Cigna Corporation (CI) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by for Cigna's Third Quarter 2012 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.

Good morning, everyone, and thank you for joining today's call. I'm Ted Detrick, Vice President of Investor Relations, and with me this morning are David Cordani, our President and Chief Executive Officer; and Ralph Nicoletti, Cigna's Chief Financial Officer. In our remarks today, David will begin by commenting on Cigna's third quarter results. He will then discuss how continued effective execution of our strategy, coupled with our differentiated capabilities, are creating significant value for our global clients and customers. David will also review our capital deployment strategy and the progress we have made toward achieving our goal of delivering meaningful shareholder value over the long term. And finally, David will conclude his remarks by making some brief observations about 2013, which we will discuss in more depth when we provide our 2013 outlook at our Investor Day in New York City on November 16. Next, Ralph will review the financial results for the third quarter and provide an update on Cigna's financial outlook for full year 2012. We will then open the lines for your questions. And following our question-and-answer session, David will provide some brief closing remarks before we end the call. Now as noted in our earnings release, Cigna uses certain financial measures which are not determined in accordance with Generally Accepted Accounting Principles, or GAAP, when describing financial results. Specifically, we use the term labeled adjusted income from operations as the principal measure of performance for Cigna and our operating segments. And a reconciliation of these measures to the most directly comparable GAAP measure is contained in today's earnings release, which is posted in the Investor Relations section of cigna.com. Now in our remarks today, we will be making some forward-looking comments, and we would remind you that there are risk factors that could cause actual results…

Thanks, Ted, and good morning, everyone. Cigna is a global company, but I do want to take a moment to acknowledge the recent events back here in the United States. This has been a tough week for many of you impacted by Hurricane Sandy on the East Coast, and I know that New York, New Jersey and Connecticut were hit particularly hard, and many dedicated individuals are focused on leading us to recovery. For those of you who were impacted by the storm, we appreciate you joining us on today's call. We hope you and your families remain safe and that you experience a speedy recovery. Now before Ralph reviews our results and outlook, I want to take a few moments to comment on our third quarter performance. I'll then discuss how the focused execution of our strategy and ongoing strengthening of our capabilities are creating value for our clients and customers across the globe. I'll also review our progress on deploying capital to support our goal of optimizing long-term shareholder value. And finally, I'll briefly comment on our expectations for 2013. Turning to our results. We are pleased with our strong performance in the third quarter. We delivered outstanding revenue growth, our earnings exceeded expectations, and we further grew our medical customer base. We also increased our strategic investments in targeted markets and in capabilities to position us to drive sustainable growth. Based on our third quarter results and the momentum we've experienced in the first 9 months of 2012, we are once again increasing our full year outlook for earnings and capital available for deployment. Moving to the specifics of the quarter, we reported adjusted income from operations of $496 million or $1.71 per share, representing a 33% increase in earnings per share versus the third quarter of…

Thanks, David. Good morning, everyone. In my remarks today, I will review Cigna's third quarter 2012 results and provide an update to our full year 2012 outlook. In my review of consolidated and segment results, I will comment on adjusted income from operations. This is also the basis on which I'll provide our earnings outlook. Before I get into the specifics of the quarter, I want to emphasize that the results of the quarter were better than our expectations, which enabled us to further increase our full year outlook and are primarily driven by favorable pharmacy and medical costs in our Health Care business and favorable loss ratios in our International business. The quarter was highlighted by strong revenue and EPS growth and continued effective deployment of capital, including the resumption of share repurchase activity and the acquisition of Great American Supplemental Business. These results provide us confidence to increase our updated full year outlook for both earnings and parent company cash. Before reviewing the specifics of the quarter I will comment briefly on the alignment -- the realignment and efficiency plan we implemented during the quarter. We reported a special item charge of $50 million after-tax related to the actions we are taking across our global operations to enhance our focus and ability to deliver value and affordability to our customers and clients and increase our productivity and operational efficiency. The majority of the expected of annualized savings of $60 million after-tax is expected to be reinvested in the business to enhance our ability to growth in our targeted markets. Now moving to operating results. Our third quarter 2012 consolidated revenues grew 31% to $7.4 billion, driven by continued contributions from the HealthSpring acquisition and growth in our targeted markets. Third quarter consolidated earnings were $496 million or $1.71…

[Operator Instructions] Our first question comes from Matthew Borsch with Goldman Sachs.

Could you just talk about what you're seeing on the commercial -- well, also Medicare medical cost trend side and the degree to which that's changed from the first half, and also how it influences your view of trend for next year?

It's David. I'll just frame that and see if Ralph wants to expand a little further. But as you track us throughout the course of the full year, our medical cost trend outlook for the year has improved overall for our total portfolio of business. You'll recall that last quarter, as well as this quarter, we acknowledged some further improvement in our overall loss ratios. And at the end of the day, broadly speaking, our contracting and our effective partnership with physicians and hospitals is working, in line with our expectation And broadly speaking, overall, the rate and pace of projected escalation utilization is not as significant as we might have thought it would be earlier part of this year. Ralph, can I ask you to expand in terms of -- as we look forward to the latter part of the year, our expectations?

Sure. Matt, regarding as we look at the balance of the year, we would see that the fourth quarter, in the 5.5% to 6% range kind of reflecting a continuation of the trend that we just saw this quarter. And in terms of some of the pieces, by and large they really haven't changed materially versus what we talked about in the first part of the year, in-patient is pretty muted; and professional service utilization, up a little bit, as well as outpatient, principally in the side of claims.

Great. And if I just could as a follow-up, on the pricing side, incrementally, have you seen anything that you would characterize as a shift in the degree of pricing pressure you face, if you can sort of average that out across different markets and segments?

Matthew, it's David. Consistent with prior dialogue, I would say no macro shift. So we've continued to say the pricing environment is competitive. There's always puts and takes in geographies given the breadth of our portfolio or segments, but no major shift in movement. I would add to that, that the breadth of our capabilities, our funding mechanisms, so having the full breadth from the ASO through the experience rate and in guaranteed cost capabilities helps us in environments if there are smaller flare-ups. But broadly speaking, no major change in the environment. It's still very competitive from a pricing standpoint.

Our next question comes from Scott Fidel with Deutsche Bank.

First question, just interested in any impacts that you're expecting from Hurricane Sandy. And specifically, just relative to utilization, would you expect that you'd probably see some lower utilization in some of the Northeast markets in the fourth quarter as a result of the storm?

Scott, just broadly speaking, I'll go at that in 2 phases. First and foremost, when something like this transpires, there's a lot of actions that are put in place to expand access to care, expand ease of access through pharmaceuticals, professional services, outpatient services, offer more coordination points, even working with the Red Cross to get the right medications to the right people the right way. So those activities, unfortunately, we're well attuned in how to manage, and that's well underway. But broadly speaking, I wouldn't expect a material effect given, again, the broad portfolio of our book of business. You might see a little dampening for a very short period of time, but we're not projecting a broad impact here at all.

Okay. And then just a follow-up question just on 2013, and you highlighted you expect revenue and earnings growth. Maybe some preliminary thoughts you can give us on membership growth and specifically, how the national accounts selling season ended up closing out for you?

Sure, Scott. A few points. As we noted in our prepared comments, for 2013, given the momentum we continue to build through '11 and '12, our broad expectations are that we will grow revenue as well as earnings. And I'd ask you to step back and think about some of our capabilities to enable us to do that in this really challenging environment, and then I'll comment on national accounts. First, our broad funding capabilities in the United States are very helpful, as employers of all sizes are looking for the most effective way to align their incentives and engage their employees. Secondly, our broad portfolio of specialty capabilities, health improvement and productivity capabilities continue to be a strong add to us. Third, we now have a very well-positioned Medicare Advantage portfolio of businesses. And fourth, our International portfolio of businesses will be extremely helpful to us as we step into 2013. As it relates to national accounts, the national account selling season, it's sufficiently complete. There's always some open switches that are in front of us. As we sit here today, we would expect for our national accounts, which we define as commercial employers with 5,000 or more employees that are multistate, so we define it more narrowly than some define it. For that marketplace, we'd expect at this point in time, overall, a good retention rate. We had an outstanding retention rate in 2012. We expect a very good retention rate in 2013. At this point in time, we see less business as having moved in either direction. So the net effect of that is we're expecting that we will keep share or maintain share in aggregate in the national segment. We view the national segment as a shrinking segment if you track the employer profile. So that's about a 2% shrinkage factor that we expect exists in the overall national account marketplace because of the employment pattern, and we expect to maintain share in that environment. The last thing I'd add is we expect to further grow revenue and further grow our specialty penetration in that portfolio based on the focus of repositioning that book of business.

Okay. So basically, just maybe down a couple percentage points in national accounts for '13?

Broadly speaking, yes, and again, I'd amplify with strong retention, good specialty penetration and overall revenue growth.

Our next question comes from Josh Raskin with Barclays Capital.

Just a quick question on a couple of the charges. I guess just starting with the HealthSpring transaction cost. I might have missed it, but it looks like there was $28 million in the first quarter, and then $12 million in the third but nothing in the second. So I'm just curious what's going on with the timing of transaction costs with HealthSpring.

Sure, Josh. You can think of it as in the first quarter, the costs you mentioned really were to complete the transaction we closed at the end of January. In the third quarter, what you see there is a settlement of a final shareholder appraisal rate situation, and that was the charge we put. And that would be the end to what we would expect to see on those kinds of costs.

Okay. That was sort of a 6-month run-out type of thing.

Right.

Okay. And then just on the $50 million realignment, maybe you could just give us a little bit of color as to what that means from an organizational efficiency. Is this just sort of a headcount reduction? And then I guess, combined with that is just where exactly are the targeted investments going into? I mean, if you're saving $50 million, $60 million a year, where should we think about that increased spending going?

Sure, Josh. It's David. So let me frame that a little bit more broadly. First, by way of context, consistent with our strategy, we've been able to improve our operating expense ratio each in the last several years, both as we've grown the business, but as we've secured productivity gains. And we would expect that to continue into 2013 more broadly. In addition to that, as we referenced, we've taken a series of actions to further strengthen alignment and identify some operating efficiencies in the company. And we're going to use that, broadly speaking, as an additional pool of resources to reinvest. The $60 million after-tax is a run rate, so you should expect that to get to a run rate level as we get to 2014 because those actions will be executed throughout the course of 2013 and the latter part of 2012. Specific to the types of investments, you should think about those as continuation of things that we've been doing. So market expansion, technology and solution capabilities and brand building would be 3 types of examples of where those resources, in addition to existing resources, would be amplified to further drive our profitable growth going forward.

So -- okay, so you said, David, at the $60 million run rate, that these actions are going to continue through 2013. Does that mean there's additional charges coming as well, or is this to cover the expected severance and actions taken over the next, say, year or so?

They're not additional charges. It is expected to cover actions that will be taken over the next several quarters.

Our next question comes from Justin Lake with JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: Just a couple of quick follow-ups on '13. Outside of national accounts, I know -- I remember last year, you'd talked a little bit more broadly about overall health care membership growth, expectations for 1/1, just wonder if you could share that number. And also, when you talk about earnings growth, can you just verify, you're talking about net income growth next year?

It's David. At this point, we're not providing detailed guidance for 2013. We'll give you a little bit more insights at our Investor Day, and then when we blow out the entire segment view. But at this point in time, we have good visibility in national accounts, and that was what we sought to frame. As we step back, the comment specifically on earnings is net earnings, so operating earnings growth very specifically and separable from EPS, which we'd obviously expect contribution there. And more broadly, as we said in our prepared remarks, we expect to profitably grow our revenue yet again in 2013. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. Any reason why at this point last year you had a little more visibility on membership? Is the decision being made later in the year or anything on that nature?

I would say nothing broadly. Again, we're not going through detailed 2013 guidance today. We'll provide you more insights at Investor Day. A little bit later decision-making cycle, but you know our business pretty well, Justin, so national accounts, good visibility today. Our regional segment, which is our largest segment, the higher end of the size of the case count, good visibility, but there's a lot of business in the 3, 4, 5, 6, 700 life account class that are still being worked today with -- we are bullish on that segment. And in the Select Segment, which is our fastest-growing segment, that selling season for 2012 ends on December 31, 2012. So we're clearly selling for 2013. Broadly speaking again, we will grow revenue. So you should expect to see growth from the franchise, but we'll provide more insights in the near future for you. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, great. Then if I could just even step further ahead into 2014, I'd just ask a couple of quick questions. One, in Medicare Advantage, there's going to be an MLR floor instituted, 85%. If you look at some of the staff filings for HealthSpring, there are MLRs in some states that are in the kind of mid- to high-70s. So curious as to what you think that impact might be from the implementation of MLR floors. And then on the other hand, as you get into 2014, you've got the industry tax or the industry fee, whatever you want to call it, kind of being implemented and only on risk-based business. If that stays that way, one would think that there might be a further shift in the move of mid-sized employers from risk to ASO, which could benefit you. I'm just curious if you started also to kind of get the temperature for the appetite for employers to do that.

Well, Justin, first, let me just put a backdrop on this. I'll go right to the, I'll call it the direction of the MLR for 2014, and then I'm going to ask Ralph to expand on our pricing posture relative to the industry tax which I think is very relevant to your comment. Broadly, to frame this though, 85% of our portfolio today is ASO. And we're a company that believes in having transparent, highly aligned programs for our clients and customers. And we continue to see good demand today in those programs, and we see that continuing. Specific to the MLR for Medicare Advantage and HealthSpring, you're correct, there's puts and takes in individual markets and geographies. But if you step back, one, as you very well know, there'll be adjustments to the calculation to the numerator and the denominator for activities that are engaged in, health improvement, health management, et cetera. When you take that into consideration, in aggregate, the HealthSpring book of business today is approximately compliant with the MLR with some outlier markets. We take that into consideration and are actively taking that into consideration with the ongoing management of the HealthSpring book of business throughout 2013. And as we approach the 2014 bidding cycle, that will be front in mind for us. Said otherwise, we do not expect that as a large step-function headwind by the time we step into 2014 for the HealthSpring book of business, but there will be some puts and takes in individual geographies that we need to manage once you adjust for all the health management activities and programs. I do want Ralph to expand a little bit in terms of our posture relative to how we're dealing with the industry tax as we step throughout 2013 and this year with an eye towards 2014. Ralph?

Sure. Thanks, David. Justin, as we look at the tax, just our philosophy on pricing is essentially to price underlying cost trends, which we would view this part of so beginning in 2013 with -- for policies that overlap into 2014, we will include and reflect the industry tax in that pricing.

Our next question comes from Ana Gupte with Sanford Bernstein. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: So just wanted to explore the Medicare outlook for 2013. The selling season has now been underway for a few weeks. Can you give us a sense for would you likely expect to exceed the CMS average forecast of pricing at about 11%? And then from a margin perspective, as you're looking into your designs and comparing it with some of your competitors that might have been adversely selected against, would you see this 81% loss ratio as carrying forward into 2013?

It's David. Just again to put your very important question in context, if you look back over time, the HealthSpring strategy and approach to positioning products and services forward 1 year has been to try to get that delicate balance between enhancing benefits to providing great value to the customers or beneficiaries, working in tight concert with their very innovative physician partnership relationships, and then generating a fair return from a shareholder standpoint. The result of that has been, on average, they've generated market average growth in their book of business. They've had relative stickiness with their portfolio because it hasn't undulated back and forth to large land grab movements in any way, shape or form, and that process continues as we go forward to try to get that balance. The same team that has actively managed and successfully managed the HealthSpring portfolio to-date is managing the bid process and manage it through 2013. And again, we're not providing detailed guidance, but we'd expect to grow that portfolio. As you know, that portfolio is largely individual MA, so we'd expect the average growth to be in line with the overall business. We'd expect that to have good retention, and we expect it to have a very good profitability profile at this point in time. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: But following up again on the Medicare angle, you have distribution as 1 of your 3 big pillars of differentiation. I might have missed this, but I don't think you have a retail partnership on the Part D side. And I think United put something out, the 72 [ph] this year, and we already had Humana and Aetna and Coventry with something. What are your thoughts on partnering with pharmacies on Part D? And then on the group side, the group selling to Medicare Advantage, given that was one of the pillars of synergies between Cigna and HealthSpring, any movement on that front, and what's the outlook for 2013 and '14?

Sure. So 2 very important points. To date, when you bring both of the organizations together, both Cigna and HealthSpring had approximately the same size PDP books of business. Both of those books of business were largely auto sign and then web enrollment relationships that came through the CMS with some additional bolt-on activities. And our strategy to-date has not been to deviate from that. As we look to 2013, broadly speaking, we expect to keep share or have slight erosion in the PDP book of business but maintain the profitability profile that is very attractive in that book. Secondly, you're correct, the group opportunity is a prospective synergy between Cigna and HealthSpring. We indicated that, that would be a ramped opportunity as we went forward, and we did not articulate a significant step-up in 2012 or 2013. There's been some targeted market activities. There's been some demand. There's been some market-driven demand because of the attractiveness of the HealthSpring value proposition and network, and we'd expect to see some movement in that through 2013. But broadly speaking, as you think about 2013, what drives the Medicare chassis for Cigna, Cigna-HealthSpring is the individual MA book of business that has been a strong-performing, stable, high-retention and good-growth book of business, tightly aligned with the physician partnership, discipline across the PDP and then some growth opportunity in the group space, which will ramp over time with some movement in 2013. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: And then final one, on SG&A, can you give us a view on what your target efficiency savings are for SG&A in the next 1 to 3 years as you put this workforce reduction and efficiency program in place?

Yes, Ana, we've not provided 2013 guidance. When we do, we will lay that out for you. But in my prior comments, I noted that we have generated, in line with our strategy, expense ratio leverage each of the last 3 years, and we'd expect to generate expense ratio leverage in 2013. But when we provide guidance, we will break that out for you as we have in the past.

Our next question comes from Kevin Fischbeck with Bank of America Merrill Lynch.

Question for you on a couple times during the call and release you talked about the pharmacy costs being a driver to some of the strong results in the Health Care segment. Can you just talk a little bit about what specifically that you're referring to there? And I might have missed it, but I thought that maybe in the comments, you indicated you were driving or doing some home delivery of drugs to your Medicare beneficiaries. Is that something that Cigna was doing, or is that a new product through Catamaran?

Sure, Kevin. It's Ralph. Just overall on pharmacy, that business is performing well. Saw primarily here in the third quarter is a mix shift to generics and lower costs in that area as well, so that's primarily what was driving our results in the third -- the favorable results in the third quarter, and as I noted in my remarks, even a little beyond what we had internally expected as they came in favorable. But regarding home delivery, maybe I'll ask David to comment on that.

Sure, Kevin. Essentially what you see, broadly speaking is a little bit of a best of both worlds, so our objective for the benefit of our customers or the beneficiaries, in this case of PDP, Medicare Advantage, et cetera, is to get the best value, and we take a total low-cost and clinical efficacy approach. PDP is notoriously low from a mail-order penetration standpoint, and you're able to get a great convenience for seniors by getting maintenance medications for a 90-day supply delivered to their home. We're at the early stages of getting some leverage there, and it's leverage of both the existing HealthSpring relationship, as well as the Cigna PBM capabilities.

Okay. So with pharmacy in particular, is that just -- is that kind of your PDP earnings being higher or is that just general kind of medical trend being lower because of the shift to generics?

Kevin, it's both meaningful on the PDP side, with what Ralph referenced in terms of both the further movement in generic, the mix in generic and therefore, the cost profile, that again, very importantly, benefits the beneficiary, as well as us. In addition, because of the ongoing strong performance of our PPACA PBM [ph] in our Commercial portfolio of business, we see continued improvement there from a pharmacy standpoint.

Okay. And then, finally, you guys keep taking up your cash flow guidance, and I think that next year, we're looking at another good year for you from a cash flow perspective. I mean, how do you think about dividends when you think about those 3 capital priorities that you outlined earlier for this year? I mean, does that change at all as you get a full year benefit of all the HealthSpring cash flow next year?

Kevin, it's Ralph. Clearly, we feel great about the cash flow. And on the business and the strong return of capital we have across the different business lines, would expect to -- that to continue into next year. Our capital priorities haven't changed, as David alluded to in his remarks, principally around supporting the base operation, strategic M&A across the priority areas that he articulated. And then we'll look at share repurchase and dividend policy on a regular basis as another means of creating value.

[Operator Instructions] Our next question comes from Christine Arnold with Cowen.

International earnings, you've seen a lot of growth with acquisitions. Can you give us some kind of same-store earnings growth that you've seen this year? And is there any reason that, that shouldn't grow double digits, which was kind of your same-store guidance entering this year going into next? And then just following up on Kevin's question, if we think about kind of the cash flow, if it feels like $1.7 billion in subsidiary dividends might be doable next year, how do we think about how much cash you feel you might need to keep as powder dry for subsidiary capital requirements for growth versus how much you could use given what's happening in 2014?

Sure, Christine. First, on the capital and the cash flows, clearly, feel good about where we're landing this year and have opportunity to deploy. We have been averaging a little above our net income on cash generation, and that already reflects strong capitalization of our subsidiaries, so they're generating sufficient cash to keep our RBC ratios well intact and then have ample room for dividend to the parent. So that's why you see us ahead there. Okay?

Okay. So something in the neighborhood of $1.8 billion plus in terms of what might be available next year.

Well, I don't think at this point we want to project where next year is going to be. But I think if you look at our track record, we've been able to bring in strong cash flow, as you saw this year and deploy it right. We'll cover that more as we talk in a few weeks at Investor Day.

And then how should we be thinking about International?

Christine, just taking that up. As you noted, we've had some very targeted acquisitions. I'd also note, offsetting that in a way has been our focus on additional investment within the franchise. So organically, we're making the investments to open and expand Turkey. Organically, we're making the investments to enter India effectively. So stepping back, we're very pleased with both the top line and bottom line growth of that franchise. And I think at the core of your question, is it reasonable to assume double-digit earnings growth as we look forward? We've indicated to you before, that's on our strategic horizon, and we'll provide more detail for '13 specifically, but double-digit earnings growth is a reasonable assumption for that business.

Our next question comes from Carl McDonald with Citigroup.

Wanted to focus on your experience rate of business in the context of the industry tax and anything else that you'd highlight specific to that business that may be a little bit different as we head into '14.

Carl, it's David. Just broadly speaking, what I would start with amplifying is that, that business we've continued to indicate is a bit of a niche business and specifically focused on a subsegment of buyers. It's performed well over time, it continues to perform well and we see it as being an important product as we look forward. Secondly, from an industry tax standpoint, it would be deemed to be more risk based than non-risk based, so it would be exposed to the tax activities. And the important part when you take it all into consideration is are we able to provide a good, highly transparent relationship with an employer, wrap the clinical programs, it is highly penetrated with our specialty capabilities and deliver a overall net cost that an employer likes. That would be, I'll call it revenue management and expense management, the benefits of an employer because of the reassuring nature of the product. So we would expect it to continue to be used on a very targeted basis going forward.

So the conversations that you've had to this point haven't indicated that the tax would be enough to make those experience or your customers consider switching to a fully self-funded product?

Yes, Carl, I think it's always hard when you say in an absolute sense, right? So our whole approach is, as we talk about our consultative selling, we sit with clients, we call an employer a client, and we have that broad set of capabilities. So long before the industry tax, we have environments where experience-rated employers would move to ASO or vice versa. We expect that phenomenon to continue. The important part is are we able to demonstrate good value by improving health, lowering health risks, managing total costs and clinical quality, and we think that, that will continue. So are there employers who may move from experience-rated to ASO? Sure, but that happened in the past as well, and the industry tax is just another factor that comes into the thought process.

Our next question comes from Peter Costa with Wells Fargo Securities.

I want to circle back to the cost trend questions from before. You talked about in the second quarter cost trend being 6% to 7%. In this quarter, you're saying 5.5% to 6%, I think you said. It's a 75-basis-point improvement. Yet when you broke it down by subcomponent, you really didn't see any changes other than maybe on the pharmacy side, which seems lower. Did all of that 75 basis points of improvement come from the pharmacy trend? And if so, was it -- it seems like that would be hard to do just from a shift to generics all in one quarter. Was there something else that altered your view on trend? And then lastly, regarding pricing for next year, you would have been pricing at, say 6% to 7% before, so do think your position now if cost trend stays at the 5.5% to 6% range should have more substantial margins next year?

Peter, it's Ralph. Just to clarify on the medical cost trending as it relates to the second quarter and the movement from the 6% to 7% down to the 5.5% to 6%, that's really across all components, in pharmacy and other medical as well. And as I mentioned earlier, what we saw was essentially the same components move but at a lower rate of increase than what we had thought they would at the end of the second quarter. So pharmacy was a piece of it, but clearly, the other aspects of it were part of what you're seeing in the favorable medical costs in the third quarter.

The prior period development was mostly on the pharmacy side based on your Part D MLR. So I assume that's where a lot of the PPD came from this quarter.

No, actually, the prior period was largely in the medical side. And the pharmacy was more, as I mentioned earlier, around the mix in generic side within the quarter.

Peter, on the second question -- it's David. Go back to the context of our business, 85% is ASO, the residual 15% is split between experience-rated and guaranteed costs. So for our ASO customers, you're reflecting a trend projection, you work with them in terms of what they would like to build into their own respective budgets. Similarly, you do the same thing from a experience-rated standpoint, agree upon a revenue stream. And lastly, for our guaranteed cost book of business, because we do not play in the under 50 market, the vast majority of our business is rated on the credibility or the experience of those cases. So point is you have more case-specific visibility of costs that you're baking into pricing. Now having said all that, to the extent our secular trend pick at a given point in time is higher than it actually turns out to be, there may be some favorable development. And if that transpires, we would talk about that quarter-to-quarter, as we have in the past. But the case-specific visibility and the, I'll call it the shared-risk visibility tends to mute that for our company.

Okay. And then just on the experience-rated book of business, going into next year, are we going to see that business have to give back some of the profitability, or are you going to be in a position where you're not really doing that this year?

Peter, there are some puts and takes in there. When we look at the overall book of business, that book of business has been pretty stable over I'll call it the case level performance and the average portfolio performance, and we see no meaningful change looking into 2013.

Our next question comes from David Windley with Jefferies. David H. Windley - Jefferies & Company, Inc., Research Division: So, David, on your individual business, you generally talked about that as being small and opportunistic as we move into exchanges. I wondered if you could comment on a couple of things there. One, you saw pretty solid membership growth, and what's the focus or emphasis there that drove that growth? And then two, what are your current thoughts and expectations about readiness of exchanges and Cigna's preparedness to launch into exchanges?

David, you're correct. To date, our focus -- your question is relative to U.S. individual and U.S. individual primary, more comprehensive insurance. Our focus to-date for the past 2.5 years or so has been to pick a limited number of markets where we have a strong value proposition and then target and test a whole variety of product offerings, distribution strategies, et cetera, so we could test and learn and be in a better position as the marketplace moves going forward. And you see the results of that coming through our overall portfolio of business. Through that process, we've tested a whole variety of distribution strategies, and we've leveraged some of our non-U.S. experience, whereas we've talked about in the past and I mentioned, we have significant experience in terms of direct-to-consumer distribution, Internet-based distribution, affinity-based distribution and the like. As it relates to exchanges, as you very well know, there's a lot of moving parts still in the marketplace relative to exchanges. We have our internal view and our posture in terms of those markets using our Go Deep strategy that are highly strategic, and we have a bias to playing in. And our priority for the organization is to get the organization ready to both comply with and play in target markets from an exchange standpoint. But we're keenly focused on the amount of moving parts that exists within the regulatory environment and within the state and federal environment over the next 2 to 3 quarters. David H. Windley - Jefferies & Company, Inc., Research Division: Very good. And then shifting for my follow-up over to operating expenses. You had talked about some investments from earlier in the year in technology and some other things. Wondered if you could give us an update on the progress there and if you're seeing the efficiency enhancement from those investments already. And then also, as you think about this realignment, I'd be curious to understand a little bit more deeply your decision process around dropping those savings to the bottom line versus reinvestment and how much reinvestment do you think you need to do?

Sure, David. First, the investments we did make in the first half of the year are paying dividend for us in the back half on operating expense efficiencies, particularly the larger ones, as we had noted previously, was in the kind of the telecommunication infrastructure area, and that's benefiting us in the back half, as we expected. And that's reflected in our operating expense ratio in the third quarter and our full year projection. Maybe, David, you want to comment on the overall?

Absolutely. So expanding on, again, your rightful framework. I'll just pick the word you used, it's balance. The key for us in terms of executing our strategy is to make sure balancing both the near term, the intermediate term and the long term. What we're pleased with is that we've been able to deliver expense ratio improvement in each of the last years. And as we've noted, we will further improve the expense ratio looking into 2013. Above and beyond that, we were able to secure a program to identify additional efficiencies to target investments. Some of those investments will bear fruit relative to efficiencies. Some of them will be product capabilities and new solutions. And some market entrée to further accelerate. So we're seeking that right balance, and I would submit to you that our results thus far as we've executed our strategy over the last 3 years, we've delivered double-digit EPS growth, operating expense efficiency and attractive revenue growth. That's the balance we're going to seek to have as we go forward as well.

Our next question comes from Ralph Giacobbe with Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: There's been somewhat of a reemergence of private exchanges, at least in the news. I guess what's your view here or what are you seeing or hearing in terms of the interest level, with the conversations you've had specifically with ASO clients.

Sure. Yes, there's been some dialogue in the marketplace around private exchanges. Broadly speaking, the way we think about them is it's another distribution mechanism, and it's a different way to frame the market. It's a way to capture choice and deliver it back to an individual for the employer. We think you'll see some movement in private exchanges over time. We've been actively managing and engaging in those activities. We're actively engaged today, and we think that'll be part of the equation as you go to the future. We don't think it'll be the sole equation, but it'll be part of the equation as you go to the future. Last thing I would add to it is going back to our non-U.S. experience, we have meaningful experience outside the U.S., where we now have over 10 million individual supplemental policies in force, including our joint venture in China. And we have significant experience working with affinity partners, working with electronic distribution, working with choice. And some of those, both marketing and distribution capabilities, will serve us well here in the United States as it relates to public exchange, private exchange or direct individual distribution. So it's a part of the equation going forward. We're actively engaged in it today. And we're going to leverage some of our non-U.S. capabilities to play there. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, that's helpful. And then just as a follow-up, any updated thoughts on the PBM and plans for HealthSpring or maybe even just timing on how you're thinking about that going into the New Year?

Ralph, broadly speaking, no directional change to our thought process around the PBM, so let me make sure I rearticulate what it is. Our PBM has been a strong performing asset for the corporation and for the benefit of our clients and customers. Our recent results yet reinforce that. It's a growing asset. It's contributing nicely. And when you think about pharmaceuticals as the #1 gap in care in America, it's an important clinical quality and service enhancer for our customers and clients. Having said that, once we're able to secure the acquisition of HealthSpring, it was acutely obvious that they can aggregate pharmacy capabilities of the company were going to grow. And therefore, we needed to make a conscious decision of how we wanted to grow that, and we've been very clear that we are thoughtful around making sure that we properly think through all scenarios that are in front of us relative to how we'll manage the PBM capabilities for Cigna, as well as for HealthSpring, which is now part of Cigna. The final note I would make is we understand that PBM is made up of a bunch of different parts: mail-order, retail, formulary management, et cetera, and we have a keen understanding of all those parts. The good news is we have a high-performing asset. It's a growing asset, and we have a large growing asset within HealthSpring, both of which have an opportunity to create a lot of value for both our customers and shareholders going forward.

Our last question comes from Sarah James with Wedbush.

In the past, you've talked about cost trends benefiting from collaborative care models with hospitals. And with the HealthSpring acquisition, you have the opportunity to view things from the other side with captive clinics and improved understanding as you come to the negotiation table, as well as adding more members. So post these benefits from HealthSpring, how are you seeing unit cost increases developing versus past years, and how impactful do you think this has been on your enrollment growth or enrollment growth as it pertains to next year?

Sarah, it's David. An important topic and pretty rapidly evolving space, as we noted in prepared remarks, before we get to HealthSpring within Cigna, we now have 42 Collaborative Accountable Care organizations, which is our approach to alignment up and running for the benefit of our commercial customers. Within that portfolio, which started back in 2008, we see some meaningful improvement in both service and clinical quality, as well as some cost improvement for the benefit of our clients and customers. You're right to note that HealthSpring has well in excess of a decade of great experience around physician partnership. That's been a net beneficiary to the Medicare Advantage population that they serve today, serve very well and has continued to grow over time. As we look to the future, as we noted in our prepared remarks, partnering with physicians is a key part of the equation. It's a key part of the equation because it's the means in which you improve clinical quality, and you take relative costs out of the system and deliver more value. We're passionately committed to this, and we've seen enough proof points both through the HealthSpring model, as well as our model, to indicate that there is significant opportunity going forward. Lastly, I would say from a Cigna result standpoint, we're just at the early, early, early stages of seeing some of that come through, which is why this is so exciting as an opportunity to further generate quality and cost improvements that then convert over to benefit for our clients and customers. So more to follow on this.

Okay. And just to clarify that last point there, if it's still in the early stages, is it too early to quantify how it may be impacting 2013 cost trends maybe from a unit cost side?

Yes, Sarah, for Cigna, so if I come back to the commercial population, if I take an individual client experience that has a lot of concentration in the Collaborative Accountable Care, you see some phenomenal results in clinical quality service results and overall cost trends. So you could see low single digits. You could see zeros in terms of cost trends when you take a well-designed benefit structure along with the Collaborative Accountable Care. The size of the coverage of our 12.5 million lives versus the number of lives that are going through these programs today tell you that it's muted in the averages that we talk about. But our approach in Go Deep is localized, so in those local geographies where those programs are running and with those employers that have high concentration, the results are outstanding, and we would expect to see more and more momentum. But to date, the aggregate numbers that Ralph walked through have a modest, modest, modest contribution because it's still a small part of the overall average. That's why we're excited about the future.

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

Thank you. In closing, I want to emphasize just a few key points from today's discussion. We delivered attractive revenue growth in each of our ongoing businesses and exceeded earnings expectations; our customer base grew, demonstrating the unique value we offer and our ability to retain and expand and acquire new clients and customers in our targeted segments; we continue to increase our strategic investments in targeted markets and customer segments while strengthening the value we offer customers and clients by further developing our differentiated capabilities in customer centricity, physician engagement and consultative distribution; and based on our third quarter results and momentum we've gained through the first 9 months of 2012, we're once again increasing our full year outlook for both earnings and capital available for deployment. We thank you for joining us on our call today, and we look forward to our future discussions.

Ladies and gentlemen, this concludes Cigna's Third Quarter 2012 Results Review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing 1 (866) 434-5265 or 1 (203) 369-1007, no passcode required. Thank you for participating. We will now disconnect.