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 second-quarter 2014 results review.
(Operator instructions)
As a reminder, ladies and gentlemen, this conference, including the Q&A 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.
And joining me this morning are David Cordani, our President and Chief Executive Officer, and Tom McCarthy, Cigna's Chief Financial Officer.
In our remarks today, Dave and Tom will cover a number of topics including Cigna's second-quarter 2014 financial results as well as an update on our financial outlook for full-year 2014.
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 our financial results.
Specifically we use the term labeled adjusted income from operations and earnings per share on this same basis as the principal measures of performance for Cigna and our business 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 www.cigna.com.
Now in our remarks today, we will be making some forward-looking statements including statements regarding 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 to today's earnings release and is in our most recent filings -- report filings with the Securities and Exchange Commission.
Now before turning over the call to David, I will cover a few items pertaining to our financial results and disclosures.
Please note that when we discuss the number of covered lives for our global medical customers, we will be doing so on a basis that excludes those individuals that were previously covered under limited benefits plans.
As a reminder, we exited the limited benefits business as of December 31, 2013 as required by the Affordable Care Act regulation.
I would also note that when we discuss our earnings outlook for 2014 it will be on the basis of adjusted income from operations.
And lastly, our outlook for earnings per share for 2014 excludes the effect of any future capital deployment.
And with that, I'll turn the call over to David.
- President & CEO
Thanks, Ted.
Good morning, everyone, and thank you for joining today's call.
To begin, I'll briefly review highlights from our second-quarter financial results.
Next I'll provide an update on how the effective execution of our strategy is addressing global challenges such as lowering health risks and improving productivity, affordability and clinical quality.
In addition, I'll profile how our Supplemental Benefits business continues to meet the needs of global consumers and is driving attractive growth across our international markets.
Next Tom will offer insights on our performance as well as an updated outlook for the remainder of the year before we open the floor to your questions.
After that I'll leave you with a few closing remarks.
Let's get started with some highlights.
Our track record of strong performance and competitively attractive financial results continued in the second quarter with each of our business segments contributing meaningful to Cigna's results.
Our second-quarter 2014 consolidated revenue increased 9% to $8.7 billion.
We reported adjusted income from operations for the second quarter of $530 million, or $1.96 per share, which represents a per share increase of 10% over the second quarter of 2013.
Turning to each of our segments, we again reported strong results across our Global Health Care business.
Our continued focus on delivering engagement-based solutions that leverage innovative physician partnerships is resulting in high-quality clinical outcomes and competitively differentiated medical costs for our customers and clients.
These outcomes are driving strong customer retention, supporting our work to deliver localized and personalized care for customers around the world.
Our Global Supplemental Benefits businesses had another strong quarter as Cigna continues to effectively deliver differentiated products and services for a growing number of customers worldwide.
In a moment I'll discuss this strategically important business in more detail.
The results of our Group Disability and Life segment continue to be strong, driven by our disability and productivity model, which produces industry leading return to work results.
In our Group business we are putting our customers front and center, leveraging their broad talented clinical teams and supporting their work with actionable insights to help our customers improve their well being and sense of security.
In total, our second-quarter results reflect strong performance that remains firmly grounded in Cigna's clear and focused strategy of Going Deep, Going Global and Going Individual.
Now I'll highlight how we've positioned Cigna to compete and win in a complex global marketplace, both today and in the future.
Faced with serious challenges that continue to confront health systems around the world, our response has been and continues to be to emphasize innovation with a focus on affordability and personalization, which from our point of view require as highly localized focus.
At Cigna, personalization describes how we're addressing today's increasing retail-oriented marketplace, and the growing demand for products and services that are personally relevant to each individual's needs, needs that clearly evolve and change at each life and health stage.
And localization sharply targets Cigna's decision-making process in local market structures with locally based leadership teams and expert resources who best understand their home markets.
And we drive delivery of our innovative solutions and value proposition each and every day.
This emphasis on localization and personalization along with our focus on achieving improved clinical quality outcomes has driven us to engage collaboratively with physicians and individuals, uniquely defined by their local market characteristics, to emphasize deep and broad clinical excellence within our Cigna teams for the benefit of our customers and to innovate new customer-driven and incentive products and services that engage our customers in a highly personalized manner.
This includes Cigna's collaborative accountable care arrangements which we launched back in 2008.
We recently surpassed our 2014 goal of establishing 100 collaborative arrangements, and as of today have more than 1.4 million customers obtaining care through these models.
These collaborative arrangements engage with individuals to encourage preventative care, reward healthy behaviors, and to actively guide, coordinate and support the care journey of our chronic and acute customers.
By closing gaps in care through programs that improve prescription adherence, coordinate health screenings and ensure follow-up care, we are seeing improved outcomes and as a result better affordability.
We have growing proof that demonstrates the effectiveness of our collaborative arrangements with physicians.
For example, for those arrangements that have been in operation for at least two years, nearly three-quarters have met targets for improving quality with a comparable percentage meeting targets for improving medical costs.
These proof points clearly demonstrate that our collaborative arrangements with physicians are effectively delivering the right care at the right time at more affordable and sustainable levels.
Now I'd like to turn to a part of our business that is predominantly based outside the United States and is of increasing scale and significance for Cigna.
Globally evolving markets are confronting a host of new societal and economic demands, presenting us with opportunities to deliver innovative solutions to protect health, well-being and sense of security.
To meet these emerging needs we have built a scale-differentiated platform for our fast growing Global Supplemental Benefits business.
This business is of increasing strategic importance for three primary reasons.
One, it represents an attraction global market for Cigna with expanding opportunities among the growing middle class and seniors population and additional opportunities in healthcare as both governments and individuals around the world seek to expand private solutions.
Two, our broad innovative distribution channels gives us more opportunities to effectively target and interact with individuals on a personalized basis.
And three, our sophisticated individual expertise can be leveraged as the individual market evolves in the United States.
Today Cigna's Global Supplement Benefits business has more than 12 million policies in force primarily serving the growing middle class.
These policies cover a wide range of health, life and accident products that provide individual customers with a diverse range of solutions targeted at filling the gaps in their social benefit programs and providing them with greater piece of mind.
The unique differentiator and driver for Cigna in the marketplace are the more than 150 diverse affinity partnerships we maintain throughout the world.
Our broad experience and industry leading capabilities in this distribution channel continue to drive new customer growth and help us deepen existing customer relationships.
In addition, we are leveraging a range of innovative distribution channels to reach current and prospective customers in a personalized approach.
For example, in the direct-to-consumer space we continue to fuel our industry leading proprietary telemarketing programs with new personalized distribution channels such as direct digital campaigns, branch banking, retail store outlets and home shopping television.
Our ongoing innovation of distribution of channels is continuing our success in helping to drive growth.
In fact today these newer channels now represent more than one-third of new sales for this business.
Another market segment with attractive potential for our Global Supplemental business is the senior segment.
We recently expanded our efforts to support the needs of seniors through an innovative digital marketing strategy focused on establishing Korea's first healthcare membership program, which offers a broader array of unique personalized services for this segment.
This innovative and rapidly growing platform is called Heyday and it's in its very early stages but it already has nearly 75,000 senior members.
Supporting the needs of this fast growing senior segment in strategic markets around the world represents an attractive growth opportunity for Cigna.
Our deep international experience in the individual market is also proving to be an advantage as we harness our analytical expertise to enhance and create solutions for the growing employer, individual and supplemental markets in the US.
Our strong track record of meeting customers' needs in our Global Supplemental Benefit business has resulted in leading financial performance over a sustained period of time.
Specifically over the last five years, our Global Supplemental Benefits business has delivered average annual growth in revenue of 19% and earnings growth of 20%.
In addition, these businesses generate high returns on capital and very attractive markets.
Cigna's substantial international footprint, differentiated capabilities and local teams of talented professionals enable us to effectively compete in some of the world's most attractive existing and emerging growth markets.
Given our strong market position and our ongoing strategic investments in Global Supplemental Benefit, over the long term we continue to expect 15% average annual growth in both revenue and earnings from this important segment.
Turning now to our portfolio of diversified businesses, as we look to the future and acknowledge the complex challenges and market conditions that lay ahead, we are energized by what we view is a tremendous opportunity to grow our capabilities and further enhance the experience and value proposition for the customers we serve.
At Cigna, we remain well positioned for sustained long-term growth with an industry leading global reach and broad capabilities that are firmly grounded in our clear and focused strategy.
Over the course of 2014, we remain confident that each of our businesses will deliver continued growth.
In addition, the strong returns on capital from our business give us flexibility to drive additional shareholder value through capital deployment opportunities.
As we look beyond 2014, given our strong financial position, our capabilities to create value for our customers and clients and multiple growth businesses, we remain committed to our long-term average EPS growth target of the 10% to 13%.
Now to summarize my remarks before turning it over to Tom, Cigna's strong financial performance during the second quarter marks another quarter of competitively attractive revenue and earnings growth.
The increasingly complex nature of change in the current business landscape presents significant opportunities to further innovate and grow.
In our targeted markets around the world, we are harnessing the power of data and insights and building an increasing agile network of partners with the goal of driving differentiated value for our customers and clients as well as our shareholders.
These capabilities across our diversified portfolio of businesses around the world remain grounded in the strong execution of Cigna's clear and focused strategy.
And our strong balance sheet continues to give us a flexible platform for additional shareholder value creation.
And now I'll turn the call over to Tom for a more detailed look at our results and our outlook.
Tom?
- CFO
Thanks, David.
Good morning, everyone.
In my remarks today I will review Cigna's second-quarter 2014 results and discuss our outlook for the full year.
Overall this quarter's results are strong driven by continued effective execution of our strategy with meaningful contributions from each of our business segments.
Key highlights in the quarter include consolidated revenues grew 9% to $8.7 billion driven by continued growth in our targeted markets.
Consolidated earnings grew to $530 million, and quarterly earnings per share increased 10% to $1.96 per share and free cash flow remains strong as we continue to deploy capital for the benefit of shareholders with $1.15 billion of share repurchases on a year-to-date basis.
The strength of these results provides us with good momentum and confidence in our full-year financial outlook for 2014.
Regarding the segments, I will first comment on our Global Health Care segment.
Global Health Care results were strong driven by our commercial employer group business.
First quarter premiums and fees for Global Health Care grew 8% to $6.1 billion.
This result reflects continued good growth in our ASO programs as demand for these products remain strong.
We ended second quarter 2014 with 14.2 million global medical customers growing by approximately 170,000 customers on a year-to-date basis.
First quarter earnings were $402 million and were primarily driven by business growth and specialty contributions.
Turning now to medical costs, we continue to deliver medical costs that reflect better health outcomes and strong clinical excellence for our customers and clients as a result of our deep collaborative relationships with physicians and our focus on personalization of care.
Our commercial medical trend continues to be among the lowest in the industry.
And given that over 85% of our US commercial customers are in transparent ASO funding arrangements, our clients directly benefit from these favorable medical costs.
Medical costs also continue to reflect the recent low utilization trend.
Regarding medical care ratios, in our US commercial guaranteed business, our second quarter 2014 medical care ratio, or MCR, was 83.1% on a reported basis or 84.3% excluding prior year reserve development.
Our commercial employer risk businesses continued to deliver strong results reflecting strong pricing, disciplined underwriting and continued effective medical management and physician engagement.
The guaranteed cost MCR in the quarter also continued to be impacted by higher than expected claims on our individual business.
In our seniors business, our second-quarter MCR for Medicare Advantage was 84.8% on a reported basis, or 85.1% excluding prior year reserve development.
Second-quarter Medicare Advantage results continue to reflect progress on the network and medical management actions we discussed in previous quarters along with revenue pressure from the low rate environment.
Across our commercial and seniors risk books of business, our second-quarter earnings included favorable prior year reserve development of $16 million after tax compared to $20 million after tax in the second quarter of 2013.
Moving to operating expenses, for second quarter 2014, the total Global Health Care operating expense ratio was 21.5%.
This includes the impact of the industry fee which added about 110 basis points to the expense ratio in the quarter and was offset by efficiency gains and expense discipline.
To recap, we had another strong quarter in our Global Health Care business.
Now I will discuss the results of our Global Supplemental Benefits business, which David profiled earlier.
This business continues to deliver very attractive growth and profitability.
Premiums and fees grew 18% quarter over quarter for Global Supplemental, or 13% on a currency adjusted basis.
Second-quarter earnings grew 24%, or 15% on a currency adjusted basis to $61 million reflecting business growth, effective operating expense management and stable benefit ratios.
For Group Disability and Life, second-quarter results were also strong with premium and fee increases of 5% over second-quarter 2013.
Second-quarter earnings in our Group business increased 6% to $110 million.
The quarter's earnings included a $35 million after tax favorable impact from a reserve study on our Group Disability business as well as strong operating results in disability underscoring the strong fundamentals in our disability and productivity programs.
For our Corporate and Other operations, results totaled to an after tax loss of $43 million for second quarter 2014.
Overall, as a result of the continued effective execution of our strategy, our second-quarter results reflect strong revenue earnings contributions from each of our business segments as well as continued significant free cash flow.
Turning to our investment portfolio, in the second quarter we recognized net realize investment gains of $43 million after tax coupled with a strong net investment income result.
We are pleased with the quality and diversification of our investment portfolio and our overall investment results.
Now I will discuss our outlook for 2014.
We expect to continue to deliver differentiated value for our customers and clients and strong financial performance for our shareholders in 2014.
We now expect consolidated revenues to grow in the range of 5% to 8% over 2013, an increase of 1% versus prior guidance.
Based on the strength of our first half results, our outlook for full-year 2014 consolidated adjusted income from operations is now in the range of approximately $1.94 billion to $2 billion, or $7.20 to $7.40 per share.
This represents an increase of $0.10 per share at the mid point over our previous expectations.
Consistent with past practice, our outlook excludes any contribution from additional capital deployment and any additional prior-year reserve development.
I would also note that full year 2014 adjusted income from operations includes approximately $110 million after tax, or $0.40 per share of aquisition-related amortization expense.
I will now discuss the components of our 2014 outlook, starting with Global Health Care.
We expect full-year Global Health Care earnings in the range of approximately $1.61 billion to $1.64 billion.
Regarding global medical customers, we continue to expect 2014 customer growth of approximately 1% to 2%.
Turning to medical costs, our year-to-date medical cost trend for our total US commercial book of business is favorable to our prior outlook of 5% to 6%, reflecting continued effective medical cost management and physician engagement and low utilization trend.
As a result, we now expect full year medical cost trend to be in the range of 4.5% to 5.5%, which is 50 basis points lower than our prior guidance.
This updated range continues to contemplate some uptick in utilization over the balance of the year.
Regarding medical care ratios, for our US commercial guaranteed cost book of business we continue to expect the 2014 MCR to be in the range of 81% to 82.5%.
This reflects continued strong results in our employer group business and pressure in our individual business.
ACA enrollees continue to be high utilizers of healthcare services and likely will push our 2014 guaranteed cost MCR to the high end of our range.
We continue to expect the impact of pressure from the individual business will be manageable within our overall diversified portfolio.
For our seniors business, our Medicare Advantage MCR for 2014 continues to be in the range of 84% to 85%.
Regarding operating expenses for 2014, we continue to expect our total Global Health Care operating expense ratio to be in the range of 22.5% to 23.5%.
This outlook reflects increased spending for open enrollment costs and strategic initiatives in the second half of 2014, which will impact both the Global Health Care operating expense ratio as well as adjusted income from operations.
Now moving to the other components of our outlook.
For our Global Supplemental Benefits businesses, we continue to expect strong top line growth and earnings now in the range of $205 million to $220 million.
Regarding the Group Disability and Life business, we now expect full year 2014 earnings in the range of $315 million to $330 million.
Regarding our remaining operations, that is Corporate and Other operations, we now expect a loss of $185 million for 2014.
So all in for full year 2014, we expect our outlook for consolidated adjusted income from operations to be in a range of approximately $1.94 billion to $2 billion, or $7.20 to $7.40 per share.
I would also highlight that we expect earnings and EPS in the second half of the year to be comparable between third and fourth quarter.
Now moving to our 2014 capital management position and outlook, overall we continued to have excellent 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 strategy and priorities have not changed.
These priorities are providing the capital 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 return capital to shareholders primarily through share repurchase.
Regarding free cash flow, we ended the quarter with parent Company cash of approximately $325 million.
During the period May 1 through July 30, we repurchased approximately 5.5 million shares of Cigna's common stock for $500 million, bringing our total year-to-date share repurchase to approximately 13.5 million shares for $1.15 billion.
After considering all sources and uses of parent Company cash, we now expect to have approximately $750 million available for deployment during the balance of the year.
Overall our financial position and capital outlook remain strong.
The high returns on capital from our businesses coupled with our strong balance sheet means that we will continue to generate significant free cash flow to deploy for the benefit of shareholders.
Now to recap, our second-quarter 2014 results reflect the strength of our diversified portfolio of global businesses and the continued track record of effective execution of our strategy.
The fundamentals in our businesses remain strong as evidenced by strong growth in revenue and earnings, competitively attractive medical cost and quality outcomes that directly benefit our customers and clients, and continued strong free cash flow.
Based on the strength of these results, we are confident in our ability to achieve our full-year 2014 earnings outlook.
And with that, we will turn it over to the Operator for the Q&A portion of the call.
Operator
(Operator Instructions)
Matt Borsch, Goldman Sachs.
- Analyst
Could you give us a little more detail on what you're seeing in the individual business, how the -- your read on the exchange utilization has changed over the course of the quarter and what you expect will happen in the back half?
- President & CEO
Matt, good morning, it's David.
Let me give you a little color of our approach to the individual and specifically the exchange business and I'll tell you what we're seeing.
First, our view of that marketplace is that 2014, 2015 and 2016 really represent version 1.0 of the market so there's a lot to play out.
For long-term success we think that three things need to be in place: clearly insurance offerings that cover needed sick care as well as proven preventative care.
But in addition to that, for sustainability, we think two things are important.
One is supporting engagement incentive-based programs to get a more sustainable cost profile and health profile, and secondly, to enable ample network flexibility to engage and really focus on the high-performing networks and the value-based networks like our Cigna collaborative accountable care networks.
Now my comments on our experience come back to the five states we're focused on in the exchanges to date and about the dozen markets there.
We saw two tranches of membership, the first tranche, then, and we'll call it the end of Q1, beginning of Q2 tranche.
As we discussed before, that first tranche was older than expected, purchased a little richer benefit profile than expected and its utilization of services was higher than our expectations and higher than any of our competitors, classes of services including oncology, maternity, musculoskeletal, et cetera.
The second tranche toward the latter part of Q1, beginning part of Q2 which saw another surge, a bit younger profile purchased a bit leaner benefit profile about the same amount of silver but more bronze, less gold.
Early to tell in terms of how that's playing out but early signs are a little bit more favorable or a little healthier population.
As we look to the second half of the year, we're anticipating to continue to see pressure here, and our MCR outlook contemplates that, that we will continue to see pressure.
And what we think is we're in the early part of a shakeout year in 2014.
Our final note is we've positioned this business to be manageable.
We didn't expect to make money.
We're not making money here and there's some more pressure.
It's manageable within the broad diverse portfolio that makes up our Company right now.
- Analyst
One follow up on the three Rs.
Where are you on accruals now or your outlook?
I think you talked to expecting reinsurance of under $100 million for the full year and you not accruing anything on the other two Rs.
Is that still where you are?
- President & CEO
Matthew, so directionally through the first half of the year, we've accrued a total of about $60 million, $65 million after tax.
The majority of that is in reinsurance.
And our outlook contemplates a similar pattern in the second half of the year based on the experience we're seeing right now.
- Analyst
Okay, thank you.
Operator
Justin Lake, JPMorgan.
- Analyst
Want to drill down a little bit further on the exchanges.
Given the guaranteed cost ratio in the quarter and all the uncertainty on what's going on with medical cost trends given hospital results, can you help us delineate the core GC MCR versus what's going on in the individual business?
For instance, what's the individual MCR right now and where is that relative to where it was last year?
- President & CEO
Okay Justin, it's David.
Let me frame the overall earnings profile.
And I'm going to ask Tom to walk through the guaranteed cost MCR and a bit of clarity here because there's some movement quarter to quarter.
Couple headlines coming in.
First, as we stepped in to 2014, we acknowledged that it was again a very disrupted and uncertain year.
And we set goals and objectives as you know to grow revenue earnings and EPS while continuing to invest in the Company.
Our results year to date for the aggregate franchise are strong and they demonstrate really that balance of our portfolio.
And net, net we're pleased with our results through the first half of the year.
Overall our loss ratios and our medical costs are in line with our expectations.
As Tom noted for our aggregate book of business, our medical costs are a little favorable to our expectations and lead us to improve our outlook on medical cost trend.
And specifically the variance that we're seeing in our aggregate guaranteed cost loss ratio is driven explicitly by the individual block of business, which is a larger percentage of our guaranteed cost of block business than maybe the market average.
So I'm going to ask Tom to give you a little bit of color in terms of the drivers of that movement and give you a little bit more dimension of what's driving the individual portfolio.
Tom?
- CFO
Justin, I'd say there's three major headlines related to our GC MCR this quarter that I'd like to make sure you take away and then I'll get into some of the nitty gritty.
First as David said, our employer group business MCR continues to perform well and remains very consistent with our expectations.
Second, the primary driver of the increased GC MCR is from our individual business.
And then finally, as you'd expect in period-to-period comparisons, there are a number of moving parts that are reflected in the quarterly results and I'll get in to that in a minute.
So looking at the sequential increase second quarter of 2014 versus first quarter of 2014.
First, there was more favorable prior-year development recorded in the first quarter than the second, that's kind of a normal pattern.
Second, there is continued pressure from individual results and individual share of our guaranteed cost business continues to increase as the individual business grows quarter to quarter.
And then finally, there's an impact from benefit structure across all of our risk business, reflecting the increased impact of deductibles which results in a low first quarter MCR.
So the combination of these three factors pushed the reported MCR and GC up by about 7 points sequentially.
The impact on the quarter MCR is about evenly spread across all three of these factors.
So reserve development, individual pressure, and benefit structure about evenly account for the 7-point sequential increase.
Again, adding it all together, our employer business MCR remains consistent with our expectations and outlook.
And our individual MCR is still high and likely to push our full year MCR to the high end of our range.
- Analyst
Okay, maybe I can come at it another way and then I'll jump off.
Maybe trying to think about what the sustainable earnings power of the business is.
You're talking about losing money in exchanges.
That seems to keep -- to be increasing.
Can you give us some color around the magnitude of that loss and how we should think about what you're doing on the individual business right now and where you think that can go next year given your pricing actions?
And then to 2016, what a normal margin would look like, so that we can get some idea of what kind headwind and where it would go from there?
- President & CEO
Yes, sure, Justin.
And so stepping back, we believe that this marketplace has the potential for being a sustainable attractive market.
And what does that mean?
A 3% to 5% margin business we would have to be able to see to get the returns that we would expect.
So firmly grounded in that.
Two, in the early shakeout period we knowingly went in to a market that we didn't expect that to transpire given the profile of the states, the dynamics and the moving parts.
Three, while we expected to have earnings pressure in this book of business, the rate of earnings pressure is growing and you and some of your peers put out at the end of the first quarter is that number in the $50 million, $60 million range.
That was order of magnitude first quarter assuming that pressure continues to mount a little bit beyond that, based on our outlook.
And even with that in our outlook for 2014, we're able to not only achieve but increase our overall earnings expectations, which we're proud of in the diversified portfolio.
And then finally, as we look at 2015 we're going to remain in the five states we're in.
Our expectation is that we're going to enter three additional targeted states with targeted focus with our collaboratives, apply some of our learnings from this year.
And make no doubt about it, our expectation is to improve off of the 2014 result, which is not sustainable.
So long term, we'd need a 3% to 5% margin expectation.
Secondly, earnings pressure in 2014 exists and is increasing, but we're managing that within our overall portfolio.
And lastly we would expect to improve on this result in 2015.
- Analyst
Thanks for all the color.
Operator
Scott Fidel, Deutsche Bank.
- Analyst
I wanted to maybe flip over to discuss the Medicare MLR.
That looks like that was in line with your full year target, but at the higher end of that range and was up sequentially.
So maybe if you can walk us through the drivers of the higher MA MLR sequentially.
How much did that relate to less reserved development as compared to the run rate business?
And then maybe talk about if there were any particular markets that did drive the higher sequential MLR and MA?
- President & CEO
Scott, good morning, it's David.
I'll give you a little bit in terms of how we're looking at the business through the first six months and ask Tom to give you the specific reconciliation of the MLR.
As you know, we were very clear as we stepped into 2014 that we expected 2014 and 2015 to be a pretty disrupted marketplace, rate pressure, industry fee et cetera.
It's also important to note that this is a market that is highly valued by seniors with now fully 30% of all Medicare coverage through MA.
High satisfaction rates industry-wide for MA, driven by higher engagement with physicians, better clinical outcomes, better services.
To date, we're actually pleased with the targeted actions we implemented to improve the overall results.
Actions have included some product positioning, pricing actions, but very targeted network movements, as well as targeted medical management.
And important to note that as you indicated, our year-to-date loss ratio is in line with our expectations for both the first half of the year as well as our full outlook.
The only other qualitative comment I would give you is there are no unique hot spots by market that I would call out for you.
There's a portfolio we're managing, but there's no unique hot spots.
I'll ask Tom to give you a little bit of the reconciliation in movement Q to Q, but overall expectations are in line with what we had the first six months of the year.
- CFO
Scott, you've pretty much hit on the key factor in the sequential increase first quarter 2014 to second quarter 2014.
Much of the increase relates to favorable prior reserve development that was reported in our first-quarter results.
If you adjust for the PYD, the MCR increase from about 84% in the first quarter to about 85% in the second quarter.
So this is consistent with our expectations and our outlook for the full year.
1% increase is within the range of expectations for normal quarterly variance here and likely also reflects some deferral of services from the first quarter into the second quarter, which would be very consistent with the low utilization recorded in the first quarter.
- Analyst
Okay and then had a follow-up question, would be interested if you can give us an update on how things are tracking around the national account selling season for 2015?
Then also interested in what you're seeing out in the market in terms of employer interest in terms of large case ASO employers to shifting towards private exchanges in the context that recently Aetna talked about how they're seeing a slowdown in that activity level, or at least the signing level of that particular theme for 2015.
- President & CEO
Scott, it's David.
A little color on both.
Relative to 2015, and again we'll speak to the national account piece, because that's where we'd have some visibility.
Important to remember we define that buying segment a little more narrowly than the market does in total.
So when I give you comments, it's commercial employers with 5,000 or more employees that are multi-state.
So we define it a little bit more tightly.
And also important to note our strategic objective has been to hold market share in aggregate in a marketplace that's shrinking while growing our penetration and engagement incentive in specialty based programs.
So as we look to the marketplace, for new business opportunities year over year we've had about the same looks in terms of size of the pipeline.
And our view of what's emerging there is that our win ratio will be similar year over year on new business.
Second point, on the portion of our book of business that was out to bid year over year.
Our percent of our book of business that was out to bid was up somewhat year over year driven by the cycle of the contracts we have.
Within that, our retention rate of wins of those pieces of business that are out to bid are about the same.
But because the percent that was out was a little higher, our net losses will be a little higher year over year.
Putting the picture all together for 2015, while not giving you guidance, would expect to see continued progress in terms of some new business sales, continued penetration of our specialty and engagement based capabilities, which are critical and we've got good traction, and a little softer retention rate than we had over the prior year which was an outstanding retention rate.
Last note I would say here, it's good to get through this year, because again a meaningful percentage of our book of business was out to bid based on contractual cycle and the team is going to come through that pretty favorably.
As it relates to private exchanges, as we noted, early in that innovation cycle may present a long-term attractive marketplace that we're clearly engaged in.
That marketplace has to have transparent products and services that engage individuals' variability around the incentive programs and a lot of flexibility for ongoing innovation so programs can remain sustainable affordable, et cetera.
To date we're positioned in the vast majority of exchanges.
The activity we've seen has been a lot of interest in exploration, including our own proprietary, but a modest amount of net movement.
So netting it all together from a Cigna standpoint, net net a de minimus movement of wins and losses but interest in the space.
And the key here is demonstration of long-term value creation, which we think that that will continue in to 2016 and 2017.
- Analyst
Okay, thank you.
Operator
Carl McDonald, Citigroup.
- Analyst
First question was wanted to go back to the comment around the pattern of the three Rs being similar in the second half of the year.
I'd think given the way the reinsurance works, you should be seeing maybe exponential growth in the accruals in the second half rather than a similar pattern.
- CFO
Carl, I know there's been some commentary on that lately.
Our expectation is that the three R impact when you net through all of them, all they are is the reinsurance, the risk adjustment and risk quarters, will probably be proportionate through the balance of the year.
- Analyst
How would that be though?
If the reinsurance kicks in at $45,000 presumably you'd have a lot more people hitting that in the second half of the year than you did in the first.
- CFO
Well had a few things going on.
We'll have more premium as we go through the year, too.
And we would also tend to develop claims to expected outcomes and have some share of that reflected in our accruals to date.
- President & CEO
And Carl, it's David, maybe to add on, when we say proportionate to Tom's very important point in terms of more premium, as you know the premium is rating and ramping up through the course of the year.
So don't think about it as absolute dollar amount, think about it in proportion to premium.
So to your hypothesis, it'll grow somewhat.
But we're not signaling a tremendous spike in the last portion of the year, but rather a proportionate pattern to our current premium profile in the first half of the year.
- Analyst
Okay, and then second question is where does the individual business stand from an enrollment perspective today, and be helpful if you broke that out between exchange and off exchange?
And then, what percent of the guaranteed cost revenue are you anticipating for the year?
- President & CEO
Carl, at a macro level, the individual business, think about we said before 250,000 to 300,000 lives we do expect to be approaching 300,000 lives and maybe stepping back a little bit.
Slightly less than 50% of that is ACA unexchanged business that we're dealing with in terms of our portfolio.
As it relates to percent of the guaranteed cost business, it's ranging between 25% and 30% and as we trail toward the end of the year, we'd expect it to push up toward 30%.
- Analyst
Great, thank you.
Operator
Ralph Giacobbe, Credit Suisse.
- Analyst
Wanted to go back to the individual book and try to ask it a different way.
How much did it actually pressure MLR in the quarter?
So in other words, if you just took the individual book out of your business, how would the MLR compare to the 83.1% that you reported?
- CFO
Well Ralph, again I don't think we're going to get in to the specifics of that level of detail.
But again as far as the sequential increase, individual again accounted for about a third of that 7 point sequential increase.
And the GC MCR was performing exactly as we'd expect.
Now there's a few things going on in the GC MCR.
We've got some things coming out like limited medical.
We've got some things coming in like pricing for the health insurance tax.
And we've got, as we've talked about, the benefit structure changes running through the quarters.
But adjusting for all those things, GC MCR is exactly where we expected it to be, very consistent with our expectations.
And again as we look to the outlook, we're staying in the range that we talked about, but acknowledging that given the pressure in individual we're going to be hanging out at the high end of that range.
- Analyst
And then can you talk about reconciling that with the taking down your trend guidance for the year despite the higher MLRs?
Is that in the context of including the ASO block that drags that number down in terms of cost trend?
I'm trying to reconcile down cost trend but up MLR.
- President & CEO
Hey, Ralph, it's David.
I think that's an important point.
Stepping back, when you look at that cost trend, we talk about that aggregate commercial cost trend is across our commercial portfolio.
So to remind you, greater than 90% of our commercial portfolio is ASO about 85%.
Another 7 % or so in shared returns and then the residual, somewhat less than 10% in guaranteed cost in total.
So that's the block in totality.
We've consistently delivered a very attractive competitive trend there and we're quite pleased with the fact that while we entered the year with an expectation at the low end of the competitive range of 5% to 6%, as Tom noted is his prepared remarks, our year-to-date trend is below that range.
So a number that starts with a 4, hence we improved that outlook to 4.5% to 5.5%.
That's separable from looking at the guaranteed cost on loss ratio.
So the underlying medical trend for the aggregate portfolio is performing very well.
Why?
Great penetration of aligned incentive and engagement based programs, strong clinical management.
And then continued emerging leverage of our physician partnerships in those collaborations.
So that's transpiring.
If you come back to Tom's point, in our employer guaranteed cost book of business, our MCRs are right where we expected them to be.
Great execution, medical cost trend netting to a favorable result and very strong result.
The simple delta in the guaranteed cost MLR is driven by the individual block of business, which is a large percentage as I noted before, 25% to 30% of the guaranteed cost portfolio.
- Analyst
Okay, thank you.
Operator
Joshua Raskin, Barclays.
- Analyst
I hate to harp on the guaranteed cost MLR.
But doing rough math, if I assume you had even $80 million or so of exchange premiums at 100% MLR, I think that's only explaining something in the ballpark of 100 bps year over year, and obviously a little bit less sequentially.
So I'm struggling to see is it the remainder of the individual book that's performing much worse?
And if so, why is that?
- CFO
So Josh, let's go back to the major headlines here.
Again we've got the -- you've that already, I think employer group as we expect, individuals, the source of the pressure and the number of moving parts.
So the number of moving parts can be instructive in a quarter-over-quarter comparison.
In the quarter-over-quarter comparison, the most significant impact in the MCR increase is individual.
That explains about three-quarters of the 400-basis point increase.
And some of that relates to the fact that we had very low MCR individual business in the first quarter of last year and now we're to an average higher MCR individual business in the first quarter of this year.
So that dynamic really is impacting the quarterly results and obviously we're also showing individual as a higher share of our premium in the second quarter of 2014.
And I think you've probably low balled the ACA premium estimate in your math.
- Analyst
Okay, and so, I think, David, is it 125,000 lives now and trending slightly down?
- President & CEO
So Josh, think about our individual book of business being in the 275,000 to 300,000 range with the ACA lives in excess of 100,000.
And we're not flagging a big trend down for the year.
We may move from 300,000 down to 280,000 in that range, but we're not flagging a big trend down for the year.
When we look at the drivers here though, important to note, we see the pressure in the aggregate individual book of business because most of our individual lives are in states that allowed the movement of the keeping plans and movement to the ACA piece.
Take this entire 300,000 lives, look through the revenue that goes along with that.
ACA is in excess of 100,000 and again 300,000 for the full year potentially rating down to 280,000 by the end of the year.
- Analyst
Okay, and then a follow up on a couple of those one timers.
The reserve studies, the $35 million in the Disability and Life, was that expected?
Is that normal course of business, i.e., was that in guidance?
And then what was the favorable currency impact?
You haven't really called that out in the past, so was that an above abnormal benefit that you saw in the quarter?
- CFO
Josh, for the first question on the currency, we call that out just to make sure people stayed grounded on growth rates in Global Sup.
In the overall scheme of things, it's about a $4 million impact, so it's not really that material to earnings.
On the reserve study question, this is -- we've got a consistent track record of continuing to refine our return to work and productivity programs in our Disability business.
And over time some of those outlooks show up in the run rate of the business and some of those outcomes show up in the reserve studies.
While we don't actually specifically plan on a reserve study benefit, we do plan on operational improvements that will improve results in Disability.
So it's one of these things, that specific study and the results from that specific study weren't planned for but some level of improvement in group results was planned for and contemplated in the outlook.
- Analyst
Got you, but the guidance really had it whether is was explicitly in a reserve study or not, you guys did expect $35 million of Disability earnings coming through that mechanism, I guess?
- CFO
We expected some improvement in the year.
Quite frankly we didn't necessarily expect it this quarter.
It's over the course of the year.
But that's -- you got the general idea, we were expecting improvements.
- Analyst
Okay, perfect.
Operator
Kevin Fischbeck, Bank of America Merrill Lynch.
- Analyst
Can you go in to the MA business a little bit more?
Obviously there's some questions about it in Q4, seems like the last couple quarters it's come in a lot better.
Can you talk about it in the contest of how you're thinking about 2015?
I know some of your competitors have given some color about how many counties they're going to add next year or new markets they're going to enter next year?
And some general commentary around what the benefit designs are shaping up like.
Do you have any color around your visioning for next year?
- President & CEO
Sure, Kevin, it's David.
As we noted previously, we're pleased with the traction thus far through the first six months and some of the actions we've taken to -- in targeted geographies to sharpen the networks, further accelerate some of the clinical programs are paying dividends and results.
As we look in 2015, our primary expansion strategy in 2015 will be to leverage additional counties off of some of our new market entries from 2014.
So think in order of magnitude 40 to 50 additional counties that lever off of market entrees we went in 2014.
Off of that there'll be some county exits as well but the net result will be total entry of additional counties.
As it relates to benefit positioning, we'll step in to 2015 with a notion of continuing to maintain an attractive benefit profile.
As you know, the HealthSpring model had had the ability because of its efficiency with the physician partnerships to build some additional benefit richness for the benefit of our respective customers.
And we expect to maintain a good level of attractiveness especially in our integrated and how they engage markets.
And therefore, we would expect to grow as we step in to 2015.
- Analyst
Okay.
And then on the guaranteed cost business, looks like membership is down.
What's going on there?
Are you seeing pricing pressures and you're walking away from business?
How should we think about that?
- President & CEO
Your relative to guarantee cost say for again the portion that's in the individual block of business, it's a smaller portfolio for us, a well performing, but smaller portfolio.
What we continue to see most specifically here, Kevin, is continued very strong appetite for ASO stop loss programs that are highly transparent and work very collaboratively with employers to get the incentives aligned.
We see higher levels of engagement and therefore better returns.
So as we've discussed in prior calls, we will frequently offer a guaranteed cost and an ASO stop loss program side by side either for new business or renewal, and we continue to see the take-up on the ASO stop loss.
Order of magnitude think about in our new business sales in the select segment, so 50 to 250 less employers, about 70% of all our new business sales are ASO stop loss versus two years ago it was 50/50 guaranteed cost.
So still a third in guaranteed cost, but that ASO stop loss and transparent proposition continues to hunt very attractively.
- Analyst
Okay so this is more planned shift of your customers to a different product option rather than necessarily a cost or pricing issue.
- President & CEO
Broadly speaking I would say the pricing environment continues to be competitive and no major change.
And when you say plan shift, that would just add to that.
It's our consultative approach where we're a bit agnostic at the end of the day as to which funding alternative an employer takes.
Because in that space neither of them are highly penetrated with their specialty portfolios and what we want to do is provide choice.
And thus far the choice has led to more of the transparent funding mechanism.
So it's plan full in terms of providing choice, but the marketplace is telling us they value that choice more so with the 70% of new business sales being ASO stop loss.
- Analyst
Okay, great, thanks.
Operator
Christine Arnold, Cowen.
- Analyst
Have a few clarifying questions.
I'm hearing the aggregate trend is separable from guaranteed costs.
So am I hearing that even excluding individual, your trend commentary doesn't necessarily apply to the underlying guaranteed cost?
- CFO
Well Christine, I'd say we just want to be clear, there are two different reference points.
One is the total commercial book for trend and one is the GC book for the MCR.
And in fact in the overall trend result, we don't get the disproportion impact from individual on our overall business and the GC MCR is disproportionately impacted from individual.
Now they run in the same range.
So it's not like we're calling out major differences on the employer group business and depending on what program type people select.
But there certainly is a big difference in the relative impact of individual.
It's disproportionately impacting the guaranteed cost MCR and it really has a minimal impact given it's such a small piece of our overall business and the overall book of business trend result.
- President & CEO
So Christine to add on to that, if you take Tom's comments relative to the employer guaranteed cost portfolio, that continues to perform very positively and in line with our expectations as is the overall medical cost trend.
We're trying to highlight that impact of the individual block of business is more disproportionate than guaranteed cost.
But the medical cost trend is benefiting all of our employer block of business.
- Analyst
So the employer guaranteed cost trend is decelerating that 50 basis points, as well?
- President & CEO
Our aggregate trend is decelerating 50 basis points and you should think about that as across our entire employer block of business.
- Analyst
Okay.
So as I think about stop loss and reinsurance, there was some -- you're selling a lot of that.
The attachment points are a bit lower.
I can conclude that you're benefiting even within that business from trend deceleration, is that true?
- President & CEO
You should think about the stop loss book of business as a large book of business; A large book of business that covers both regional as well as smaller employers with various attachment points and configurations.
And a book of business that has grown, continues to perform well and is repriced in a dynamic fashion.
But the current economic environment benefits very importantly the employers through lower medical costs and we benefit from some of that through the design of the stop loss programs when the stop loss programs exist.
- Analyst
Okay and then final question from me, you said you have some accruals in the individual book of business for expected outcomes in response to a question to the three Rs.
So I can assume that you're saying to yourself, okay, I know a certain -- I know what my profile of this membership looks like and I'm accruing all three Rs somewhat evenly through the year even though folks may not have hit that $45,000 attachment point yet for reinsurance.
Is my understanding correct?
- CFO
As we look to reinsurance, yes.
Again as it relates to the other Rs, we are being a little thoughtful about knowing that the information there is still a little scarce.
So trying to be cautious in how we're accruing that.
Operator
Ana Gupte, Leerink Swan.
- Analyst
Wanted to follow up on the question from Josh around your individual book.
I think you have about at least 200,000 lives as I understand from your previous individual book, and I'm wondering if you had a lower MLR on those before the CA and because of risk pooling that has deteriorated as well, not just in the states you're expanding, but elsewhere?
- President & CEO
Ana, the answer is yes.
- Analyst
Okay, so is that a big component of the 3%-ish MLR deterioration you're seeing year over year (inaudible -- technical difficulties)?
- CFO
It's a component but I wouldn't call it a big component, Ana.
Again, the dynamic for the year is very high MCRs in the ACA-related business and that business will grow over the year both in the momentum of enrollment.
And also we do expect lapses in our legacy individual business throughout the year and off period enrollment into ACA programs.
So the dynamic will be shifting towards more ACA business as we go through the year.
- Analyst
And then I think one of your competitors is related has been saying that they've been selected against because the not for profit Blues or even WellPoint are getting more previously insured people, whereas if you didn't have very large individual books.
Do you think you are getting selected against, and if so, if they are ACA compliant, would you not be eligible for risk adjustment beyond what you're projecting for this year?
- President & CEO
Yes, Ana, it's David.
Not going to speculate who's getting selected for and against.
I think the important thing here is a couple fold, and I'll come back to your risk adjuster in a second.
We're in the very early phase of the establishment of a new market and it is clearly dynamic and somewhat volatile, one.
Two, we sought to position our play in that marketplace as focused, targeted and manageable within the overall portfolio and our aggregate earnings reinforce that.
Three, any selection dynamic is going to be state-specific that is playing through and we'll flesh through as the 2015 renewal cycle transpires.
And finally as Tom referenced in a prior comment, on the I'll call it the other two Rs other than reinsurance, while we've recognized some level there, we've sought to be on the conservative or prudent range.
Hence, there may be some additional opportunity there.
But again, we're trying to give a lot of visibility to this book, make sure our shareholders understand that it's manageable within our portfolio even though there's pressure in it, and finally beyond what we think is the conservative end of some of the assumptions and the other two Rs given the volatility of the market.
- Analyst
And are you comfortable now next year considering this could become 50% of your guaranteed cost book that your pricing strategy on your loss exchange either through because you're encouraging forced attrition or on exchange trying to improve your loss ratios, that you wouldn't get a continually deteriorating book if you raised pricing on exchanges because of the potential second mover advantage?
- President & CEO
I'm not too concerned about a second mover advantage at this point.
This is a new market, a very dynamic and moving marketplace.
I think the most important point, back to yours, is insuring laser focus of specific resources, understanding the performance of the book of business, targeting benefit designs, pricing models, et cetera.
And finally where possible, leveraging our collaborative relationship so this population is becoming more actively managed more rapidly.
Because what we're seeing in the utilization is an under managed or underserved population.
So, I don't think the second mover advantage is an issue in the markets we're talking about, and we would expect a lot of movement in the markets in 2015.
It's still a very immature marketplace.
Operator
Andy Schenker, Morgan Stanley.
- Analyst
So I know you mentioned increased spending and open enrollment cost as related to OpEx spend.
But OpEx spend in the first half was still well below your guidance, so could you remind us about the types of investment spend in the second half and the expected time in there, as well as how we should think about some of that spending on a run rate basis?
- President & CEO
Sure Andy, it's David.
Broadly speaking, first, our strategy is guided as to drive continued operating improvements in the Business.
And I'm proud of the fact that our organization is rallied around that, and you've seen continued improvement in our operating expense ratio, which has in part created further and further capacity for ongoing investment.
2014 marked another year when you adjust for the industry tax of improvements and operating expense ratios.
Our results are strong and in line with our expectations year to date.
And our expectation in the second half of the year is that we'll see increased strategic spending.
Give you some examples: staffing and capacitization to support new Medicaid expansion and contracts; two, readiness for our January new business, expanded marketing and branding programs; expanding distribution, as well as geographic investments in our international business; and then, ongoing technological investments.
Stepping back, I think we've demonstrated a good balance of making sure the rate, pace and timing of investments are prudent and the returns, as demonstrated with our sustained growth rate, are also there.
So that gives you a little example of what we're contemplating in the second half of the year, and the team will continue to be disciplined relative to that.
- Analyst
Okay and then changing direction here a little bit, we've seen, obviously, continued declining unemployment rates.
Wondering if you're seeing any impact on your in-group growth versus obviously the attrition we've seen over the last several years, and if that's varied at all by your customer size and buckets?
- President & CEO
Yes, Andy, it's David.
I would say slight.
So as the unemployment rate has come down somewhat, as you know, unfortunately for the country in part, some of that is people leaving the workforce.
Save for that in some of our industries we've seen the rate of, I'll call it disenrollment or attrition, slow stem the tides and in some cases a little in-group growth.
So small movement, I wouldn't signal a spike by any stretch of the imagination, but small movement from a continued disenrollment, to a stabilization, to, in many of the industries, a bit of an uptick in enrollment.
- Analyst
And does that vary at all by market segment?
Is there more roads in select perhaps versus national accounts or --?
- President & CEO
Absolutely.
As we've flagged strategically we see the national account segment as a net shrinking segment in the country right now, based on a whole variety of reasons of employment profile.
Commercially as you go down market, the select are 50 to 250 life employer market, we see some attractive growth there, both organically in the employer profile, as well as our share of that.
Operator
Peter Costa, Wells Fargo.
- Analyst
With your membership growth target to be 1% to 2% this year and you're talking about retention being down for next year, without putting words in your mouth, that sounds like you're talking about flat to down membership next year.
With the lowest trend in the industry and you lowering it again here today, why do you think you don't see more growth?
Is there some -- is it a breadth issue for you, or is there some other issue that you need to address strategically to rectify why accounts are leaving?
- President & CEO
Yes, Peter, I would caution you not to extrapolate the comments on the national account commercial portfolio to the aggregate book of business, number one.
Two, we're quite proud of the fact that we've had a high retention rate in aggregate across our businesses and net growth year over year that has been profitable net growth year over year.
My comments were specifically to the national account and specifically to retention, because the contractual cycle we were in with many cases had those cases out to bid, but our overall retention rate when the dust settles will be attractive.
We would expect the ability to grow in 2015, not giving you guidance: the strength of our regional segment, which is the largest segment of our portfolio; the strength of the select segment, which is the fastest growing portion of our portfolio, continues to perform very well; and in part, our aggregate enterprise retention is driven by just what you pointed at, a tremendous medical cost trend on a competitive basis that is benefiting clients and customers that we're serving.
So, overall the portfolio is in good shape and our commercial growth is expected to be positive, both competitively, as well as in absolute terms next year.
- Analyst
Okay and is there anything you got to do to address what's going on with the national accounts, or is that something you expect going forward to continue to be an issue?
- President & CEO
Yes, if you step back and look at the last handful of years, our performance in the national segment have been totally in line with our strategic expectation.
So holding share, changing profile of the business to more engagement incentive based and driving specialty program penetration.
So for example, when we talk about 2015 you'll see further specialty penetration.
So deepening share of wallet, which enables us to actually have deeper and broader clinical programs, which fuels our ability to deliver the returns for our clients, and we would expect to see continued success there.
So there are no specific unique actions.
We're signaling the fact that we had a higher percentage of our book of business out to bid.
You'll see a small variance in national accounts, which won't be a big variance for the enterprise in totality, given the strength of the regional and the select segment.
Operator
Dave Windley, Jefferies.
- Analyst
Hi, it's [Dave Stiebel] in for Windley.
Couple questions.
First one is could you peel back the onion more on what is the source of the individual medical cost being higher, can you elaborate on what categories those are in and the trends, are they accelerating, decelerating?
What sort of prescription data versus claims data that you have on that book?
And then more broadly as we look forward, what exactly are the steps that you're looking to resolve that is it more pricing, network adjustments, medical management?
That would be helpful.
- President & CEO
Dave, it's David.
So I made a brief reference to this previously.
So in the first tranche of lives that came on we saw much, much higher utilization of services.
So categories.
I'm not going to give you the traditional inpatient, outpatient professional because it cuts across multiple categories.
But think about major episodes of care, oncology, maternity, musculoskeletal as examples.
And some of those categories of care would tell you it was pent up demand or services in flight that are assumed in the portfolio.
The second tranche or latter part of Q1, beginning part of Q2 suggested a bit younger population.
You make a reference to pharmacy.
The combination of the demographics and early analytics and pharmacy and the like would infer somewhat of a healthier population.
So opportunity to see some stabilization there.
And we need to see that play through the population as we go in to the second half of the year.
As it relates to actions, all of the above.
Product positioning, network sharpening, clinical management programs.
And again, you have an underserved population in many cases that we need to get involved in clinical management.
So all those opportunities present positive dimensions to increase clinical quality and engagement which will improve cost, which improve sustainability from affordability.
But pricing, network and clinical management programs all being targeted in specific geographies and specific programs for 2015.
- Analyst
Okay, and then maybe the follow up would be on, you did this a couple times throughout the call, but on a more broad basis, how are you thinking about the 2015 head and tailwinds at this point?
And are you willing to broadly characterize how you might see EPS growing next year?
- President & CEO
So Dave, it's David.
Relative to 2015, we're not going to provide guidance for 2015 at this point.
Consistently it's too early in the cycle.
Before I get to headwinds and tailwinds, important to note that our underlying working assumption is that 2015 marketplace will continue to be a disrupted and challenging marketplace.
Continuation of ACA implementation, Medicare revenue pressure, version 2.0, the shake out of the public exchanges, the global economy being fragile.
In that context, we're proud of the fact that we have a well positioning international business that, as we referenced in our prepared remarks, the individual as well as the group portion of that are performing well.
Secondly, a very well performing effective group insurance portfolio that has performed well and will continue to perform well.
Within the employer landscape, sustained traction within our largest segment which is the regional segment, as well as our fastest growing segment which is the select portfolio.
Against that backdrop, you have the disruption of ACA implication, Medicare disruption, public exchanges.
And then lastly for us, will continue to be the rate and pace of our strategic investments.
We've been prudent.
We've created the capacity to invest.
But the rate and pace of our strategic investments both outside the US and inside the US will come in to play in terms of the net guidance we provide as we approach 2015.
Operator
A.J. Rice, UBS.
- Analyst
I'll ask you about two areas that you haven't been asked about.
Any update on the PBM, and both from the perspective of the integration of activities with Catamaran and the selling season.
And then I know from time to time there's been discussion about capital allocation strategy adjustments.
Thanks for the comments in the prepared remarks.
But any update in your thinking relative to dividends or any other changes in the capital allocation?
- President & CEO
A.J., it's David.
I know you never wither under pressure, so no problem there.
I'll address the PBM question then I'll ask Tom to address the ongoing capital management philosophy and strategy.
As we've discussed before, our PBM is well positioned and a strong performing asset.
In fact, in our statistical supplement you'll see continued growth in PBM lives.
We've took a couple strategic steps to further advance our capabilities there.
Examples of shared purchasing leverage, access to a leverage of a leading technological platform and opportunities for future shared innovation.
Programs tracking well, is the headline.
It's tracking well from the external marketplace.
It's tracking well in terms of our operating plans.
And as we go in to the latter portion of this year, again we'll continue to manage the rate and pace of investments in that program.
But the net headline there is we continue to be pleased with our underlying value proposition, the overall program and the marketplace feedback continues to be very positive.
I'll ask Tom to talk about the ongoing capital management strategy and philosophy.
- CFO
Again, A.J., there's really not much news there.
As you know our preference is to deploy capital to support organic growth or find attractive shareholder value creating acquisitions that we can deploy capital for.
Absent that, right now our primary vehicle to return capital to shareholders is share repurchase.
We do periodically evaluate whether a dividend should play a more important role in that, but right now we haven't really made any change in direction.
- Analyst
Okay, thanks a lot.
Operator
I will now turn the call over to David Cordani for closing remarks.
- President & CEO
Thank you for joining today's call.
To conclude I'd like to emphasize just a few key points from our discussion this morning.
Cigna's second-quarter results were strong and reflect meaningful revenue and earnings contributions from each of our business segments.
Our performance was driven by the continued effective execution of our clear and focused strategy, and the contributions of our more than 35,000 talented colleagues that work around the world.
We continue to strengthen our differentiated distribution capabilities across our diversified businesses to improve the health, well-being and sense of security of the people we serve around the globe.
Based in part on our first half performance, we are confident in achieving our increased outlook for 2014 on a full-year basis.
And we remain committed to achieving our long-term average annual EPS growth of 10% to 13%.
Thank you again for joining us this morning and your continued interest in Cigna, and we look forward to continuing our discussion in the future.
Operator
Ladies and gentlemen, this concludes Cigna's second-quarter 2014 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 866-513-4389 or 203-369-1987.
No passcode is required.
Thank you for participating.
We will now disconnect.