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Aetna (NYSE:AET)

Q4 2012 Earnings Call

January 31, 2013 8:30 am ET

Executives

Thomas F. Cowhey - Vice President of Investor Relations

Mark T. Bertolini - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Investment & Finance Committee

Joseph M. Zubretsky - Chief Financial Officer, Chief Enterprise Risk Officer and Senior Executive Vice President

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Melissa McGinnis - Morgan Stanley, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Operator

Good morning. My name is David, and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the Aetna Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Tom Cowhey, Vice President of Investor Relations. Mr. Cowhey, please go ahead.

Thomas F. Cowhey

Good morning, and thank you for joining Aetna's Fourth Quarter and Full Year 2012 Earnings Call and Webcast. This is Tom Cowhey, Vice President of Investor Relations for Aetna. And with me this morning are Aetna's Chairman, Chief Executive Officer and President, Mark Bertolini; and Senior Executive Vice President and Chief Financial Officer, Joe Zubretsky. Following their prepared remarks, we will respond to your questions.

During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC, including our 2011 Form 10-K, our 2012 Form 10-Qs and our 2012 Form 10-K when filed.

We have provided reconciliations of metrics related to the company's performance that are non-GAAP measures in our fourth quarter 2012 financial supplement and our 2013 guidance summary. These reconciliations are available on the Investor Information section of aetna.com.

Also, unless specifically otherwise noted, all of Aetna's projections exclude the impact of the proposed Coventry acquisition and sale of Missouri Care.

As you know, our ability to respond to certain inquiries from investors and analysts in nonpublic forums is limited. So we invite you to ask all questions of a material nature on this call.

With that, I will turn the call over to Mark Bertolini. Mark?

Mark T. Bertolini

Good morning. Thank you, Tom. And thank you, all, for joining us today. This morning, we reported fourth quarter operating earnings per share of $0.94 and full year operating earnings per share of $5.13. These results bring to a close another solid year for the company, our customers and our shareholders.

Looking back on 2012, Aetna continued to price with discipline and execute across our core business. Our improved National Accounts selling season, our dual eligible contract wins and our successful Medicare selling season, including the TRS conversion, all position us well for 2013.

We continue to advance our efforts to transform the network model with our Accountable Care Solutions business. And we announced our agreement to acquire Coventry Health Care, creating a company with over $50 billion in pro forma revenue, over $4 billion in EBITDA and over $2 billion in parent level cash flow in 2012.

Aetna's fourth quarter and full year financial results are a testimony to the power of our diversified portfolio and its ability to deliver sustainable results. Underlying these results, we ended the year with over 18.2 million medical members, reflecting strong and continued growth across multiple products, and its full year Commercial medical benefit ratio was 81.1%, at the low end of our initial guidance range for 2012.

Aetna's business segment operating expense ratio was below 19% for the year, as we continue to focus on expense management while investing in our business for the future. Pretax operating margins were 8.7% last year, at the high end of our high single-digit operating margin target and among the highest operating margins of any of our diversified managed care peers.

Finally, 2012 was another strong year of excess cash generation, enabling us to meaningfully increase our dividend and repurchase 32.3 million shares or over 9% of our shares outstanding.

Aetna's solid finish to 2012 and strong positioning as we enter 2013 gives us increased confidence as we reaffirm our 2013 operating earnings per share guidance of at least $5.40.

Before I turn the call over to Joe to discuss our results and guidance in greater detail, I would like to discuss Aetna's growth outlook, how we are realigning our business to drive growth and briefly comment on the macro environment.

At our Investor Conference in December, we outlined 6 critical components of the Aetna growth story: Aetna's diversified portfolio businesses can grow predictably; our Large Group Commercial business can grow profitably; Aetna's government franchise is a growth engine; Small Group and Individual are modest contributors to our consolidated earnings and represent an opportunity for future growth; Accountable Care Solutions is gaining traction and enhancing our core business; and Coventry is a strategically and financially attractive acquisition.

This morning, as part of our continuing commitment to drive improved execution on these growth initiatives, we announced on organizational realignment. While many of our customers are national, the delivery of health care is local. Our realigned structure will allow us to support decision-making deeper in the organization and close to the people who know our customers best, whether they are national or local customers.

After 6 years as Aetna's Chief Financial Officer, Joe Zubretsky will assume broader operating responsibilities in executing our strategic priorities, becoming head of Aetna's national businesses. Joe has been an exceptional CFO, managing through a difficult period in the industry and the economy, while maintaining a relentless drive to increase shareholder value through advanced capital management. Joe's in-depth understanding of our core business makes him uniquely qualified for this new role, as he assumes responsibility for a broader portfolio of businesses.

This portfolio will now include Aetna's flagship National Accounts franchise, representing nearly half of our medical membership; our network and medical management operations; and our Pharmacy Benefit Management and Behavioral Health businesses.

These new responsibilities are in addition to Joe's continuing leadership of our Strategy and Corporate Development teams and our emerging businesses, including Health Information Technology businesses and Accountable Care Solutions.

This realignment not only places a strong leader at the helm of some of our largest businesses, but reinforces our commitment to transform the network model by aligning provider and payer incentives to achieve improved outcomes and lower costs.

Shawn Guertin will become Aetna's Chief Financial Officer effective February 25. Shawn has been an integral part of the finance team over the last 2 years and was a critical resource during our evaluation of Coventry, where he was previously CFO for approximately 5 years. Shawn will be a key member of our executive leadership team at Aetna, reporting directly to me.

Karen Rohan, who has become an increasingly valuable member of my senior team since joining Aetna last year, will also assume additional responsibilities, becoming head of Aetna's local and regional businesses. Karen's responsibilities will include leadership for the company's Individual, Small Group and Middle Market businesses; the company's field organization and local infrastructure; and Aetna's Group businesses.

These businesses represented over $20 billion of revenue in 2012 and would approach almost $30 billion of revenue pro forma for the Coventry acquisition. Aligning these important businesses under one leader will help facilitate our integration with Coventry, which Karen is responsible for executing.

Finally, after 27 years in the industry and almost 2 decades at Aetna, Frank McCauley will be retiring from Aetna later this year. Frank has been a distinguished leader at Aetna, beginning his career in our Medicare business and moving on to successfully lead a wide variety of regional and national businesses to profitable growth. Most recently, Frank served as a member of our executive committee and led Aetna's Commercial businesses, including National Accounts, Individual, Small Group and Middle Markets. Until his retirement later this year, Frank will continue to work with me on a number of initiatives, including preparing the company for health care reform. We wish him the best in his future endeavors.

We believe these changes will ensure that we have Aetna's strongest leaders in place to drive the execution of our growth strategy and better align our leadership as we look to close the Coventry acquisition later this year.

Let me highlight some of the areas in our growth strategy where we have demonstrated recent success. Our diversified book of business is producing membership growth again, having grown in each of the last 3 consecutive quarters, and we now project that we will grow medical membership again in the first quarter of 2013 to approximately 18.3 million members.

In our large group Commercial business, despite a challenging economy and labor market, we are pleased to report that in the first quarter of 2013, we project that our underlying Commercial ASC membership will grow by approximately 25,000 members after adjusting for the TRS Medicare Advantage conversion. This result is due to continued improvement in our National Accounts outlook, including a strong open enrollment season and continued growth in our network access products. After 2 consecutive years of membership losses in our Commercial ASC business, we are very pleased with this projected result.

In our Large Group Commercial Insured business, we continue to project that membership will decline in the first quarter of 2013. After the first quarter, we expect modest membership growth over the remainder of the year, partially driven by our Accountable Care Solutions relationships.

Importantly, we believe we can continue to generate revenue and profit growth in 2013 in this business, as we price to medical cost trend and manage to our target margin. We remain committed to our disciplined pricing model, and when faced with a choice, we will continue to favor achieving target margins over membership growth.

Moving to our Government businesses. We just completed a successful Medicare selling season. Based on the strength of our January 1 enrollment, we now project that our Medicare Advantage membership will increase by approximately 175,000 members in the first quarter of 2013, an increase of 45,000 members over our previous guidance. This growth is driven by the TRS conversion, which will add 100,000 members and approximately $1.2 billion in incremental revenue in 2013; continued sales success with other Group Medicare Advantage accounts, which will add another 50,000 members; and a successful open enrollment season for Individual Medicare Advantage, resulting in growth of approximately 25,000 members.

Additionally, our Medicare Supplement business continues to perform well, having grown membership by 46% in 2012 and exhibiting strong momentum in the first quarter of 2013, with growth projected of an additional 45,000 members.

These successes are a testament to the strength of our Medicare products, relationships and distribution, and speak to the value we continue to offer our customers while maintaining our target margins.

I would also like to touch on our Small Group and Individual businesses. As we discussed at our recent Investor Conference, our overall earnings exposure to these businesses is modest. Further, the proposed Coventry acquisition will enhance our capabilities in these businesses without meaningfully changing our overall earnings exposure.

Our exchange strategy will be defined by a measured approach, as we explore whether we can reasonably earn our cost of capital in these marketplaces. We continue to believe that if exchanges are successful and profitable, they will represent an upside opportunity for Aetna in 2014.

We are also making great progress in executing on our strategy of transforming the network model, and in turn, making health care more accessible and affordable. Aetna continues to be a leader in enabling providers to change their business model from episodic acute care management to population management, which allows them to convert their volume-based reimbursement to value-based reimbursement.

Aetna's strategy is designed to obtain the most competitive cost structure in the marketplace, which we then package into higher-quality, lower-cost insured and self-insured products, which already have and will continue to drive membership growth.

To date, Aetna has signed 17 accountable care collaboration agreements, with 32 letters of intent in place and a pipeline of over 200 opportunities. In the fourth quarter, Aetna signed 5 new accountable care agreements, as we align our interest with marquis partners and drive growth in our core business.

Our recently announced agreement with Memorial Hermann continues to advance this strategy and includes: a more coordinated personalized experience for patients with cost savings for members who use providers in the Memorial Hermann accountable care network; a new payment model to reward physicians for meeting quality, efficiency and patient satisfaction measures; and a Medicare provider collaboration arrangement for Medicare Advantage members, including our TRS membership.

I am very pleased with the progress we have made in our Accountable Care Solutions business to date, and we remain confident in our ability to grow to 30 ASC partnerships in 2013, encompassing approximately 375,000 members and $1.5 billion in revenues.

Before I conclude and pass the call on to Joe, I wanted to say a word about the fiscal cliff and ongoing deficit reduction debates. As you know, I am an advocate for a long-term plan in Washington that will secure the fiscal health of our nation and provide certainty to the business community. As both the President and members of Congress have acknowledged, entitlement reform is the key to solving our nation's fiscal crisis. And the largest of these entitlement programs relate to health care.

As solutions are negotiated to address these fiscal issues, changes to government-sponsored programs such as Medicare and Medicaid are likely, and we continue to believe that Managed Care Organizations can provide solutions that help address these challenges.

In particular, I would highlight that Medicare Advantage, which has growing bipartisan support, can act as a viable solution to reform the Medicare program, providing enhanced quality, benefits and access for seniors, while reducing costs and achieving superior outcomes.

We believe Aetna's strong Medicare and Medicaid portfolios, enhanced by both the proposed Coventry acquisition and our Accountable Care Solutions strategy, position us well to succeed in this period of change.

In summary, as we begin 2013, I am confident in our strategic direction and particularly, our execution, our ability to manage through the legislative and regulatory changes associated with health care reform, our ability to maintain our pricing discipline and grow membership over the course of 2013 and our 2013 operating EPS projection of at least $5.40.

I would like to thank all of our employees for their dedication in meeting the needs of our customers. By focusing on sound fundamentals, creating new approaches to satisfying customers and generating and deploying capital responsibly, we believe that we can continue to create value for our customers and our shareholders.

I will now turn the call over to Joe to provide insight into our fourth quarter results and our 2013 outlook. Joe?

Joseph M. Zubretsky

Thanks, Mark, and good morning, everyone. Earlier today, Aetna reported full year 2012 operating earnings per share of $5.13. Aetna's 2012 full year results demonstrate our focus on operational and financial execution across all aspects of our business, as we grew revenue by approximately 6% over 2011. We improved our full year business segment operating expense ratio by nearly 100 basis points, due to operating leverage from growth and continued discipline in controlling costs.

We continued to focus on capital management, raising our quarterly dividend by over 14% and repurchasing $1.4 billion of Aetna shares. We announced the proposed acquisition of Coventry, which will enhance our core businesses, increase our exposure to government programs, create synergy value and provide earnings accretion. We advanced our ACO strategy by launching over 100 products in 2012, leading to approximately 130,000 members under our Accountable Care Solutions arrangements at year end.

We delivered on our goal to begin converting 1.2 million Medicare-eligible members to Medicare Advantage with the TRS win, and we were awarded both dual eligible opportunities for which we did.

For 2012, operating earnings were just under $1.8 billion, and we realized a pretax operating margin of 8.7%, reflecting strong performance across all of our product lines, disciplined execution of our pricing and medical cost strategies and unit cost controls. Once again, we achieved our high single-digit operating margin target and produced a return on capital of over 12% and a return on equity of nearly 16%, both significantly in excess of our cost of capital.

Moving on to some of the key metrics highlighting our fourth quarter performance. We ended 2012 with over 18.2 million medical members, an increase of 64,000 members during the quarter, including growth of 48,000 Commercial ASC members and 37,000 Medicare Supplement members.

Fourth quarter 2012 revenue increased year-over-year by 5% to $9 billion, primarily due to higher Commercial Health Care premium and growth in our Medicare business. Our increase in Health Care premium included a net increase in Commercial premiums of approximately 3% into a 4.5% increase in premium yields, partially offset by volume declining by 1.5%. The increase in premium yields was a function of a 5.5% increase in rates, offset by a 1% decrease from mix. Health Care premium also reflected a 10% increase in the Medicare premium, primarily driven by membership growth in Medicare Advantage.

We also posted a 13% increase in Medicaid premium, due primarily to our in-state expansions.

Our fourth quarter total medical benefit ratio was 84.1%, including the impact of approximately $81 million before tax, a favorable prior period reserve development. We remain confident in the adequacy of our reserves, as we experienced favorable prior period reserve development in the fourth quarter across all of our businesses, primarily related to third quarter dates of service.

Additionally, our days claims payable were 45 days at the end of the quarter, down sequentially primarily due to changes in processing time and up 1 day from the fourth quarter of 2011.

There were 2 medical cost impacts in the fourth quarter of 2012 that deserve specific mention. Given our membership in areas affected by storm Sandy, we experienced lower-than-expected utilization in those geographies. Partially offsetting this impact were increased flu cost in the fourth quarter, as the flu season began earlier and was more severe than normal. Incorporating both of those impacts and based on our fourth quarter experience to date, Commercial medical cost trend projections for 2012 remain at 6.5%, plus or minus 50 basis points.

We continue to invest in innovation to improve health care delivery for our members and customers, to capitalize on opportunities for profitable growth and to improve productivity. Our fourth quarter 2012 business segment operating expense ratio was 19.7%, reflecting typical seasonal spending on open enrollment activities and the timing of certain investments, which we discussed on our third quarter call.

There were also other items reported in the fourth quarter, which were excluded from our operating results. These items totaled approximately $147 million after tax and included the previously announced proposed litigation settlement, Coventry-related transaction and integration cost and a loss on the early extinguishment of long-term debt.

The other items also included a severance charge related to job actions, the majority of which have already been completed as we naturally align our resources to areas of projected growth and appropriately size our business to best meet the needs of our customers. Additional information about these other items can be found in our fourth quarter 2012 press release and financial supplement.

The final area of our 2012 financial performance I will comment on relates to our investment portfolio, management of capital and cash flow generation. Aetna has a disciplined approach to managing our investment portfolio, focused on total return and preservation of capital. Fourth quarter net investment income on our continuing business portfolio was $155 million.

As we continue to match the duration of our investments to expected liabilities in our portfolios, the current low interest rate environment puts downward pressure on portfolio yields and earnings. We expect this dynamic to persist throughout 2013.

Our capital generation was very strong in the quarter. We started the quarter with $450 million of liquidity at the parent. Net subsidiary dividends to the parent were $499 million. We repurchased 11 million shares for $493 million. We paid down outstanding commercial paper by $70 million. We raised $2 billion in long-term financing at attractive rates to fund the proposed Coventry transaction.

After other net uses, including our shareholder dividend and retirement of long-term debt, we ended the quarter with $2.4 billion in cash and investments at the parent. Of this amount, $100 million represents core liquidity, with the remainder held to fund the Coventry acquisition.

Our basic share count was 327.6 million at December 31.

Our financial position, capital structure and liquidity all continued to be very strong. At December 31, we had a debt-to-total-capitalization ratio of approximately 38%, consistent with our guidance. Prior to the closing of the Coventry acquisition, we continue to target a risk-based capital ratio of approximately 300% of company action level.

Operating cash flow generation in the fourth quarter was excellent, as Health Care and Group Insurance operating cash flow was approximately 2x operating earnings. For the full year, operating cash flow was approximately 1.2x operating earnings, consistent with our projections.

Our 2012 results, combined with a solid start to 2013, give us increased confidence in our 2013 operating earnings per share guidance of at least $5.40 per share.

Our 2013 guidance is influenced by the following drivers: We are projecting first quarter total medical membership of approximately 18.3 million members, driven by growth in Medicare Advantage and Medicare Supplement, partially offset by declines in Commercial ASC and Insured. The TRS Medicare Advantage conversion is projected to account for approximately 100,000 of the decline in Commercial ASC membership in the first quarter. Adjusting for this conversion, we now project Commercial ASC membership will grow by approximately 25,000 members in the first quarter of 2013.

Aetna's full year 2013 membership guidance remains unchanged at approximately 18.4 million medical members.

We remain confident in our projected revenue growth of approximately 9% in 2013. Any outperformance from our early Medicare wins may be offset by the potential for delays in our dual eligible contracts and the pending divestiture of Missouri Care.

We project that our full year Commercial medical benefit ratio will increase modestly in 2013 to 81.5%, plus or minus 50 basis points. Aetna's 2013 Commercial medical cost trend projections remain unchanged at 6.5%, plus or minus 50 basis points.

The Medicare medical benefit ratio is projected to increase from the mid-80s in 2012 to the mid- to high-80s in 2013. It is important to note, this increase in MBR is driven primarily by Aetna's Group Medicare Advantage business where we have credited favorable experience back to customers through the renewal process.

We project our operating expenses in 2013 to increase in dollar terms, as we continue to grow and invest in our businesses. However, we project the growth rate in total revenue to exceed the growth rate in operating expenses as we continue to focus on cost control measures. For 2013, our operating expense ratio is projected to be 18% to 18.5%, an improvement over 2012.

Aetna's pretax operating margin is projected to be 8%, plus or minus 25 basis points, consistent with our high single-digit target. As discussed at our Investor Conference, the projected downward pressure on our pretax operating margin is driven by mix shift in the crediting of favorable experience to our Large Group Insured customers, partially offset by operating expense leverage.

Finally, we project operating earnings in 2013 will approximate $1.75 billion, roughly flat with 2012.

In contrast to prior years, as we examine the quarterly progression of our 2013 forecast, it is worth noting that we project that operating earnings per share in the second half of the year will exceed operating earnings per share in the first half of the year. This pattern is partially a function of the timing of recovery of health insurance fees and taxes, which will ramp over the course of the year.

In addition, we currently project that our investment spending in 2013 will be more evenly spread over the year, in contrast to our heavy investment spending in the back half of 2012.

For 2013, we continue to project net dividends from subsidiaries of approximately $1.1 billion and deployable capital of approximately $500 million. An important driver of lower dividends from subsidiaries in 2013 is the strong top line growth that we are projecting and the statutory capital required to fund that growth.

We also recently competed our fourth Vitality Reinsurance arrangement at attractive pricing and with a 4-year duration. This new arrangement will replace a portion of our coverage that expires in December 2013. And therefore, we have not adjusted our subsidiary dividend guidance for this transaction.

Aetna's share count projections for 2013 also remain unchanged.

Before I conclude, I wanted to briefly discuss our pending acquisition of Coventry Health Care. We continued to work diligently with the Department of Justice and with state regulators towards final approvals of the transaction and continue to advance our integration readiness plans. We are pleased with our progress. As of today, we have obtained 18 of the 21 state approvals that are required to close the transaction.

We also recently announced that we have agreed to sell our Missouri Medicaid business called Missouri Care to WellCare. We expect the sale of Missouri Care to close in the next 90 days. And this sale represents another important milestone as we progress towards closing the Coventry transaction.

We remain on-track to close the transaction in mid-2013, and our integration teams stand ready if we are able to close at an earlier date.

I am pleased that a strong year such as 2012 will delineate my transition from Chief Financial Officer of Aetna. Shawn Guertin has been an exemplary leader on my finance team for the last 2 years, and I am confident I am leaving the financial management of the company in highly capable hands as I enter into the next stage of my career at Aetna.

Looking to 2013 and beyond, we believe we have the winning strategy in the marketplace. Our core business is executing well, and we are well positioned for sustainable growth. Our emerging businesses continue to work to transform the network model, improve our cost structure and drive additional membership growth. Following closing, the acquisition of Coventry will only serve to strengthen our current positions in the Commercial, Medicare and Medicaid businesses and add to earnings growth in the years to come. Finally, our capital generation remains strong and will only be stronger after the closing of the Coventry transaction. We believe our core business, supplemented by emerging business growth and effective capital deployment, will enable us to generate low double-digit operating earnings per share growth on average over time.

I will now turn the call back over to Tom. Tom?

Thomas F. Cowhey

Thank you, Joe. The Aetna management team is now ready for your questions. [Operator Instructions] Operator, the first question, please.

Question-and-Answer Session

Operator

And we'll take our first question from Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

Question just relates to the Commercial MLR increase. Consistent with what you guys have been saying and expected, but I'm just curious if you could break out how much was flu, what the positive impact, I guess, was -- of Sandy was. If there's any way to understand sort of the mix impact. And then maybe, were there any sort of true-up or thoughts around the rebates relative to what you paid last year?

Joseph M. Zubretsky

Josh, with respect to the Commercial MBR, it was a pretty straightforward quarter with respect to items. As we said during our Investor Day in December that we are guiding to the lower end of the range of 81 to 81.5, and we came in at 81.1 for the year, which means the fourth quarter, in our estimation, was pretty much on what we expected. There was a little bit of uplift from the lack of utilization due to the storm-affected areas. And that was mostly offset by increase in early wave of the flu. But for the most part, the Commercial MBR we posted in the quarter of 83.4 was spot on our internal projections.

Joshua R. Raskin - Barclays Capital, Research Division

And no change in rebate relative to the previous year?

Joseph M. Zubretsky

No. It would be -- as I said, out of period items and adjustments and true-ups had no impact on the MBR. Those are the 2 items that you should track.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, got you. And then -- I'm sorry, just to sneak in one more. The return on equity you guys are posting about 16% for the full year, I'm just curious, as you think about the returns going forward, and maybe if you could think more pro forma with Coventry included, as your segments change around a little bit, would you expect pressure on those returns?

Joseph M. Zubretsky

I'm not sure I follow your question. Returns -- with respect to returns on capital?

Joshua R. Raskin - Barclays Capital, Research Division

Yes. You guys give sort of an ROE of 16% and a return on capital of, say, 12% or so this year. Would you expect those numbers to be sustainable going forward based on the change in your business mix?

Joseph M. Zubretsky

Okay, now I understand the question. When we announced the Coventry acquisition, we had given you forward guidance that the Coventry acquisition itself had a high-teens ROE, which means if we're in the mid-teens today, there is ROE accretion due to the transaction. And one of the reasons is you're taking a well-margined company and financing 2/3 of it with 2% money. So the ROE expands dramatically due to the leverage, the earnings accretion and the synergy value, that then gets harvested over time.

Joshua R. Raskin - Barclays Capital, Research Division

Got you, got you, okay. And then -- but the change in business mix to lower-margin business, though, in terms of your internal growth, you don't think that's enough to offset that?

Joseph M. Zubretsky

No. The change in government mix from 20% to 30% has a small impact on margin mix, but not significant.

Mark T. Bertolini

And the Small Group and Individual business does not change our exposure to that market either.

Operator

We'll take our next question from Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

First, just let me follow up on Josh's question here around the fourth quarter results. So it looked like there was a fair amount more seasonality in 2012 in the fourth quarter than we had seen in 2011. By my math, it's about 200 basis points from third quarter to fourth quarter, the increase. I'm just wondering if you can talk about the drivers of the seasonality there and just reiterate your level of comfort in terms of what you're seeing on price cost break [ph] going into '13.

Joseph M. Zubretsky

We saw nothing in the fourth quarter from a yield perspective or a medical cost perspective that changes our outlook for 2013. In fact, it gives us more confidence that the trend yield spread we project for 2013 will be achieved. As I said, the only 2 items that caused noise in the quarter were the lack of utilization from Sandy and increased flu. But other than that, the quarter was pretty much as planned. And the seasonality, again, the back-ended utilization due to the increased -- the preponderance of consumer-driven health plans, the increase in deductibles, that continues to have a sloping effect that every single year, that slope increases. And so, it's nothing more than that.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And then my last question is just, as you think about 2014, I know it's pretty early in '13, but your peers have been increasingly optimistic around their ability to grow earnings next year. And I wonder if you could share your early view on 2014 and walk us through some of what you think kind of the key headwinds and tailwinds by business segment, if you can.

Joseph M. Zubretsky

Sure, Justin. And it is early, and we're not going to really give anymore guidance than we already gave you at our Investor Day. But if you recall what we said, very clearly, we gave a long-term earnings per share growth view of at least double-digit earnings per share growth. And we said that was over a 5-year period, including any impact from headwinds in 2014. And so, if you look at those items, there's a lot of speculation about the ability of the industry to collect the taxes and fees due to health care reform. Early on, we see our ability to include those in rates and get them accepted as being favorable. But it's way too early to call exactly what the success will be in collecting that from customers. We feel good that the minimum MLRs in the Medicare business will be a non-event for the industry. And don't forget, as we integrate Coventry, in the first full year of integration, we'll have $0.45 of accretion, which is expected to be 2014, and $0.90 of accretion in 2015. And those numbers were not included in our base projection of double-digit earnings per share growth. So we do have confidence in that long-term projection we gave you, but we're not giving specific guidance on the 2014 year itself.

Mark T. Bertolini

And nor was Coventry included in our forward guidance either.

Justin Lake - JP Morgan Chase & Co, Research Division

Right. So if I -- just if I can put together some quick math, I mean, this year, you're growing about 6% EPS from $5.10 to $5.40. And you're going to hit a 5-year CAGR, which I think you said at the Investor Day of 10% over 5 years through '17? You're going 6% this year. Could earnings be much worse than flat next year x Coventry and still get to that 10% over a 5-year period?

Joseph M. Zubretsky

Well, again, we're not giving any particular guidance on 2014. But I will say, if you go back and look at our track record of deploying capital, the excess cash flow generation of the business, particularly as combined with Coventry, which will produce pro forma $2 billion of parent company cash flow, you can get the majority of that growth rate through deployment of capital. And therefore, you only have to grow operating earnings at a modest rate to hit the double-digit growth rate.

Operator

We'll take our next question from Carl McDonald with Citi.

Carl R. McDonald - Citigroup Inc, Research Division

Interested in the time line that you typically see on new products. So when you design a product and submit it to regulators, how long does that generally take to get approved, and obviously thinking about context of 2014 and exchange products and the time line that we're looking at to get everything up and running?

Mark T. Bertolini

Well, Carl, I think it depends on a couple of factors. Number one, the state within which you are trying to seek that approval; and number two, the number of other plans trying to seek approval at the same time. We find it varies from state to state depending on the workload they have and the number of people that they resource to handle this. So we've been very careful to get into the front of the queue quickly with our view of the products we need in the marketplace. But generally, we can get them approved in a quarter over -- usually, within 90 days. But again, there's going to be a crush of product filings as we get near health care reform and particularly, October 1. And so, I think that could slow things down.

Carl R. McDonald - Citigroup Inc, Research Division

And then second question is you've been vocal about Individual premiums increasing in 2014. At the same time, you've also been active building narrow networks, expanding ACOs. So as you net those 2 together, I'd be interested in sort of how you think that translates to overall premium increase in the Individual market in '14.

Mark T. Bertolini

We don't want to tip our hand on where we are going to be from a price point standpoint, particularly against our competitors. So we've been pretty straightforward about what we think the effects of the Affordable Care Act are on premiums. Obviously, as you can see from our ACO business and our narrow network business that we're getting substantive discounts from the providers with which we're contracting. We believe that offsets a portion of that increase, but not all of it. Secondly, in the Medicare space, we view having half of our Medicare Individual enrollment in ACOs or Medicare collaboration pilots in 2014.

Carl R. McDonald - Citigroup Inc, Research Division

When you talked about 20% to 30% average increases potentially in 2014, is that on a same product basis?

Mark T. Bertolini

No. That's -- it's definitely not on a same product basis because one of the key drivers of the increase is moving from a below 60% actuarial benefit to that 60%. So it isn't on a same product basis, definitely not.

Carl R. McDonald - Citigroup Inc, Research Division

I guess maybe I asked the question the wrong way. Just meaning, when you say 20% to 30%, that doesn't factor in any meaningful provider savings, or that does include something in the...

Mark T. Bertolini

No, the 20% to 30% we've been talking about has been largely on the basis of the effects of the Affordable Care Act.

Operator

And our next question comes from Matt Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Maybe I could ask a question about on your Medicare Supplemental business. So you had 46% growth in 2012, which is huge. And sorry, I haven't calculated the growth rate that you expect from the 45,000 you're adding in the first quarter. But can you just comment on the dynamic there in the sense that you're growing a lot faster on Med Sup than on the retail Individual MA side? It's not meant as a criticism, just curious what trends you think were contributing to that.

Joseph M. Zubretsky

Matt, sure, I'll comment on that. The Medicare Supplement business of Genworth was pretty much languishing when we bought it. Under that corporate umbrella, they had a hard time with new sales. Persistency was an issue. And the halo effect of the Aetna ownership has been fantastic from an agent retention, attraction and particularly, from a persistency rate point of view. So it's not only new business, but an improvement in the persistency rate that's allowing us to grow membership. Keep in mind, it's off a small base, and we still haven't yet begun the process of making our full suite of Medicare products available to those agents. And that should bode well for Part D growth through that channel, as well as future Supplement growth. So I would just say, it was an asset that was pretty much languishing under former ownership, and it's really come alive under Aetna ownership and management.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Fantastic. If I could ask a follow-up on a different topic. And I know it's early, but as you are no doubt in discussions with -- at least, with large employers about 2014 and small ones as well, any more observations you can make on whether you think some of the large employers may strategically drop coverage going into 2014 ahead of the exchanges or if that will be very limited, and then also on the Small Group side?

Mark T. Bertolini

On the large group side, we don't see a whole lot of activity about dropping coverage. What we will see are the emergence of private exchanges, but that will get slow -- that will be a slow start in 2014. And so, we think that's actually opportunities we discussed on the last call, as large employers will get private exchanges as a way of converting ASO membership into fully insured membership. We think it gives their employees more choice, but also gives them an opportunity to lock in their health care cost over a longer period of time. So we think that's what's going to happen in the large market. In the small group market, we don't see a whole lot of impetus for small groups to drop coverage and push their people into the exchanges unless those employees are getting a lot of subsidy. And so -- or I'm sorry, for them to go into shop exchanges because those employees are going to get -- if they have a lot of subsidy. So we don't see small group exchanges growing quickly. We do see some potential for small groups to drop coverage and move their employees in. We're also seeing a lot of discussion around reducing hours on employees, below 30 hours, to avoid having to provide health care coverage at all.

Operator

Our next question is from Christine Arnold with Cowen.

Christine Arnold - Cowen and Company, LLC, Research Division

Can you guys help us understand the factors you're thinking about as you look forward to 2014? I think you said that you expect to be in 15 exchange markets. You're in 20 individual states now, and then Coventry has theirs. So it looks like there are some states you're thinking about sitting out. Should I be thinking of the 15 exchanges as 15 states, or are you thinking of 2 exchanges per state? And then again, what factors could change your enthusiasm towards or away from these exchanges?

Joseph M. Zubretsky

Sure, Christine. Yes, we said we're going to be in 15 markets. That represents pretty much our entire footprint. There will be some states that we haven't made public yet that will not be participating. And we've chosen those states based on the franchise and brand recognition we have in those states, the density we have, the provider relationships and contracts and regulatory environments that are amenable to making sure that the entire cost of the product can be loaded into rates. We also believe that the 3Rs will help mitigate the risks of adverse selection. But given all that, we're still approaching the exchanges with a great deal of caution, step into them lightly, allocate capital very deliberately and cautiously. And when and if we can prove that a sustainable margin that produces an adequate return on capital can be achieved, then we might turn on the spigot more aggressively. But a very cautious approach, and we believe our new colleagues or potential colleagues at Coventry sort of feel the same way.

Mark T. Bertolini

We see, Christine, the off exchange market in the Individual segment being about 20% of the population, so we will be in places where we are not on exchange but still in the Individual market.

Christine Arnold - Cowen and Company, LLC, Research Division

And then Texas RS market, the $1.2 billion in revenue, you've upped your expectation there, I think from $800 million originally. So it looks like you got good take up there. How is that developing in terms of early trend experience since it's such a large account?

Mark T. Bertolini

We'd -- I mean, we took care of that population in the self-funded market for a lot of years, so we have a good understanding of the trend within the self-funded product that they offered. It's just way too early. I mean, we're in the first 3 weeks of January here, still trying to figure out all of the -- all the various revenue lines we have, let alone, from what the experience is in any of the groups. But we are obviously going to keep a close eye on it.

Christine Arnold - Cowen and Company, LLC, Research Division

Did you get the members you thought you'd get? And is the profile of the membership what you thought, and the drug trend looking pretty good?

Mark T. Bertolini

The membership is what we thought we got, plus some more. So we've got some membership than we thought we were going to get. The open enrollment period was good, and it's along the lines we expected.

Operator

And we'll take our next question from Scott Fidel with Deutsche Bank.

Scott J. Fidel - Deutsche Bank AG, Research Division

First question, just a question on the Commercial risk guidance for the remainder of the year to generate some modest growth. And just wondering if you're including any assumptions around some attrition in the Individual business in the back half of the year in that forecast ahead of exchange implementation in 2014.

Joseph M. Zubretsky

Scott, our membership forecast for 2013, first of all, we've only said that we're going to end the first quarter with 18.3 and then 100,000. We really haven't given any guidance about where the 100,000 comes from for the balance of the year, but it's pretty much spread across all products. We're not looking for dramatic growth in Small Group and Individual for the balance of the year. That's not where it's going to come from.

Scott J. Fidel - Deutsche Bank AG, Research Division

Okay. So it'd be biased a bit more towards some modest growth in the Large Group side, potentially offset by some slower growth dynamics in ISG?

Joseph M. Zubretsky

Yes.

Scott J. Fidel - Deutsche Bank AG, Research Division

Okay. And then just a follow-up question, just on the percentage of pools or premiums in rebate status. Last year, I know you had given us an update that you had around 20% of the pools and 25% of the premiums in rebate status. And just now that the year's wrapped up, just interested if you can update those figures, just given that you did have around a 320 basis point increase in the Commercial MLR this year.

Joseph M. Zubretsky

Scott, we probably won't talk about the actual number until it becomes public information. But suffice it to say that rebates, rebate accruals, true-ups to rebates were just not a significant item in this year's financial outcome, including the quarterly progression. Obviously, the rebates are a lot less than they were initially because if you recall, in the second year, we at least had the ability to price closer to the minimum and not pay a rebate. So a lot less of an impact this year than in the first year the rebates were in vogue.

Operator

Our next question comes from Melissa McGinnis with Morgan Stanley.

Melissa McGinnis - Morgan Stanley, Research Division

Can you remind us again the pacing of your Individual and Small Group Commercial renewals throughout the year? And do you actually see any potential to early renew some of the -- your typical 1-1 business in late 2013 ahead of Reform taking effect?

Mark T. Bertolini

I didn't catch your last part of your question. You broke up, Melissa.

Melissa McGinnis - Morgan Stanley, Research Division

Oh, sorry. I just said -- to repeat the whole thing. Can you remind us again the pacing of your Individual and Small Group renewals throughout the year? And then, do you see any potential to early renew some of your typical 1-1 Small Group business in late 2013 before Reform takes effect?

Mark T. Bertolini

Melissa, Individual and Small Group is pretty flat throughout the year, and that's by -- just by nature of the way they buy. And we are seeing some of that activity about early renewal, as we think about how we relate the fees and taxes going into their rates. And so, we will be anticipating some of that behavior, and we'll be engaging where our clients are interested in moving ahead in that way. So we've got that into our pricing models, as well as some of our competitors.

Melissa McGinnis - Morgan Stanley, Research Division

Great. And then, kind of a different topic. You sound really confident in some of your commentary about 2014 or pretty confident that you can price for the tax in your Commercial book. How are you feeling about absorption of the industry tax on your government books, particularly like Medicaid and Medicare? I guess, for Medicaid, do you think the states are leaning towards building that into rates? And then on Medicare Advantage, do you think there's enough excess benefit over Medicare to absorb that into benefit design changes?

Mark T. Bertolini

So, yes, I think on the Medicaid front, Melissa, we are not going to get the fees and taxes out of the state governments unless we have a very robust recovery in the economy and the states feel flushed with their budgets. So I would expect that to be a tough discussion and a tough fight moving forward. On the Medicare side, we believe, as with a whole host of other impacts that will impact Medicare revenue through the next few years, that we have the opportunity through medical management; through benefit design; through our provider re-contracting, particularly ACOs and narrow networks; our Medicare collaborations where we expect 50% of our Individual membership to be in those groups; and through the star ratings, that we can absorb some of those fees. Now we'll obviously have some opportunity in the SG&A line as we further automate to offset some of those. But we believe that we're going to -- our approach right now is to absorb those.

Operator

Next question is Sarah James with Wedbush.

Sarah James - Wedbush Securities Inc., Research Division

You've had some great success with the National Accounts segment in '13, and I was wondering what's changed so far as far as messaging to consultants on this product, maybe in terms of discounts. This time last year, you were saying that you were within about 200 basis points of the market leader in 24 of your 30 top markets. So maybe if you could talk about how you're doing in comparison to that and thinking about the mix of incoming opportunities versus outgoing compared to last year.

Joseph M. Zubretsky

Sure, Sarah. We are projecting to be within 2 discount points of the leader in 26 of the top 30 markets in 2012. And that covers -- those 30 markets cover over 80% of the National Account membership. And that should just get better. And so, we decided to play the discount game because sometimes those optics are important to customers, so we're working hard at narrowing that gap. But in the meantime, we continue to invest heavily in total effective net cost that it's really what you end up paying, not a unit price discount that matters. And I think the turn in our membership trajectory here in 2013 and hopefully '14 recognizes the fact that customers that were very financially stressed during the economic downturn now see the long-term investments paying off. Many of those customers left to get Blues base discount and have now returned because their trend increased beyond what was expected. And now they're returning to the total med effective cost model. So we're working down both tracks. We're going to narrow that gap as we already have, and we continue to invest it heavily in total effect of net cost.

Sarah James - Wedbush Securities Inc., Research Division

Great, so much more stable pricing. That's very helpful. And last question here is, when I think about the timing of heading towards the exchanges, I know one of the things that companies are still working on is setting up what your unit cost bases will look like as far as provider contracting. So how do you think about the timing of when you'll know what your provider contracting costs look like versus when you would have to submit bids for exchanges?

Joseph M. Zubretsky

That's a great question. Our company philosophy and our strategy is to always make sure you know what your unit cost of goods sold is before you file rates. And now the timing is going to get pushed here, right, because we have to start filing and the exchanges are going to be open in October. But we are furiously at contracting with providers, segregating the exchange contracts out from the base Commercial contract. We're not going to talk about what rates we're trying to obtain, but we believe that the majority of the unit cost discounts we need to have contracted will be contracted before we file rates.

Operator

Our next question is Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

I guess, first question, can you just help us maybe break out the favorable development by product line in terms of Commercial, Medicare and Medicaid, or at least directionally?

Joseph M. Zubretsky

All product lines were positive during the quarter. The majority of the development was from the Commercial line of business.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then, just wanted to go back to the commentary around the industry tax for Medicaid specifically. Maybe I'm misremembering, I thought historically, the working assumption was that states would sort of incorporate the tax into rates. Did I just sort of not hear that right? Is there sort of a change in sort of your opinion on that? Just general commentary there.

Joseph M. Zubretsky

To be clear, the attempt will be made, as we said early on, to collect every dollar of tax from every dollar of premium that serves as the base on which we incur the tax. What Mark was referring to, given the stressed state budgets, that's going to be a real difficult negotiation. And we're not projecting that we're going to recover 100% of the taxes from our Medicaid customers. The intent is there. I assure you, the taxes will show up on every rate proposal we submit, but then the negotiations will be difficult.

Operator

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

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I don't know if Shawn is on the line or not, but Mark, you kind of highlighted that he has been very active on the capital deployment. So I wanted to see if Shawn had any different views about how to maximize the capital structure, or if there's anything else that he really thinks about as being his primary focus as being the CFO.

Mark T. Bertolini

Well, Shawn won't be joining us for this call. We're going to let Joe close things up, and we'll have Shawn available on the next call as we move forward. But I can assure you, Shawn and Joe have worked very closely together on our capital deployment strategies. And they've worked together in coming up with those strategies and implementing those strategies. And I'm sure Shawn, as he -- as bright as he is, as he comes up with new ideas, working with all of us, we'll make sure that we're on the leading edge of capital deployment as a company.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. Then I guess a couple of quick follow-ups then. You've mentioned that G&A is going to be more evenly spread throughout the year. I would think you're going to have a whole new open enrollment period now on the Commercial side. What -- I guess, how do you think about those extra costs? I would think that would kind of lean towards another year of back-end loading on that front.

Mark T. Bertolini

I think we will have some back-end loading. But I think the way to think about our G&A structure for the remainder of the year is we're going to be prepared early for exchanges, but more importantly -- and those start October 1, but more importantly, the second half of our year is going to be devoted to integrating Coventry effectively. That is, if we do that really well, that does more for us than anything else, we'll invest in the last half of the year. That would be a below-the-line expense, so it won't show up in our SG&A ratio next year -- for this year.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. And then just to go back to the point about the Medicaid difficulty in passing through the industry fee, do you think -- are you still able to earn the rate of return that you want if you're not able to pass through the entire industry fee? Does that make you think differently about the Medicaid business? Or do you think about it as subsidizing that with maybe more profits on the Medicare or the Medicaid -- Commercial side of things?

Joseph M. Zubretsky

No, we really don't believe in cost subsidy of product profitability, but I would say, and you can look at the industry results, Medicaid margins today are at the lower end of the range, just barely in excess of the cost of capital. But with all of the unmanaged lives going managed and all of the unmanaged dual lives going managed, we believe that expanding footprint today at barely above cost of capital is a prudent growth investment and only gives us upside in the future to expand those margins into the mid-single digits from the low single digits.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. So your view is that absent this fee, you might have been able to expand margins in the business as you gain density and leverage G&A. Instead, you think that the industry fee is going to kind of keep margins more stable with where they've been historically.

Joseph M. Zubretsky

Yes, our projection is that the margins will still produce returns in excess of the cost of capital. And yes, the fees will put pressure on that.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

And then one last really quick question. I thought you said that -- at the TSR conversion, I think you said it's 100,000 lives. Was it -- is that up from where it was before? Was that 85,000 lives last time? And what's the delta there?

Joseph M. Zubretsky

Yes, your memory is good. That's correct.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

So what's the delta there?

Joseph M. Zubretsky

Just more uptake into the new product.

Operator

Our next question is Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

A couple questions on the Medicaid side. I guess, if I think about Medicaid margins, typically in the 2 to 3, 1 to 4, however you want to describe them, I mean, it doesn't seem like if you load in the industry tax on a pro rata basis that, that's going to -- it will be barely profitable. So I guess, am I thinking about it -- is there something incorrect in the way I'm thinking about the math on the Medicaid side?

Joseph M. Zubretsky

No, I think you're right. I think the pre-health care reform tax returns are in the low single digits. But we plan to either offset the impact of the taxes with medical cost savings or SG&A savings and make sure that in the near term, we can get that book of business to earn its cost of capital. Again, you're not going to grow a very profitable and attractive dual-eligible population without the TANF footprint. And so, think of barely earning your cost of capital as the price to pay to expand your footprint to get access to the high-acuity populations. We think it's a really, really good investment.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then maybe this is a question for Mark. But I guess, when you're in D.C. -- I mean, is there a realization at the federal level that obviously there's a circular impact here? And I guess, I would -- if you're comfortable, I'd love to get your odds on this actually getting carved out on the Medicaid side.

Mark T. Bertolini

I think both Medicare and Medicaid will come front and center as we have those 2 programs and Social Security is the only thing left on the table to solve our nation's deficit. Now the question will be, and the big driver of Medicaid is dual eligibles, can we do a more formal program for dual eligibles across the country? But getting the fee carved out as an issue, I know it's on the table, but it's not going to be one of the top priority items to solve relative to the fiscal cliff.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then one more, if I could, just on the Sandy impact. I know sometimes you see events like this on the facility side, and it's normally just a delay in the procedures. And I guess, I would love to get your sense as to how confident you are that you didn't just see people delay, at least the electorate procedures, for 1 month or 2 and that you haven't -- just based on the lag in the claims data that, that's not going to hit up later in the quarter and we'll see that in Q1.

Joseph M. Zubretsky

In our accounting for the fourth quarter, we fully contemplated the potential for a rebound or a boomerang effect from the forward utilization rather than forgone utilization. So it's a good comment, but we fully contemplated that book in the fourth quarter result.

Operator

We'll take our last question from Peter Costa with Wells Fargo Securities.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

I'm going to take it back to where we started, on the Commercial medical loss ratio. You wouldn't have been forecasting the favorable prior-period development in the quarter. And then if I look sequentially, especially if I take out the PPD, because it was very big in third quarter of 2011, your seasonal pattern seems to have gotten much worse. And even if the MLR was where you expected it to be, it looks like the seasonal pattern got worse in the fourth quarter. Can you talk to that, and give us more comfort as to why your MLR looks much worse sequentially and year-over-year relative to the way it looked in the third quarter and compared to the fact that you had PPD in the quarter?

Joseph M. Zubretsky

Well first of all, I think it was unusually good in the third quarter, number one. And number two, again, we fully contemplated the seasonality impact of high-deductible plans and deductibles and projecting the result. And we're very comfortable that we hit our internal forecast, which produced that 81.1% for the year, which is exactly what we expected.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

So should we expect the seasonal pattern to increase again next year the way it increased this year?

Joseph M. Zubretsky

We have internal forecast and that -- we haven't made those public yet. But we are -- we will soon give you guidance on what the seasonal pattern might look like for next year, maybe at one of our upcoming conferences.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Okay. And then I believe you said you had 45,000 more Medicare Advantage members than you'd originally thought you'd have at the beginning of the year, yet you didn't take your guidance up for 2013 for that incremental -- fairly large amount of membership, and can you explain why?

Joseph M. Zubretsky

Sure. We did not take our revenue forecast up from the 9% year-over-year increase in spite of the fact that we have a higher Medicare membership. We also believe that there is high potential for delay in the 2 dual eligible contracts that we sold for Ohio and Illinois, and of course, the sale of Missouri Care, which will take place and was never in our forecast. That's why we're keeping our revenue forecast the same as original, and therefore, not increasing our earnings guidance.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

And the earnings side of that, you think the Medicare business would be more profitable than some of the dual stuff that you would have otherwise picked up?

Joseph M. Zubretsky

Yes, I mean, in addition to that, I mean, it's just way too early to start forecasting pennies here and pennies there. We're very confident in our outlook for the year. Everything we learned in the fourth quarter validates the data points on which our 2013 is projected, and it just gives us increased confidence that we're going to achieve those numbers.

Thomas F. Cowhey

A transcript of the prepared portion of this call will be posted shortly on the Investor Information section of aetna.com, where you can also find a copy of our updated guidance summary containing details of our guidance metrics, including those that were unchanged and not discussed on this call. If you have any questions about matters discussed this morning, please feel free to call me or one of my colleagues in the Investor Relations office. Thank you for joining us this morning.

Operator

That does conclude today's conference. Thank you for your participation.

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