12 months to shore up the balance sheet, with that being in pension.

  • Just wanted to get an update your interest level in M&A at this point, any specific areas you'd like to bulk up or expand into.

  • Maybe even any thoughts on dividend at this point.

  • Thank you.

  • - President and CEO

  • Ralph, I'll comment on M&A and then I'll ask Tom to talk just about the overall capital deployment priorities.

  • As it relates to M&A, no major change in posture for us.

  • We've continued to view that, where strategically and financially attractive, there are three major categories of M&A opportunity that continue to be attractive to us.

  • First, further expansion of our global footprint and global portfolio of capabilities.

  • Second, US seniors and/or duals capability that enable us to serve the growing duals population.

  • And, third, our retail-based capabilities that allow us to better deliver a more personalized solution, distribution service capabilities, et cetera.

  • So that portfolio of priorities has not changed for us.

  • And you can look back over the last several years and see we've been disciplined in terms of staying in those categories.

  • I'll ask Tom to elaborate a little bit more to the capital deployment priorities because, as he referenced in his prepared remarks, we'll have a significant amount of free cash flow and capital to deploy in 2014.

  • - CFO

  • As we reiterated in the prepared remarks, our first priority in capital deployment, of course, is to invest to support organic growth.

  • Now, the margin profile of our business tends to generate significant capital in excess of what's needed to finance internal growth.

  • So that does give us the opportunity to deploy capital elsewhere.

  • We've said many times, we'd like to deploy couple strategically -- that would be our preference -- through M&A or business expansions.

  • And if we don't find the right opportunities to do that, we do return capital to shareholders.

  • We're still using share repurchase as our primary vehicle for returning capital to shareholders.

  • We do regularly revisit dividend policy but at this point there's no change in that.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Christine Arnold, Cowen.

  • - Analyst

  • Good morning.

  • As I've looked through my model, it seems like other MLRs were elevated.

  • I'm kind of calculating back of the envelope and haven't had much time with it.

  • But it looks like the stop-loss, experience-rated loss ratios, were up about 5 percentage points year over year, and also up pretty significantly sequentially.

  • What's going on there?

  • - CFO

  • Christine, it's Tom.

  • First, a couple things.

  • Just stepping back, that global MCR does have a lot of moving pieces to it.

  • The characteristics of the business is the loss ratio versus expense ratio that we have across the broad portfolio are very diverse.

  • Even within experience-rated we have different business types that have different MCR levels.

  • So, the movement around in the global result has a number of impacts in it.

  • I would point to you, though, the headline result here really is the variability in our GC MCR in the commercial business.

  • On the stop-loss side, we also did have a small change in reserving methodology that produced some reserve strengthening in stop-loss.

  • But overall no material change to the overall outlook for that business.

  • - Analyst

  • So, was international loss ratio up within -- I'm trying to figure out -- there's other stuff going on here.

  • Just to lay it on the table, it begs the question -- are trends rising.

  • Because, as I look at this model, it's not just guaranteed costs and Medicare Advantage.

  • There's other stuff that's significantly happening on the loss ratios.

  • - CFO

  • Again, Christine, I'd take you to the bottom line, the bottom line margin.

  • Really, the variability there is explained by what we've talked about.

  • The additional variability within the MCR, really is more of a function of business mix.

  • Again, different lines of business have different loss ratios even though they have the same bottom-line margin contribution.

  • - President and CEO

  • Christine, the only add is, as you referenced, there's a number of various lines of business in there.

  • So, to Tom's point, you could have some puts and take within the various experience-rated different funding types.

  • The loss ratio as reported in that aggregate loss ratio will move, but the margin profile does not.

  • The headline that Tom's delivering is the important one, which is the underlying margin profile of the discrete businesses is strong and intact and carrying into the new year.

  • Or else we would have flagged it otherwise.

  • Also, it's the reason why we caution not to overly analyze that aggregate bucket because there's so many moving parts in it.

  • - Analyst

  • One last question here.

  • I'm trying to get a run rate for fourth quarter.

  • Was there prior-period negative development perhaps related to prior quarters, such as the fourth quarter maybe was better than it looked on a run rate basis?

  • - CFO

  • Actually, in the fourth quarter, as I mentioned, we did do a small stop-loss reserving methodology change.

  • So there really was modest negative prior-period development in the fourth quarter in commercial.

  • - Analyst

  • But only in that stop-loss?

  • - CFO

  • Yes.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Kevin Fischbeck, Bank of America Merrill Lynch.

  • - Analyst

  • Okay, great, thanks.

  • I want to go back to that MA for a minute here.

  • I think I understand what you're saying -- the higher costs are being caused by in Q4 and expectation in 2014.

  • But is there a good way to get on top of those costs and really adjust that?

  • If you're below your target margin for 2014, yow do you think about positioning yourself and getting back to a normal margin when the 2015 rates are also going to be difficult?

  • - President and CEO

  • Kevin, good morning, it's David.

  • There's two different sets of actions that are currently being actively worked.

  • Again, as I referenced before, they're going to be different depending on the market types.

  • So, our integrated markets versus our highly activated physician markets versus our less activated physician markets.

  • If you think about bucket number one, it's to further accelerate our timeframe to move less activated physicians to more activated and get them into the shared risk model.

  • Or, on a more accelerated basis, deal with culling from the network.

  • That's bucket number one.

  • In those markets, over the near term, I would say more comprehensively use traditional medical management and cost tools, which you typically don't use in the more activated physician markets.

  • So that's bucket of actions number one.

  • Bucket of actions number two are on the facility side, several different actions.

  • One is to seek for outlier reimbursement activity to adjust the reimbursement levels contractually with the facilities.

  • Absent your ability to do that, seek to use the activated physicians to guide their patients to higher value facilities and lever freestanding surgery centers, where appropriate, where the value is best.

  • Then, finally, if you're not able to get to the desired outcome, as we're looking toward the 2015 environment, be willing to remove an underperforming facility from the network, still obviously delivery network adequacy.

  • So, all those actions are being worked.

  • We believe we've taken an informed view of the earnings for 2014 into our outlook by stepping down our outlook here in our margin expectations.

  • But you hit the nail on the head, getting as much visibility into it as possible as we go into the second quarter for the bid cycle.

  • And we believe we'll make some good traction in these actions.

  • - Analyst

  • And does this dynamic with the clear out-performance of the targeted provider alignment change your view at all about your ability to enter new markets over the next couple of years?

  • You entered two new markets this year.

  • And the thought was you might add one to two per year after that.

  • Does it get harder to do that if you really need to have the specific alignment?

  • Or is there enough out there to be able to continue to enter new markets in 2015 and beyond?

  • - CFO

  • Kevin, I think it's a real important point.

  • I'm going to answer you yes and no.

  • The difference here is, if you enter a new market de novo with no activated physician relationships, the time to go from that to a fully activated shared risk model, probably too long, given the reimbursement environment we operate in.

  • So it's puts a premium on choosing those markets that are both attractive from a seniors standpoint and, very importantly, we have well-developed commercial relationship with physician groups, and integrated care delivery systems where we're already moving through that activated physician environment.

  • So, the opportunity for us is, given that we have 86 of them up and running, we have more than our fair share of opportunities in front of us in new markets to choose from.

  • So, that's where the opportunity is.

  • And we would expect to continue to open new markets building off of the success of the commercial proposition.

  • So, it compresses the timeframe where you could go from no activation to fully activated and integrated.

  • And those collaboratives will help us accelerate that timeframe.

  • - Analyst

  • Okay.

  • Just a last question here on the efficiency review.

  • It sounded like a lot of it was actually the Catamaran thing.

  • I just want to see if that was right.

  • If there's a big part that's not part of that, understand what has spurred this review.

  • And then just an update on how Catamaran is going.

  • - CFO

  • Kevin, it's Tom.

  • PBM is part of the restructuring but I wouldn't say it's a majority of it or anywhere close to all of it.

  • The restructuring included a number of factors.

  • First, just some general process improvement and efficiency enhancement throughout the organization.

  • As we mentioned, the impact from PBM implementation.

  • We also were able to consolidate some real estate locations.

  • And we had some realignment costs in our overseas operation.

  • So, it was a number of things across the organization to better position ourselves to grow and give us the capacity to reinvest in new initiatives.

  • - President and CEO

  • Kevin, the only add I would give you to that is, we have now a track record over the last four-plus years in terms of continuing to see efficiency and effectiveness gains, in part folding that back into our investment portfolio to continue to invest back into new markets, new capabilities.

  • And, in part, seeking to shore up the expense ratio on a run rate basis in terms of the improvement you've seen year over year.

  • And this is a continuation of that good progress the organization has driven.

  • - Analyst

  • Okay.

  • Then just an update on how Catamaran is going?

  • - President and CEO

  • Relative to the PBM in total, just putting Catamaran back into context, the PBM steps off of another very strong year for us, delivering very good economic outcomes, very good clinical outcomes for the benefit of our customers.

  • As I answer you in terms of how it's going, just to remind you what we are seeking to do, we are seeking to further improve the operating platform to drive a level of flexibility that's necessary to innovate for the future, further improve the underlying cost of goods sold for the pharmacy business, as well as administrative expenses.

  • We've set ourselves a target for 2015 of about $0.50 of EPS accretion.

  • 2014 as a transition year is progressing well.

  • Operator

  • A.J. Rice, UBS.

  • - Analyst

  • Hi, everybody.

  • Just to think through conceptually how you're setting up the guidance, when you released third quarter and came in ahead of expectation, I think the comment at that point was on the increased performance.

  • You expected revenue growth and earnings growth for 2014.

  • Today, obviously, you're giving us the formal guidance.

  • Admittedly, none of the other major companies are even projecting any growth.

  • But at the high end you've got about 6%, at the low end about flat year to year.

  • Has there been any change?

  • I'm trying to put in perspective the comments about what you saw in the fourth quarter.

  • Have you changed -- any of these things changing your view about 2014 relative to where it was three months ago?

  • - President and CEO

  • AJ, it's David.

  • I think macro you have the right picture here.

  • When we provided the comments after the third quarter, we said we expected our organization would grow both revenue and earnings, albeit at a lower rate than our historic run rate.

  • And as we look at 2014, our framing of that is when you take the 2013 result, that we're rather proud of, and you back out the prior-year reserve development because we don't project any, we jump off of a base of about 1.85, and we've given you a range of 1.9 to 2. That's a base that we believe is attractive.

  • The only thing that's changed and evolved is what we've spent some time on this morning, is that our assumption on a prospective basis is that the medical cost pressure in Medicare will continue into 2014.

  • So that reduces our Medicare Advantage expectations.

  • But with the breadth of our portfolio, we're still able to harness the overall strength of the portfolio and still deliver an attractive revenue result on an organic basis, still delivering attractive overall earnings results.

  • To remind you, we don't project any reserve development in our outlook.

  • And we're not projecting any further capital deployment beyond what Tom referenced.

  • So, all in, we think it is an attractive result for 2014 off of a very strong 2013.

  • - Analyst

  • Okay.

  • Just maybe a quick follow-up to that.

  • You're mentioning this morning that in January alone you bought $225 million worth of stock.

  • How should we think about that in the context of this?

  • Is it all about the fact that you got this extra liquidity that's going to be available to you?

  • In anticipation of today's results, it's just interesting to me that you were fairly aggressive in purchasing in January, even coming up on this.

  • - CFO

  • AJ, it's Tom.

  • Our share repurchase program tends to follow a periodic pattern of repurchase.

  • There's really no particular signaling in decisions we make there.

  • And obviously we don't give any guidance to future repurchase activity.

  • - Analyst

  • Okay.

  • All right, thanks.

  • Operator

  • Ana Gupte, Leerink Partners.

  • - Analyst

  • Hi, thanks, good morning.

  • Just trying to put the third quarter and the fourth quarter and your guidance in context with your growth model longer term.

  • If I just looked at global healthcare, it appears you'll have continued margin pressure.

  • You were probably in the high single, still doubles eve, maybe, on margins.

  • You're guiding to mid single.

  • So now MA is less of a growth story.

  • 2014 you have Catamaran that helps you in Global healthcare.

  • But just longer term, is that whole business line going to be a slow growth story, or are you seeing more conversions to self insured?

  • Then on the global supplemental side, you were growing at a much higher pace in 2013 and now your guiding to 7% to 17%, which may be a longer-term growth guidance.

  • But, again, that was an outside grower, it feels like.

  • Is that slowing down, as well?

  • So, what gives you confidence about your growth model and the whole pitch about Cigna being a longer-term growth story, that's undervalued in the long term?

  • Are you planning any deals to supplement your growth?

  • - President and CEO

  • Ana, good morning.

  • It's David.

  • I think you put about 16 questions into that.

  • I'm going to take the first part.

  • You importantly framed, I'll call it, the underlying earnings performance and earnings trajectory and the drivers of that.

  • So I'll take that piece of it.

  • Then I'm going to ask Tom to take the global sup component of your question.

  • When you think about 2013, just to put it back in context, for 2013 we successfully executed and delivered 11 and 11 for the top line and the bottom line, and 13% for the EPS.

  • We were able to increase our outlook each quarter.

  • And we feel great about the overall year, acknowledging the fourth-quarter pressure on Medicare Advantage.

  • Looking to 2014, in a marketplace that is going to have a series of headwinds, including MA for the marketplace, including us, our assumption of no prior-year reserve development, we're running off the limited benefit business.

  • Which previously we gave you context to say that's about $30 million of earnings, or so.

  • That is still in the right trajectory.

  • As well as in 2013 we delivered a medical cost that was superior to the underlying assumptions.

  • So we had positive spread from our ratings.

  • Looking to 2014, we don't make those assumptions.

  • So, in 2014 you have tailwind's, which include ongoing organic growth in a very challenging market, and we have a track record of delivery of that.

  • Two, ongoing expense leverage, which we have a track record of delivery.

  • And, three, contributions from further strengthening of our PBM.

  • Taken as a whole, we'll generate organic earnings growth and organic revenue growth that we see is competitively attractive in a disruptive environment.

  • And we believe positions us with strength, as the marketplace conditions change somewhat, to be able to continue to grow both our US healthcare business, our global healthcare business, our global sup business, our disability business, as well as the seniors business as it gets repositioned.

  • As it relates to deals, I'll comment very briefly relative to that, and kick it back to Tom on the global sup question you specifically asked.

  • You see in our past track record we've been targeted and opportunistic relative to acquisitions that make good strategic and financial sense.

  • We've been very consistent in terms of where we see the category of assets we're attracted to.

  • And we'll be disciplined relative to that.

  • But our underlying organic earnings growth rate is what will drive the organization.

  • And, very importantly, a level of free cash flow production, because of the profile of our businesses, is going to be very attractive no matter how we seek to deploy it for shareholder value creation.

  • I'll ask Tom to talk a little bit more about global sup.

  • - CFO

  • Stepping back on global sup, obviously 2013 was a very strong year.

  • 27% revenue growth, 24% earnings growth.

  • Both very strong metrics.

  • The revenue growth split about 50/50 between acquisitions and organically.

  • So, the run rate revenue growth in 2013, excluding the inorganic activity, was within the range of the long-term expectation we had in the mid teens.

  • And that, again, what we would expect to normally see in global sup going forward.

  • Our earnings projection for 2014 is a little bit light of that.

  • But keep in mind 2014 has some startup activities going on that tend to contribute over the longer term, but well within the range of what we might expect in that business.

  • And we're very comfortable with our position in these fast-growing markets overseas.

  • - Analyst

  • And then self-insured, do you think that conversion continues?

  • That's a huge part of your growth.

  • - President and CEO

  • Sure, Ana.

  • What we've seen to date, as related to self-insured, that's been a continuation for us.

  • So, when you look at where there's indicators, the bulk of the regional segment -- and we define the regional segment quite broadly, it's the largest segment of business that we run in our Company today -- employers with 250 to 5,000 employees, and large single-site, single-state pieces of business -- the bulk of that is self-funded.

  • Interesting that when you go down to the select segment, our fastest-growing segment, 50 to 250 employees, we've seen systematically growth of penetration of the self-funded capabilities.

  • So, Ana, thinking about that trajectory-wise, a few years ago you would have had less than 50% of the new sales being self-funded, and more than 50% of the sales being risk or guaranteed cost.

  • A year and a half ago, it was broaching to 50/50.

  • Most recently it's 70% or so is self-funded.

  • But still a full 30% of it being guaranteed cost.

  • And we're able to offer successfully both of those alternatives.

  • So, both parts attractive, but the self-funded continues to do well, largely because it's a highly transparent funding mechanism that allows us to align our incentives and the employers' incentives, get a level of visibility with them monthly and quarterly, to actively manage their care programs, their health improvement programs.

  • Operator

  • Carl McDonald, Citigroup.

  • - Analyst

  • Great, thanks.

  • I'm going to ask Christine's question in a different way.

  • If I look in the healthcare segment, medical expenses went up about $90 million sequentially in the fourth quarter.

  • $45 million of that was guaranteed cost.

  • But the PDP was down $30 million sequentially, and Medicare Advantage was basically flat.

  • So, somewhere and the other products medical expenses went up $75 million sequentially.

  • That seems like too big just to be a stop-loss reserve adjustment.

  • So just wondering if you have any comment on that.

  • - CFO

  • Yes, Carl, it's Tom.

  • Again, different perspectives on different things you're trying to triangulate.

  • It sounded like you were going sequential quarter three to quarter four.

  • While I haven't done the math to reconcile to the $90 million you point out, we do expect pretty much every fourth quarter now an uptick in medical claims due to the deductible impact.

  • And I suspect that's what's underlying the math that you're seeing, although, again, I haven't done the math that way to figure it out.

  • Again, the headline on the medical cost results in the fourth quarter in commercial is, as we've talked about, some variability due to large claims and an uptick in utilization.

  • - Analyst

  • There's definitely an increase in the guaranteed cost.

  • It's just seems like there's $75 million missing somewhere else that hasn't been explained.

  • The second question is, just on the Medicare loss ratio, it's increased 150 basis points in each of the last two quarters.

  • So, what gets you comfortable that we're going to see that stabilize in 2014 rather than continue that acceleration?

  • - CFO

  • Carl, it's Tom again.

  • A good deal of that Medicare MCR increase also related to revenue pressure, both as sequestration worked in over the year, risk adjusters adjusted over the course of the year.

  • So, those things we would expect to have normalized out.

  • And the issue we're focused on is making sure we get the medical costs under control.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Andy Schenker, Morgan Stanley.

  • - Analyst

  • Thanks.

  • Just a quick one here.

  • Thinking about your cost trend guidance for the year of 5% to 6%, only about a 50 basis point increase at the midpoint versus when you started 2013 you were actually thinking originally 6% to 7%.

  • So, maybe any color about how trends developed over this year and your expectations for next year.

  • Then any more detail on what's really driving that 50 basis points.

  • I think you said utilization.

  • Is there ACA related costs in there, and maybe anything around inpatient versus outpatient, and any of the other drivers?

  • Thanks.

  • - President and CEO

  • Andy, it's David.

  • Just at a macro level, as Tom noted in his prepared remarks, 2013 is coming in favorable to 5%.To put that back in context, we have several years in a row of competitively very attractive medical cost trend.

  • And, as Tom noted, with 85% of our book of business being self funded, those clients and employees benefit directly from that.

  • As it relates to looking forward for 2014, we're projecting somewhat of an uptick to that trend.

  • So, go below 5%, to 5% to 6%.

  • So, at the mid point it's a little greater than the 50 basis points you made reference to.

  • The major headline in there is we're still making some assumptions that some of the utilization pattern will uptick slightly.

  • There's no major category changes that are sea changes in there.

  • Little puts and takes but no major category sea changes in there for the commercial population.

  • - Analyst

  • Okay.

  • So, most of the increase there, you're expecting it's all utilization driven.

  • Anything related to ACA driving that at all?

  • - President and CEO

  • Not especially to call out.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Dave Windley, Jefferies.

  • - Analyst

  • Hi, thanks for taking my questions.

  • I wondered, David, if there were any callout's or proof points that you could highlight on your ACO strategy.

  • And is that enough of a critical mass to have a meaningful impact on your cost trend performance across the business?

  • - President and CEO

  • Sure, David.

  • So, context and coming back to some of the prepared remarks.

  • Again, the Collaborative Accountable Cares, as we call them, are still in the early stages of development.

  • We're really pleased in terms of the amount of growth we've seen in those.

  • So, a 50% growth year-over-year number of customers that are experiencing it, up about 400,000 lives going from a base of 800,000 to about 1.2 million, both seniors as well as commercial.

  • Growth of collaboratives going from low 50s to the mid 80s in terms of the number of collaboratives.

  • To the core of your question -- proof points -- we're able to see now in some of the more mature collaboratives a meaningful improvement in both clinical quality engagement and cost.

  • So, then it comes down to, the ability to move trend is you're really seeing trend move for employers that are higher utilizer of those collaboratives.

  • So, where you have high concentration coming through, to the benefit of some of those collaboratives.

  • And now, with a density of 80-plus collaboratives, we have the ability in some markets to offer, I'll call it, network constellations that will have just the collaboratives, or an incented collaborative model where the employer can make the decision to more aggressively steer their employees in that direction.

  • So headline is, meaningful growth -- still early but meaningful growth in terms of lives, physicians, collaboratives.

  • Two, the exciting news is the proof points would say off of an open access high-performing clinical model, another step function in cost improvement in clinical quality because of the customer-physician engagement.

  • And that's really the so what that matters.

  • Then driving now enough density were some employers could really benefit from using just the collaboratives or highly incented collaboratives.

  • That's the next stage of what we're driving toward right now.

  • - Analyst

  • A follow-up question off the main topics here.

  • The disability business, I think, has been under pressure from the general economic cycle.

  • Has that turned the corner?

  • I think disability was called out as a better performer.

  • - CFO

  • You're right, disability did perform really well in 2013.

  • And, as you pointed out, it's been operating in a very challenging environment over the last few years given the low interest rates and high unemployment.

  • We all are hoping both of those are normalizing.

  • Within that timeframe, though, I'll focus on health and productivity produced great results that allowed us to mitigate a great deal of the environmental pressure.

  • The fundamentals of our productivity and the return-to-work tools in that business are very strong.

  • So, as you say, going into 2014, with the background of improving market conditions and investment results, we're expecting group to have another strong year.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Thank you, Mr. Windley.

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

  • - President and CEO

  • Thanks.

  • To wrap up, I just want to emphasize a few key points from our discussion this morning.

  • Cigna's full-year results were strong and include earnings and revenue growth from each of our business segments, continuing our track record of strong financial results for the fourth consecutive year.

  • Our outstanding performance was made possible by the passion and focus of our 35,000 colleagues who are deployed around the world.

  • Our Go Deep, Go Global, Go Individual strategy has enabled us to grow over the long term in the midst of an environment that continues to undergo considerable change and disruption.

  • By leveraging our flexible and transferable capabilities across the globe, which include our ability to have a deep understanding of our customers, use of consultative distribution and physician partnership capabilities, we will continue to compete and win in the global markets for the benefit of our customers' clients and shareholders.

  • And based on this we're confident in achieving our full-year outlook for 2014.

  • We remain committed to our long-term average EPS growth outlook of 10% to 13%.

  • We want to thank you for joining us this morning and your continued interest in Cigna.

  • And we'll look forward to continue our dialogue as the year unfolds.

  • Operator

  • Ladies and gentlemen, this concludes Cigna's fourth-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.

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  • Thank you for participating.

  • We will now disconnect.