Cigna's (CI) CEO David Cordani on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Cigna Corp. (CI)

Cigna (NYSE:CI)

Q2 2014 Earnings Call

July 31, 2014 8:30 am ET

Executives

Edwin J. Detrick - Vice President of Investor Relations

David M. Cordani - Chief Executive Officer, President, Director and Member of Executive Committee

Thomas A. McCarthy - Chief Financial Officer and Executive Vice President

Analysts

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Ana Gupte - Leerink Swann LLC, Research Division

Andrew Schenker - Morgan Stanley, Research Division

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

David A. Styblo - Jefferies LLC, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Operator

Ladies and gentlemen, thank you for standing by for Cigna's Second Quarter 2014 Results Review. [Operator Instructions] As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded.

We'll begin by turning the conference over to Mr. Ted Detrick. Please go ahead, Mr. Detrick.

Edwin J. Detrick

Good morning, everyone, and thank you for joining today's call. I am Ted Detrick, Vice President of Investor Relations. And joining me this morning are David Cordani, our President and Chief Executive Officer; and Tom McCarthy, Cigna's Chief Financial Officer.

In our remarks today, David and Tom will cover a number of topics, including Cigna's second quarter 2014 financial results, as well as an update on our financial outlook for full year 2014.

Now, as noted in our earnings release, Cigna uses certain financial measures, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP, when describing our financial results.

Specifically, we use the term labeled, adjusted income from operations, and earnings per share on the same basis as the principal measures of performance for Cigna and our business segments. And a reconciliation of these measures to the most directly comparable GAAP measure is contained in today's earnings release, which is posted in the Investor Relations section of cigna.com.

Now on our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2014 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of the risks and uncertainties is contained in the cautionary note to today's earnings release and is in our most recently report filings with the Securities and Exchange Commission.

Now before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Please note that when we discuss the number of covered lives for our global medical customers, we will be doing so on a basis that excludes those individuals that were previously covered under Limited Benefits plans. As a reminder, we exited the Limited Benefits business as of December 31, 2013, as required by the Affordable Care Act regulations.

I would also note that when we discuss our earnings outlook for 2014, it will on the basis of adjusted income from operations. And lastly, our outlook for earnings per share for 2014 excludes the effect of any future capital deployment. And with that, I will turn the call over to David.

David M. Cordani

Thanks, Ted. Good morning, everyone, and thank you for joining today's call. To begin, I'll briefly review highlights from our second quarter financial results. Next, I'll provide an update on how the effective execution of our strategy is addressing global challenges, such as lowering health risks, and improving productivity, affordably, and clinical quality. In addition, our profile, our supplemental benefits business continues to meet the needs of global consumers and is driving attractive growth across our international markets.

Next, Tom will offer insights on our performance, as well as an updated outlook for the remainder of the year before we open the floor to your questions. After that, I'll leave you with a few closing remarks.

Let's get started with some highlights. Our track record of strong performance and competitively attractive financial results continued in the second quarter, with each of our business segments contributing meaningfully to Cigna's results.

Our second quarter 2014 consolidated revenue increased 9% to $8.7 billion. We reported adjusted income from operations for the second quarter of $530 million or $1.96 per share, which represents a per share increase of 10% over the second quarter of 2013.

Turning to each of our segments. We again reported strong results across our Global Health Care business. Our continued focus on delivering engagement-based solutions that leverage innovative physician partnerships is resulting in high-quality clinical outcomes and competitively differentiated medical costs for our customers and clients.

These outcomes are driving strong customer retention, supporting our work to deliver localized and personalized care for customers around the world.

Our Global Supplemental Benefits business had another strong quarter, as Cigna continues to effectively deliver differentiated products and services for our growing number of customers worldwide. In a moment, I'll discuss this strategically important business in more detail.

The results of our Group Disability and Life segment continue to be strong, driven by our disability and productivity model, which produces industry-leading return-to-work results. In our group business, we are putting our customers front and center, leveraging our broad, talented clinical teams and supporting their work with actionable insights to help our customers improve their well-being and sense of security. In total, our second quarter results reflect strong performance that remains firmly grounded in Cigna's clear and focused strategy of going deep, going global and going individual.

Now I'll highlight how we position Cigna to compete and win in a complex global marketplace, both today and in the future. We faced some serious challenges that continue to confront health systems around the world, our response has been, and continues to be, to emphasize innovation, with the focus on affordability and personalization, which from our point of view, requires a highly localized focus.

At Cigna, personalization describes how we are addressing today's increasing retail-oriented marketplace and the growing demand for products and services that are personally relevant to each individual's needs, needs that clearly evolve and change at each life and health stage. And localization, sharply targets Cigna's decision-making process in local market structures, with locally-based leadership teams and expert resources, who best understand their home markets, and we drive delivery of our innovative solutions and value proposition each and every day.

The syntheses on localization and personalization, along with our focus on achieving improved clinical quality outcomes has driven us to engage collaboratively with physicians and individuals, uniquely defined by their local market characteristics to emphasize deep and broad clinical excellence within our Cigna teams for the benefit of our customers and to innovate new customer-driven and incentive products and services that engage our customers in a highly personalized manner. This includes Cigna's Collaborative Accountable Care arrangements, which we launched back in 2008.

We recently surpassed our 2014 goal of establishing 100 collaborative arrangements, and as of today, have more than 1.4 million customers obtaining care through these models. These collaborative arrangements engage with individuals to encourage preventive care, reward healthy behaviors and to actively guide, coordinate and support the care journey of our chronic and acute customers.

By closing gaps in care through programs that improve prescription adherence, quality health screenings and ensure follow-up care, we are seeing improved health outcomes and as a result, better affordably. We are going to improve to demonstrate the effectiveness of our collaborative arrangements with physicians.

For example, for those arrangements that have been in operation for at least 2 years, nearly 3 quarters have met targets for improving quality, with a comparable percentage meeting targets for improving medical costs. These proof points clearly demonstrated that our collaborative arrangements with physicians are effectively delivering the right care at the right time at more affordable and sustainable levels.

Now I'd like to turn to a part of our business that is predominantly based outside the United States and is of increasing scale and significance for Cigna. Globally, evolving markets are confronting a host of new societal and economic demands, presenting us with opportunities to deliver innovative solutions to protect health, well-being and sense of security.

To meet these emerging needs, we have built a scale, differentiated platform for a fast-growing Global Supplemental Benefits business. This business is of increasing strategic importance for 3 primary reasons: One, it represents an attractive global market for Cigna with expanding opportunities among the growing middle class and seniors population. And additional opportunities in health care, as both governments and individuals around the world seek to expand private solutions; two, our broad, innovative distribution channels gives us more opportunities to effectively target and interact with individuals on a personalized basis; and three, our sophisticated individual expertise can be leveraged as the individual market evolves in the United States.

Today's Cigna's Global Supplemental Benefits business has more than 12 million policies in force, primarily serving the growing middle class. These policies cover a wide range of health, life and accident products that provide individual customers with a diverse range of solutions targeted at filling the gaps in their social benefit programs and providing them with greater peace of mind.

The unique differentiator and driver for Cigna in the marketplace are the more than 150 diverse infinity partnerships, we maintain throughout the world. Our broad experience and industry-leading capabilities in this distribution channel continue to drive new customer growth and help us deepen existing customer relationships.

In addition, we are leveraging the range of innovative distribution channels to reach current and prospective customers in a personalized approach. For example, in the direct-to-consumer space, we continue to feel our industry-leading proprietary telemarketing programs with new personalized distribution channels, such as direct digital campaigns, branch banking, retail store outlets and home shopping television.

Our ongoing innovation of distribution channels is continuing our success in helping to drive growth. In fact, today, these newer channels now represent more than 1/3 of new sales for this business.

Another market segment with attractive potential for our global supplemental business is the Seniors segment. We recently expanded our efforts to support the needs of seniors through an innovative digital marketing strategy focused on establishing Korea's first health care membership program, which offers a broad array of unique, personalized services for this segment.

This innovative and rapidly growing platform is called, Heyday, and within this very early stages, but it already has nearly 75,000 senior members. Supporting the needs of this fast-growing Senior segment in strategic markets around the world represents an attractive growth opportunity for Cigna. Our deep international experience in the individual market is also proving to be an advantage as we harness our analytical expertise to enhance and create solutions for the growing employer, individual and supplemental markets in the U.S.

Our strong track record of meeting customer's needs in our global supplemental benefit business has resulted in leading financial performance over a sustained period of time. Specifically, over the last 5 years, our Global Supplemental Benefits business has delivered average annual growth in revenue of 19% and earnings growth of 20%.

In addition, these businesses generate high returns in capital and very attractive markets. Cigna's substantial international footprint, differentiated capabilities and local teams of talented professionals enable us to effectively compete in some of the world's most attractive, existing and emerging growth markets.

Given our strong market position and our ongoing strategic investments in Global Supplemental Benefits over the long term, we continue to expect 15% average annual growth in both revenue and earnings from this important segment.

Turning now to our portfolio of Diversified Businesses. As we look to the future and acknowledge the complex challenges and market conditions that lay ahead, we are energized by what we view as a tremendous opportunity to grow our capabilities and further enhance the experience and value proposition for the customers we serve.

At Cigna, we remain well positioned for sustained long-term growth, with an industry-leading global reach and broad capabilities that are firmly grounded in our clear and focused strategy.

Over the course of 2014, we remain confident that each of our businesses will deliver continued growth. In addition, the strong returns on capital from our business give us flexibility to drive additional shareholder value through capital deployment opportunities.

As we look beyond 2014, given our strong financial position, our capabilities to create value for our customers and clients and multiple growth businesses, we remain committed to our long-term average EPS growth target of 10% to 13%.

Now to summarize my remarks before turning it over to Tom. Cigna's strong financial performance during the second quarter marks another quarter of competitively attractive revenue and earnings growth. The increasingly complex nature of change in the current business landscape presents significant opportunities to further innovate and grow.

In our targeted markets around the world, we are harnessing the power of data and insights, and building an increasingly agile network of partners with the goal of driving differentiated value for customers and clients, as well as our shareholders.

These capabilities across our diversified portfolio of businesses around the world remained grounded in the strong execution of Cigna's clear and focused strategy, and our strong balance sheet continues to give us a flexible platform for additional shareholder value creation.

And now I'll turn the call over to Tom for a more detailed look at our results and our outlook. Tom?

Thomas A. McCarthy

Thanks, David. Good morning, everyone. In my remarks today, I will review Cigna's Second Quarter 2014 results and discuss our outlook for the full year.

Overall, this quarter's results are strong, driven by continued effective execution of our strategy with meaningful contributions from each of our business segments.

Key highlights in the quarter include: Consolidated revenues grew 9% to $8.7 billion, driven by continued growth in our targeted markets; consolidated earnings grew to $530 million; and quarterly earnings per share increased 10% to $1.96 per share; and free cash flow remained strong, as we continued to deploy capital for the benefit of shareholders with $1.15 billion of share repurchases on a year-to-date basis.

The strength of these results provides us with good momentum and confidence in our full year financial outlook for 2014. Regarding the segments, I will first comment on our Global Health Care segment. Global Health Care results were strong, driven by our Commercial Employer group business. First quarter premiums and fees for Global Health Care grew 8% to $6.1 billion. This result reflects continued good growth in our ASO programs, that demand for these products remained strong. We ended the second quarter of 2014 with 14.2 million global medical customers, growing by approximately 170,000 customers on a year-to-date basis. First quarter earnings were $402 million and were primarily driven by business growth and specialty contributions.

Turning now to medical costs. We continued to deliver medical costs that reflect better health outcomes and strong clinical excellence for our customers and clients as a result of our deep collaborative relationships with physicians and our focus on personalization of care.

Our commercial medical trend continues to be among the lowest in the industry, and given that over 85% of our U.S. Commercial customers are in transparent ASO funding arrangements, our clients directly benefit from these favorable medical costs. Medical cost also continue to reflect the recent low utilization trends.

Regarding medical care ratios, in our U.S. Commercial Guaranteed Cost business, our second quarter 2014 Medical Care Ratio, or MCR, was 83.1% on a reported basis, or 84.3% excluding prior year reserve development.

Our Commercial Employer risk businesses continued to deliver strong results, reflecting strong pricing, disciplined underwriting and continued effective medical management and physician engagement. The guaranteed cost MCR in the quarter also continued to be impacted by higher-than-expected claims on our individual business.

In our Seniors business, our second quarter MCR for Medicare Advantage was 84.8% on a reported basis, or 85.1% excluding prior year reserve development. Second quarter Medicare Advantage results continue to reflect progress on the network and medical management actions we discussed in previous quarters, along with revenue pressure from the low rate environment. Across our Commercial and Seniors risks books of business, our second quarter earnings included favorable prior year reserve development of $16 million after tax compared to $20 million after tax in the second quarter of 2013.

Moving to operating expenses. For the second quarter of 2014, the total Global Health Care operating expense ratio was 21.5%. This includes the impact of the industry fee, which added about 110 basis points to the expense ratio in the quarter and was offset by efficiency gains and expense discipline.

To recap, we had another strong quarter in our Global Health Care business. Now I will discuss the results of our Global Supplemental Benefits business, which David profiled earlier. This business continues to deliver very attractive growth and profitability. Premiums and fees grew 18% quarter-over-quarter for Global Supplemental or 13% on a currency adjusted basis. Second quarter earnings grew 24%, or 15% on a currency adjusted basis to $61 million, reflecting business growth, effective operating expense management and stable benefit ratios.

For Group Disability and Life, second quarter results were also strong with premium and fee increases of 5% over second quarter 2013. Second quarter earnings in our group business increased 6% to $110 million. The quarter's earnings included a $35 million after tax favorable impact from a reserve study on our Group Disability business, as well as strong operating results in Disability, underscoring the strong fundamentals in our disability and productivity programs.

For our Corporate and Other operations, results totaled to an after-tax loss of $43 million for second quarter 2014. Overall, as a result of the continued effective execution of our strategy, our second quarter results reflect strong revenue or earnings contributions from each of our business segments, as well as continued significant free cash flow.

Turning to our investment portfolio. In the second quarter, we recognized net realized investment gains of $43 million after tax, coupled with a strong net investment income result. We are pleased with the quality and diversification of our investment portfolio and our overall investment results.

Now, I will discuss our outlook for 2014. We expect to continue to deliver differentiated value for our customers and clients and strong financial performance for our shareholders in 2014. We now expect consolidated revenues to grow in the range of 5% to 8% over 2013, an increase of 1% versus prior guidance.

Based on the strength of our first half results, our outlook for full year 2014 consolidated adjusted income from operations is now in the range of approximately $1.94 billion to $2 billion, or $7.20 to $7.40 per share. This represents an increase of $0.10 per share at the midpoint over our previous expectations.

Consistent with past practice, our outlook excludes any contribution from additional capital deployment and any additional prior year reserve development. I would also note that full year 2014 adjusted income from operations includes approximately $110 million after tax, or $0.40 per share of acquisition-related amortization expense.

I will now discuss the components of our 2014 outlook, starting with Global Health Care. We expect full year Global Health Care earnings in the range of approximately $1.61 billion to $1.64 billion. Regarding global medical customers, we continue to expect 2014 customer growth of approximately 1% to 2%.

Turning to medical costs. Our year-to-date medical cost trend for our total U.S. commercial book of business is favorable to our prior outlook of 5% to 6%, reflecting continued effective medical cost management and physician engagement and low utilization trend.

As a result, we now expect full year medical cost trends to be in the range of 4.5% to 5.5%, which is 50 basis points lower than our prior guidance. This updated range continues to contemplate some uptick in utilization over the balance of the year.

Regarding medical care ratios, for our U.S. Commercial Guaranteed Cost book of business, we continue to expect the 2014 MCR to be in the range of 81% to 82.5%. This reflects continued strong results in our employer group business and pressure in our individual business. ACA enrollees continued to be high utilizers of Healthcare services, and likely will push our 2014 guaranteed cost MCR to the high end of our range. We continue to expect the impact of pressure from the individual business will be manageable within our overall diversified portfolio.

For our Seniors business, our Medicare Advantage MCR for 2014 continues to be in the range of 84% to 85%. Regarding operating expenses for 2014, we continue to expect our total Global Health Care operating expense ratio to be in the range of 22.5% to 23.5%. This outlook reflects increased spending for open enrollment costs and strategic initiatives in the second half of 2014, which will impact both the Global Health Care operating expense ratio, as well as adjusted income from operations.

Now moving to the other components of our outlook. For our Global Supplemental Benefits business, we continue to expect strong top line growth and earnings now in the range of $205 million to $220 million. Regarding the group Disability and Life business, we now expect full year 2014 earnings in the range of $315 million to $330 million.

Regarding our remaining operations, that is, Corporate and Other operations, we now expect a loss of $185 million for 2014. So all in, for full year 2014, we expect our outlook for consolidated adjusted income from operations to be in a range of approximately $1.94 billion to $2 billion, or $7.20 to $7.40 per share. I would also highlight that we expect earnings and EPS in the second half of the year to be comparable between third and fourth quarter.

Now, moving to our 2014 capital management position and outlook. Overall, we continue to have excellent financial flexibility. Our subsidiaries remain well capitalized and are generating significant free cash flow to the parent, with a strong return on capital in each of our business segments. Our capital deployment strategy and priorities have not changed. These priorities are: providing the capital to support the growth of our ongoing operations; pursuing M&A activity with a focus on acquiring capabilities and scale to further grow in our targeted areas of focus; and after considering these first 2 items, we'll return capital to shareholders, primarily through share repurchase.

Regarding free cash flow, we ended the quarter with the parent company cash of approximately $325 million. During the period May 1 to July 30, we repurchased approximately 5.5 million shares of Cigna's common stock for $500 million, bringing our total year-to-date share repurchases to approximately, 13.5 million shares for $1.15 billion.

After considering all sources and uses of parent company cash, we now expect to have approximately $750 million available for deployment during the balance of the year.

Overall, our financial position and capital outlook remain strong. The higher returns on capital from our businesses, coupled with our strong balance sheet, means that we will continue to generate significant free cash flow to deploy for the benefit of shareholders.

Now to recap. Our second quarter 2014 results reflect the strength of our diversified portfolio of global businesses and a continued track record of effective execution of our strategy. The fundamentals in our businesses remain strong, as evidenced by strong growth in revenue and earnings, competitively attractive medical cost and quality outcomes that directly benefit our customers and clients and continued strong free cash flow. Based on the strength of these results, we are confident in our ability to achieve our full year 2014 earnings outlook.

And with that, we will turn it over to the operator for the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Matt Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Could you give us a little more detail on what you're seeing in the individual business? How the -- your read on the exchange utilization has changed over the course of the quarter? And what you expect will happen in the back half.

David M. Cordani

Matthew, it's David. Let me just give you a little color of our approach to the individual and specifically, the exchange business and I'll tell you what we're seeing. First, our view of that marketplace is that 2014, 2015 and 2016 really represent version 1.0 of the market. So there's a lot to play out. For long-term success, we think that 3 things need to be in place. Clearly, insurance offerings that cover needed sick care, as well as proven preventative care. But in addition to that, for sustainability, we think 2 things are important. One is supporting engagement, incentive-based programs to get a more sustainable cost profile and health profile. And secondly, to enable ample network flexibility to engage and really focus on the high performing networks and the value-based networks, like our Cigna Collaborative Accountable Care networks. Now, my comments on our experience come back to the 5 states we're focused on in the exchanges to-date in about the dozen markets there. We saw 2 tranches of membership. The first tranche, and then we'll call the end of Q1, beginning of Q2 tranche. As we've discussed before, that first tranche was older than expected, purchased a little richer benefit profile than expected, and its utilization of services was higher than our expectations and higher than any of our competitors, classes of services, including oncology, maternity, muscular, skeletal, et cetera. The second tranche through the latter part of Q1, beginning part of Q2, which saw another surge. A bit younger profile purchased a bit leaner benefit profile; about the same amount of silver, but more bronze, less gold. Early to tell in terms of how that's playing out. But early signs are a little bit more favorable or a little healthier population. As we look to the second half in the year, we are anticipating to continue to see pressure here and our MCR outlook contemplates that, they will need to see pressure, and what we think is we're in the early part of a shake out here in 2014. Our final note is, we've positioned this business to be manageable. We didn't expect to make money. We're not making money here and there is some more pressure. It's manageable within the broad, diverse portfolio that makes up our company right now.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Just one follow-up on the 3Rs. Where are you on accruals now, or your outlook? I think you've talked to expecting reinsurance of under $100 million for the full year, and you're not accruing anything on the other 2Rs. Is that still where you are?

David M. Cordani

Matthew, so -- directionally, through the first half of the year, we've accrued a total of about $60 million, $65 million after tax. The majority of that is in reinsurance. And our outlook contemplates a similar pattern in the second half of the year based on the experience we're seeing right now.

Operator

The next question is from Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

I just want to drill down a little bit further on the exchanges. Given the guaranteed cost ratio in the quarter and all the uncertainty on what's going on with medical cost trends, given the hospital results, can you help us delineate the core GC MCR versus what's going on in the individual business? For instance, what's the individual MCR right now? And where is that relative to where it was last year?

David M. Cordani

Okay. Justin, it's David. Let me just kind of frame the overall earnings profile, and I'm going to ask Tom to walk through the guaranteed cost MCR in a bit of clarity here because there's some movement, quarter-to-quarter. A couple of headlines coming in. First, as we stepped into 2014, we acknowledge that -- it was again, a very disruptive and uncertain year. And we set goals and objectives, as you know, to grow revenue earnings and EPS, while continuing to invest in the company. Our results year-to-date for the aggregate franchise are strong, and they demonstrate, really, that balance of our portfolio. And net-net, we're pleased with our results through the first half of the year. Overall, our loss ratios and our medical costs are in line with our expectations, as Tom noted, for our aggregate book of business, our medical costs are a little favorable to our expectations and let us to improve our outlook on medical cost trend. And specifically, the variance that we're seeing in our aggregate guaranteed cost loss ratio is driven explicitly by the individual block of business, which is a larger percentage of our guaranteed cost of block of business than, maybe, the market average. So I'm going to ask Tom to give you a little bit of color in terms of the drivers of that movement and give you a little bit more dimensioning of what's driving the individual portfolio. Tom?

Thomas A. McCarthy

So Justin, I'd say there's 3 major headlines related to our GC MCR this quarter, and I'd like to make sure you take away and then I will get into some of the nitty-gritty. First, as David said, our employer group business MCR continues to perform well and remains very consistent with our expectations. Second, the primary driver of the increased GC MCR on this from our individual business. And then, finally, as you'd, expect in period-to-period comparisons, there are number of moving parts that are reflected in the quarterly results, and I'll get into that in a minute. So looking at the sequential increase, second quarter '14 versus first quarter '14, first, there was more a favorable prior year development recorded in the first quarter than the second -- that's kind of a normal pattern. Second, there is continued pressure from individual results. And individual share of our guaranteed cost business continues to increase as the individual business grows quarter-to-quarter. And then, finally, there's an impact from benefit structure across all of our risk business, reflecting the increased impact of deductibles, which results in a low first quarter MCR. So the combination of these 3 factors pushed the reported MCR and GC up by, probably, 7 points sequentially. The impact on the quarter, MCR is about evenly spread across all 3 of these factors. So reserve development individual pressure and benefit structure about evenly account for the 7-point sequential increase. Again, adding it all together, our employer business MCR remains consistent with our expectations and outlook, and our individual MCR is still high and likely to push our full year MCR to the high end of our range.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. Maybe I can comment another way and then I'll jump off. It's just -- maybe just trying to think about what the sustainable earnings power of the business is. You're talking about losing money and exchanges that seems to be increasing. Can you give us some color around the magnitude of that loss and how we should think about? Maybe just, what you're doing on the individual business right now? And where do you think that can go next year, given your pricing action? And then the '16, what a normal margin would look like, so that we can get some idea what kind of headwind is this and where it would go from there?

David M. Cordani

Yes, sure, Justin. And so stepping back. We believe that this marketplace has the potential for being a sustainable, attractive market. And what does that mean? A 3% to 5% margin business we would have to be able to see to get the returns that we would expect. So firmly grounded in that. Two, in the early shakeout period, we knowingly went into a market that we didn't expect that to transpire, given the profile of the states, the dynamics in the moving parts. Three, well, we expected to have earnings pressure in this book of business. The rate of earnings pressure is growing. And even some of your peers put out, at the end of the first quarter is that number in the $50 million, $60 million range? That was order of magnitude first quarter, assume that that pressure continues to mount a little bit beyond that, based on our outlook and even without in our outlook for 2014, we're able to not only achieve, but increase our overall earnings expectations, which we're proud of in the diversified portfolio. And then finally, as we look to 2015, we're going to remain in the 5 states we're in. Our expectations is that we're going to enter 3 additional targeted states with targeted focus with our collaboratives, apply some of our learning from this year, and make no doubt about it. Our expectation is improve off of the 2014 results, which is not sustainable. So long term, we would need a 3% to 5% margin expectation. Secondly, earnings pressure in 2014 exists and is increasing, but we're managing that within our overall portfolio. And lastly, we would expect to improve on this result in 2015.

Operator

The next question is from Scott Fidel with Deutsche Bank.

Scott J. Fidel - Deutsche Bank AG, Research Division

I just wanted to maybe flip over to discuss the Medicare MLR. And it looks like that was in line with your full year target, but at the higher end of that range and was up by a sequentially. So maybe if you can just walk us through the drivers of the higher MA, MLR sequentially. How much of that maybe relate to less reserve development as compared to the run rate business. And then maybe just talk about if there were any particular markets that did drive the higher sequential MLR and MA.

David M. Cordani

Scott, it's David. I'll give a little bit in terms of how we look at the business through the first 6 months and ask Tom to give you the specific reconciliation of the MLR. As you know, we were very clear as we stepped into 2014, that we expected '14 and '15 to be a pretty disruptive marketplace, great pressure, industry fee, et cetera. It's also important to note that this is a market that is highly valued by seniors, with now fully, a 30% of all Medicare coverage are MA, high satisfaction rates, industry wide for MA, driven by higher engagement with physicians that are clinical outcomes, better services. Today, we're actually pleased with the targeted actions we implemented to improve the overall results, actions that included some product positioning, pricing actions, but very targeted network movements, as well as targeted medical management. And important to note that, as you indicated, our year-to-date loss ratio is in line with our expectations for both the first half of the year, as well as our full outlook. The only other qualitative comment I would give you is there are no unique hotspots by market that I would call out for you. There's a portfolio we're managing, but there's no unique hotspots. I will ask Tom to give you a little bit of a reconciliation of movement, Q-to-Q. But overall, expectations are in line with what we had for the first 6 months in the year.

Thomas A. McCarthy

Scott, you've pretty much hit on the key factor in the sequential increase first quarter '14 to second quarter '14. Much of the increase relates to favorable prior reserve development that was reported in our first quarter results. If you adjust for the PYD, the MCR increased from about 84% in the first quarter to about 85% in the second quarter. So this is consistent with our expectations and our outlook for the full year. That 1% increase is within the range of expectations for normal quarterly variance here ad likely also reflects some deferral of services from the first quarter into the second quarter, which would be very consistent with the low utilization recorded in the first quarter.

Scott J. Fidel - Deutsche Bank AG, Research Division

Okay. And then just had a follow-up question. Just would be interested if you can give us an update on how things are tracking around the national account selling season for 2015. And then, also, just interested in what you're seeing out in the market in terms of employer interest, in terms of large case ASO employers to shifting towards private exchanges just in the context that recently, Aetna talked about are they -- they're seeing a slowdown in that activity level or at least see the signing level of that particular theme for 2015?

David M. Cordani

Okay Scott, it's David. A little color on both. Relative to 2015 -- and again, we'll speak to the national account piece because that's where we have some visibility. Important to remember, we define that buying segment a little more narrowly than the market does in total. So when I give you a comment, it's commercial employers with 5,000 or more employees that are multistate. So we defined a little bit more tightly. And also, important to note our strategic objective has been to hold market share in aggregate in a marketplace that's shrinking, while growing our penetration and engagement incentives and specialty-based programs. So as we look to the marketplace, for new business opportunities, year-over-year, we've had about the same looks in terms of the size of the pipeline and our kind of view of what's emerging there is that our win ratio will be similar year-over-year on new business. Second point, on the portion of our book of business that was out to bid year-over-year, our percent of our book of business that was out to bid was up somewhat year-over-year, driven by the cycle of the contracts we have. Within that, our retention rate of wins of those pieces of businesses that are out to bid are about the same. But because the percent that was out is a little higher, our net losses will be a little higher year-over-year. Putting the picture altogether for 2015, we're not giving you guidance. We'd expect to see continued progress in terms of some new business sales, continued penetration of our specialty and engagement-based capabilities, which are critical and we've got good traction, and a little softer retention rate than we had over the prior year, which was an outstanding retention rate. Last note I would say here, it's good to get through this year because, again, a meaningful percentage of our book of business was out to bid based on contractual cycle. And the team is going to come through that pretty favorably. As it relates to private exchanges, as we noted, early, I mean that innovation cycle, may present long-term attractive marketplace that we're clearly engaged in. That marketplace has to have transparent products and services that engage individuals variability around the incentive programs and a lot of flexibility for ongoing innovation, so programs can remain sustainable, affordable, et cetera. To date, we're positioned in the vast majority of exchanges. The activity we've seen was -- has been a lot of interest in exploration, including our own proprietary, but a modest amount of net movement. So netting it altogether from a Cigna standpoint, net-net, kind of a de minimis movement of wins and losses, but interest in the space. And the key here is demonstration of long-term value creation on which we think that dialogue will continue into '16 and '17.

Operator

The next question is from Carl McDonald with Citigroup.

Carl R. McDonald - Citigroup Inc, Research Division

First question, I was just wanted to go back to the comment around the pattern of the 3Rs being similar in the second half of the year. I would think, given the way the reinsurance works, you should be seeing maybe exponential growth in the accruals in the second half, rather than a similar pattern.

Thomas A. McCarthy

Carl, I know there's been some commentary on that lately. I mean, our expectation is that the 3R impact, when you net through all of them, all the Rs, the reinsurance, the risk adjustments in this quarter, it will probably be proportionate through the balance of the year.

Carl R. McDonald - Citigroup Inc, Research Division

How would that be, though? If the reinsurance kicks in at $45,000, presumably you'd have a lot more people hitting that in the second half of the year than you did in the first?

Thomas A. McCarthy

Well, a few things going on, right. We will have more premium as we go through the -- Year 2, and we would also tend to develop claims to expected outcomes, and have some share of that reflected in our accruals to date.

David M. Cordani

And Carl, it's David. Maybe to add on, when we say proportionate, to Tom's very important point in terms of more premium, as you know, the premium is raving and ramping up throughout the course of the year. So don't think about it as absolute dollar amount. Think about it in proportion to premium. So to your hypothesis, it will grow somewhat, but we're not signaling a tremendous spike in the last portion of the year, but rather a proportionate pattern to our current premium profile in the first half of the year.

Carl R. McDonald - Citigroup Inc, Research Division

Okay. And then second question is just where does the individual business stand from on an enrollment perspective today, and you broke that out between exchange and off exchange? And then what percent of the guaranteed cost revenue are you anticipating for the year?

David M. Cordani

Carl, just at a macro level, the individual business, think about -- we've said before, 250,000 to 300,000 lives. We do expect to be approaching 300,000 lives, and maybe stepping back a little bit. Slightly less than 50% of that is ACA un-exchanged business that we're dealing with in terms of our portfolio. As it relates to percent of the guaranteed cost business, it's ranging between 25% and 30%, and as we trail toward the end of the year, we'd expect it to push up towards 30%.

Operator

The next question is from Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Just want to go back to the individual book, and try to ask it a different way, I guess. How much did it actually pressure MLR in the quarter? So, in other words, if you just took the individual book out of your business, how would the MLR compare to the 83.1 that you reported?

Thomas A. McCarthy

Well, Ralph, again, I don't think we're going to get into the specifics of that level of detail. But again, as far as the sequential increase, individual again accounted for about 1/3 of that 7-point sequential increase, and the GC MCR was performing exactly as we'd expect. Now there's a few things going on in the GC MCR. We've got some things coming out, like limited medical. We've got some things coming in, like pricing for the health insurance tax. And we've got, as we talked about, the benefit structure changes running through the quarters. But adjusting for all those things, GC MCR is exactly where we expected it to be, very consistent with our expectations. And again, as we look to the outlook, we're staying in the range that we talked about, but acknowledging that given the pressure in individual, we're going to be hanging out at the high end of that range.

Ralph Giacobbe - Crédit Suisse AG, Research Division

And then and can you talk about sort of reconciling that with sort of the -- taking down sort of your trend guidance for the year despite sort of the higher MLRs? Is that in the context of including sort of the ASO block that sort of drags that number down in terms of cost trend? I'm just trying to reconcile down sort of cost trend, but up MLR.

David M. Cordani

Ralph, it's David. I think that's an important point. Stepping back, when you look at that cost trend, we talked about that aggregate commercial cost trend is across our commercial portfolio. So to remind you, greater than 90% of our commercial portfolio is ASO, about 85%, another 7% or so insured returns, and then the residual, somewhat less than 10% in guaranteed costs in total. So that's the block in totality. We've consistently delivered a very attractive competitive trend there, and we're quite pleased with the fact, that while we entered the year with an expectation at the low end of competitive range of 5% to 6%, as Tom noted in his prepared remarks, our year-to-date trend is below that range. So a number that starts with a 4. Hence, we improved that outlook to 4.5% to 5.5%. That's separable from looking at the guaranteed cost on loss ratio. So the underlying medical trend for the aggregate portfolio is performing very well. Why? Great penetration of aligned incentive and engagement-based programs, strong clinical management, and then continued emerging leverage of our physician partnerships in those collaborations. So that's transpiring. If you come back to Tom's point, in our employer guaranteed cost book of business, our MCRs are right where we expected them to be, great execution, medical cost trend netting to a favorable result and a very strong result. The simple delta in the guaranteed cost MLRs is driven by the individual block of business, which is a large percentage, as I noted, before 25% to 30% of the guaranteed cost portfolio.

Operator

The next question is from Joshua Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

I hate to harp on the guaranteed cost MLR. But just doing some rough math, if I assume you guys had even $80 million or so of exchange premiums at 100% MLR, I think that's only explaining something in the ballpark of 100 bps year-over-year, and obviously, a little bit less sequentially. So I'm struggling to see, is it the remainder of the individual book that's performing much worse? And if so, I guess, why is that?

Thomas A. McCarthy

So Josh, let's go back to the major headlines here. Again, we've got the -- you've got that already, I think, employer group, as we expect individuals, the source of the pressure, there's a number of moving parts. So the number of moving parts can be instructive in the quarter-over-quarter comparison, right? The quarter over -- in the quarter-over-quarter comparison, the most significant impact in the MCR increase is individual. That explains about 3/4 of the 400 basis point increase, and some of that relates to the fact that we had very low MCR individual business in the first quarter of last year. And now, we're to an average higher MCR individual business in the first quarter of this year. So that dynamic really is impacting the quarterly results, and obviously, we're also showing individual as a higher share of our premium in the second quarter of 2014, and I think you probably low-balled the ACA premium estimates in your math.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And so, I mean, David, is it a 125,000 lives now and trending slightly down?

David M. Cordani

So Josh, think about our individual book of business being in the 275,000 to 300,000 range, with the ACA lives in excess of 100,000, and we're not flagging a big trend down for the year. We may move from 300,000 down to 280,000 in that range, but we're not flagging a big trend down for the year. When we look at the drivers here, though, important to note, we see the kind of pressure in the aggregate individual book of business because most of our individual lives are in states that allowed the movement of the -- keeping plans and movement to the ACA piece. So take this entire 300,000 lives, look through the revenue that goes along with that, ACA is in excess of 100,000, and again, 300,000 for the full year, potentially rating down to 280,000 by the end of the year.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And then just a follow-up on a couple of one-timers. The reserve study, the $35 million in disability and life, was that expected? Is that sort of normal course business, i.e., was that in guidance? And then what was the favorable currency impact? You guys haven't really called that out in the past. So was that sort of an above abnormal benefit that you saw in the quarter?

Thomas A. McCarthy

Well, Josh, the first question on the currency. We call that -- now just to make sure people stay grounded on growth rates in Global Supp, in the overall scheme of things, it's about a $4 million impact. So it's not really that material to earnings. On the reserve study question, I mean, this is -- we've got a consistent track record of continuing to refine our return to work in productivity programs in our disability business, and over time, some of those outlooks show up in the run rate of the business, and some of those outcomes show up in the reserve studies. So while we don't actually specifically plan on a reserve study benefit, we do plan on operational improvements that will improve results in disability. So it's one of these things -- that specific study and the results from that specific study weren't planned for, but some level of improvement in group results was planned for and contemplated in the outlook.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. So the guidance really had it. Whether it was explicitly in the reserve study or not, you guys did expect $35 million of disability earnings coming through that mechanism, I guess?

Thomas A. McCarthy

We expected some improvement in the year. Quite frankly, we didn't necessarily expect it this quarter. It's kind of over the course of the year, but that's -- you have got the general idea. We were expecting improvements.

Operator

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

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Can you go into the MA business a little bit more? Obviously, there's some questions about it in Q4. It seems like the last couple of quarters has come in a lot better. But can you talk about it in the context of how you're thinking about 2015? I know some of your competitors have given some color about how many counties they're going to add next year or new markets to enter next year, and just some general commentary around what the benefit designs are shaping up -- like, do you have any color around your visioning for next year?

David M. Cordani

Sure, Kevin. It's David. As we noted previously, we're pleased with the traction, thus far, through the first 6 months, and some of the actions we've taken to -- in targeted geographies to sharpen the networks, further accelerate some of the clinical programs are paying dividends and results. As we look into 2015, our primary expansion strategy in 2015 will be to leverage additional counties off of some of our new market entries from 2014. So thinking order of magnitude, 40 to 50 additional counties that lever off of market entrees we went in, in 2014. Off of that, there'll be some county exits as all, but the net result will be total entry of additional counties. As it relates to benefit positioning, we'll step into 2015 with a notion of continuing to maintain an attractive benefit profile. As you know, the HealthSpring model has the ability because of its efficiency with the physician partnerships to build some additional benefit richness for the benefit of our respective customers. And we expect to maintain a good level of attractiveness, especially in how they are integrated and how they engage markets. And therefore, we would expect to grow as we step into 2015.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. And then just on the guaranteed cost business, it looks like membership is down. I mean, what's going on there? Are you seeing pricing pressures and you're walking away from business? How should we think about that?

David M. Cordani

Relative to guaranteed cost, say, for, again, the portion that's in the individual block of business, it's a smaller portfolio for us -- a well- performing, but smaller portfolio. What we continue to see, most specifically here, Kevin, is continued very strong appetite for ASO stop-loss programs that are highly transparent, and work very collaboratively within employers to get the incentives aligned. We see higher levels of engagement and therefore, better returns. So as we've discussed in prior calls, we will frequently offer a guaranteed cost in an ASO stop-loss programs side-by-side, either for new business or renewal. And we continue to see the take-up on the ASO stop-loss. Order of magnitude, think about in our new business sales in the select segment, so 50 to 250 less employers, about 70% of all of our new business sales are ASO stop-loss versus 2 years ago is 50-50 guaranteed costs. So still a third in guaranteed cost, but that ASO stop-loss and transparent proposition continues to hunt very attractively.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay, this is more kind of -- planned shift of your customers to a different product option rather than, necessarily, a cost or pricing issue?

David M. Cordani

No. Broadly speaking, I would say the pricing environment continues to be competitive, but no major change. And when you say planned shift, I would just add to that, it's our consultative approach, where we're a bit agnostic at the end of the day as to which funding alternatives an employer takes, because in that space, either of them are highly penetrated with specialty portfolios, and what we want to do is provide choice. And thus far, the choice has led to more of the transparent funding mechanism. So it's planned full in terms of providing choice, but the marketplace is telling us they value that choice more so with the 70% of new business sales being ASO stop-loss.

Operator

The next question is from Christine Arnold with Cowen.

Christine Arnold - Cowen and Company, LLC, Research Division

Just have a few clarifying questions. I'm hearing that the aggregate trend is separable from guaranteed cost. So am I hearing that even excluding individual, your trend commentary doesn't necessarily apply to the underlying guaranteed cost?

Thomas A. McCarthy

Well, Christine, I'd say that we just want to be clear. There are 2 different reference points. One is the total commercial book for trend, and one is the GC book for the MCR. And in fact, in the overall trend result, we don't get the disproportion impact on -- from individual on our overall business, and the GC MCR is disproportionately impacted from individual. Now they run in the same range. So it's not like we're calling out major differences on the employer group business, and depending on what program type people select, but there certainly is a big difference in the relative impact of individual. It's disproportionately impacting the guaranteed cost MCR, and it really has a minimal impact, given it's such a small piece of our overall business and the overall book of business trend result.

David M. Cordani

So Christine, to add onto that, if you take Tom's comments relative to the employer guaranteed cost portfolio, that continues to perform very positively and in line with our expectations, as is the overall medical cost trend. We're just trying to highlight that impact of the individual block of business is more disproportionate in guaranteed cost, but the medical cost trend is benefiting all of our employer block of business.

Christine Arnold - Cowen and Company, LLC, Research Division

So the employer guaranteed cost trend is decelerating about 50 basis points as well?

David M. Cordani

Our aggregate trend is decelerating 50 basis points, and you should think about that as across our entire employer block of business.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay. So, as I think about Stop Loss in reinsurance, there's some -- you're selling a lot of that. The attachment points are a bit lower. I can conclude that you're benefiting in -- even within that business from trend deceleration. Is that true?

David M. Cordani

You should think about the stop-loss book of business as a large book of business, a large book of business that covers both regional, as well as smaller employers with various attachment points and configurations, and a book of business that has grown, continues to perform well, and is repriced in a dynamic fashion. But the current economic environment benefits, very importantly, the employers through lower medical costs, and we benefit from some of that through the design of the stop-loss programs, and the stop-loss programs exist.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay. And then final question for me. You said you have some accruals in the individual book of business for expected outcomes in response to a question for the 3Rs. So I can assume that you're saying yourself, okay, I know a certain -- I know what my profile of this membership looks like, and I'm accruing all 3Rs somewhat evenly through the year, even though folks may not have hit that $45,000 attachment point yet for reinsurance. Is my understanding correct?

Thomas A. McCarthy

As it relates to reinsurance, yes. Again, as it relates to the other Rs, we are being a little thoughtful about knowing that the information there is still a little scarce, so -- trying to be cautious in how we're accruing that.

Operator

The next question is from Ana Gupte with Leerink Swann.

Ana Gupte - Leerink Swann LLC, Research Division

Just wanted to follow up on the question from Josh and around your individual book. I think you have about at least 200,000 lives, as I understand, from your previous individual book. And I'm just wondering if you had a lower MLR on those before the ACA, and because of risk pooling, that has deteriorated as well, not just in the state you're expanding, but elsewhere?

David M. Cordani

Ana, the answer is yes.

Ana Gupte - Leerink Swann LLC, Research Division

Okay. So is that a big component of the 3 percentage MLR deterioration you're seeing, I guess, your [indiscernible]?

Thomas A. McCarthy

It's a component, but I wouldn't call it a big component, Ana. I mean, again, the dynamic for the year is very high MCRs in the ACA-related business. And that business will grow over the year, both in the momentum of enrollment. And also, we do expect lapses in our legacy individual business throughout the year, and off period enrollment into ACA program. So the dynamic will be shifting towards more ACA business as we go through the year.

Ana Gupte - Leerink Swann LLC, Research Division

And then I think one of your competitors, as related to this, has been saying that they've been selected against because the not-for-profit Blues or even WellPoint are getting more previously insured people, whereas you didn't have a very large individual book. Do you think you are getting selected against? And if so, if they are ACA-compliant, would you not be eligible for risk adjustment beyond what you're projecting for this year?

David M. Cordani

Yes, Ana, it's David. Nothing to speculate who's getting selected for and against. I think the important thing here is a couple-fold, and I'll come back to your risk adjustment in a second. We are in the very early phase of the establishment of a new market, and it is clearly dynamic and somewhat volatile, one. Two, we sought the position. Our play in that marketplace is focused, targeted and manageable within the overall portfolio, and our aggregate earnings reinforce that. Three, any selection dynamic is going to be state-specific; that is, playing through, and we'll kind of flush through as the 2015 renewal cycle transpires. And finally, as Tom referenced in a prior comment, on the, I'll call, the other 2 Rs other than reinsurance, while we've recognized some level there, we've sought to be on the conservative or prudent range. Hence, there may be some additional opportunity there. But again, we're trying to give a lot of visibility to this book, make sure our shareholders understand that it's manageable within our portfolio even though there's pressure in it. And finally, beyond what we think is the conservative end of some of the assumptions on the other 2 Rs, given the volatility of the market.

Ana Gupte - Leerink Swann LLC, Research Division

And are you comfortable about next year, considering this could become 50% of your guaranteed cost book that you're pricing strategy on your off exchange either through because you're encouraging forced attrition? Or on exchange, trying to improve your loss ratios that you wouldn't get a continually deteriorating book if you raised pricing on exchange is because of the potential second mover advantage?

David M. Cordani

I'm not too concerned about a second mover advantage at this point. This is a new market, a very dynamic and moving marketplace. I think the most important point back to yours is ensuring laser-focus of specific resources, understanding the performance of the book of business, targeting benefit designs, pricing models, et cetera, and finally, where possible, leveraging our collaborative relationships so this population is becoming more actively managed more rapidly because what we're seeing in the utilization is an under-managed or underserved population. So I don't think the second mover advantage is an issue in the markets we're talking about, and we would expect a lot of movement in the markets in 2015. It's still a very immature marketplace.

Operator

The next question is from Andy Schenker with Morgan Stanley.

Andrew Schenker - Morgan Stanley, Research Division

So I know you mentioned increased spending in open enrollment cost, as related to OpEx spend, but OpEx spend in the first half was still well below your -- it's below your guidance. So can you just remind us about the types of investments during the second half and the expected timing there, as well as how we should think about some of that spending on a run rate basis?

David M. Cordani

Sure, Andy. It's David. Just broadly speaking, first, our strategy has guided us to drive continued operating improvements in the business, and I'm proud of the fact that our organization has rallied around that. And you've seen continued improvement in our operating expense ratio, which has, in part, created further and further capacity for ongoing investment. 2014 marked another year when you adjust for the industry tax and improvements in our operating expense ratios. Our results are strong and in line with our expectations year-to-date, and our expectation in the second half of the year is that we'll see increased strategic spending. Give you some examples: staffing and capacitation to support new Medicaid expansion and contracts; two, readiness for our January new business; expanded marketing and branding programs; expanding distribution, as well as geographic investments in our international business; and then ongoing technological investments. Stepping back, I think we've demonstrated a good balance of making sure the rate, pace and timing of investments are prudent, and the returns is demonstrated with our sustained growth rate, are also there. So that gives you a little example of what we're contemplating in the second half of the year, and the team will continue to be disciplined relative to that.

Andrew Schenker - Morgan Stanley, Research Division

Okay. And then, changing direction a little bit. We've seen, obviously, continued declining unemployment rates. So I was just wondering if you're seeing any impact on your in-group growth versus, obviously, the attrition we've seen over the last several years, and if that's varied at all by your customer size and buckets.

David M. Cordani

Andy, it's David. I would say slight. So as the unemployment rate has come down somewhat, as you know, unfortunately, for the country, in part, some of that is people leaving the workforce. Say, for that, in some of our industries, we've seen the rate of -- I'll call it dis-enrollment, or attrition, slow, sensitized, and in some cases, a little in-group growth. So small movement. I wouldn't signal a spike by any stretch of the imagination, but small movement from a continued dis-enrollment to a stabilization to, in many of the industries, a bit of an uptick of enrollment.

Andrew Schenker - Morgan Stanley, Research Division

And does that vary at all by market segment? Is there more growth in select, perhaps versus national accounts or...

David M. Cordani

Absolutely. As we flag strategically, we see the national account segment as a net shrinking segment in the country right now based on a whole variety of reasons of employment profile. Commercially, as you go down market, the select, our 50 to 250 life employer market, we see some attractive growth there both organically in the employer profile, as well as our share of that.

Operator

The next question is from Peter Costa with Wells Fargo.

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

With your membership growth target to be 1% to 2% this year, and you're talking about retention being down for next year, without putting words in your mouth, that sounds like you're talking about flat to down membership next year. With the lowest trend in the industry, and you lowering it again here today, why do you think you don't see more growth? Is there some -- is it just a breadth issue for you guys? Or is there some other issue that you need to address strategically to rectify why accounts are leaving?

David M. Cordani

Yes, Peter, I would caution you not to extrapolate the comments on the national account commercial portfolio to the aggregate book of business, number one. Two, we're quite proud of the fact that we've had a high retention rate in aggregate across our businesses, and net growth year-over-year that has been profitable net growth year-over-year. My comments were specifically to the national account, and specifically to retention because the contractual cycle we were in with many cases had those cases out to bid, but our overall retention rate, when the dust settles, will be attractive. We would expect the ability to grow in 2015. I'm not giving you guidance. The strength of our regional segments, which is the largest segment of our portfolio, the strength of the select segment, which is the fastest growing portion of our portfolio, continues to perform very well. And in part, our aggregate enterprise retention is driven by just what you pointed at, a tremendous medical cost trend on a competitive basis that is benefiting clients and customers that we're serving. So overall, the portfolio is in good shape, and our commercial growth is expected to be positive, both competitively as well as in absolute terms next year.

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

Okay. Is there anything you're going to do to address what's going on with the national accounts? Or is that just something you don't expect, going forward, to continue to be an issue?

David M. Cordani

Yes, if you step back and look at the last handful of years, our performance in the national segments have been totally line with our strategic expectations. So holding share, changing profile of the business to more engagement incentive-based, and driving specialty program penetration. So for example, when we talk about 2015, you'll see further specialty penetration. So deepening share of wallet, which enables us to actually have deeper and broader clinical programs, which fuels our ability to deliver the returns for our clients, and we would expect to see continued success there. So there are no specific unique actions. We're just signaling the fact that we had a higher percentage of our book of business out to bid. You'll see a small variance in national accounts, which won't be a big variance for the enterprise in totality, given the strength of the regional and the select segment.

Operator

The next question is from Dave Windley with Jefferies.

David A. Styblo - Jefferies LLC, Research Division

It's Dave Styblo, in for Dave Windley. A couple of questions. The first one is, could you just peel back the onion more on what is the source of the individual medical costing higher? Can you elaborate on what categories those are in, and the trends, are they accelerating, decelerating? What sort of prescription data versus claims data that you have on that book? And then more broadly, as we look forward, what exactly are the steps that you're looking to resolve that? Is it more pricing, network adjustments, medical management? That would be helpful.

David M. Cordani

David, it's David. So I made a brief reference to this previously. So in the first tranche of lives that came on, we saw much, much higher utilization of services. So categories, I'm not going to give you the traditional inpatient, outpatient professional because it cuts across multiple categories, but think about major episodes of care: oncology, maternity, musculoskeletal, as examples. And some of those categories of care would tell you that it was pent-up demand or services in flight that are assumed in the portfolio. But the second tranche for the latter part of Q1, beginning part of Q2, suggests that a bit younger population, you make a reference to pharmacy, the combination of the demographics, and early analytics on pharmacy and the like, would infer somewhat of a healthier population, so opportunity to see some stabilization there. We need to see that play through the population as we go in the second half of the year. As it relates to actions, all of the above, right, product positioning, network sharpening, clinical management programs. And again, you have an under-served population in many cases that we need to get involved in clinical management. So all of those opportunities present positive dimensions to increase clinical quality and engagement, which will improve costs, which improves sustainably from affordability, but pricing, network and clinical management programs, all being targeted in specific geographies and specific programs for '15.

David A. Styblo - Jefferies LLC, Research Division

Okay. And then maybe to follow-up would just be on -- you did this a couple of times throughout the call, but on a more broad basis, how are you thinking about the 2015 head and tailwinds at this point? And are you willing to broadly characterize how you might see EPS growing next year?

David M. Cordani

So David, it's David. So relative to '15, we're not going to provide guidance for '15 at this point. Consistently, it's too early in the cycle. Before I get to headwind and tailwinds, it's important to note that our underlying working assumption is that the '15 marketplace will continue to be a disrupted and challenging marketplace. Continuation of ACA implementation, Medicare revenue pressure version 2.0, the shakeout of the public exchanges, the global economy being fragile. In that context, we're proud of the fact that we have a well-positioning international business, that as we prefaced in our prepared remarks, the individual as well as the group portion of that are performing well. Secondly, a very well performing effective Group Insurance portfolio that has performed well and will continue to perform well, within the employer landscape, sustained traction within our largest segment, which is the regional segment, as well as our fastest-growing segment, which is the select portfolio. Against that backdrop, we have the disruption of ACA implementation, Medicare disruption public exchanges, and then lastly, for us, will continue to be the rate and pace of our strategic investments. We've been prudent. We've created the capacity to invest, but the rate and pace of our strategic investments, so both outside the U.S. and inside the U.S., will come into play in terms of the net guidance we provide as we approach 2015.

Operator

The final question comes from A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Putting pressure on me there. I'll just ask you about 2 areas that you haven't been asked about. Any update on the PBM and -- both from the perspective of the integration of activities with Catamaran in the selling season? Then I know, from time to time, there's been discussion about capital allocation, strategy adjustments. Thanks for the comments in the prepared remarks, but any update are you thinking relative to dividends and/or any other changes in the capital allocation?

David M. Cordani

A.J., it's David. I know you never whither on pressure, so no problem there. I'll address the PBM question, and I'll ask Tom to address the ongoing capital management philosophy and strategy. As we've discussed before, PBM is well-positioned and a strong performing asset. In fact, in our statistical supplement, you'll see continued growth in PBM lives. We took a couple of strategic steps to further advance our capabilities there, examples of share repurchasing leverage, access to a leverage of a leading technological platform and opportunities for future shared innovation. Programs tracking well is the headline. It's tracking well from the external marketplace. It's tracking well in terms of our operating plans. And as we go into the latter portion of this year, again, we'll continue to manage the rate and pace of investments in that program. But the net headline there is we continue to be pleased with our underlying value proposition, the overall program, and the marketplace feedback continues to be very positive. I'll ask Tom to talk about the ongoing capital management strategy and philosophy.

Thomas A. McCarthy

Again, A.J., there's really not much news there. As you know, our preference is to deploy capital to support organic growth or find attractive shareholder value creation, creating acquisitions that we can deploy capital for. Absent that, right now, our primary vehicle to return capital to shareholders is share repurchase. We do periodically evaluate whether a dividend should play a more important in that, but right now, we haven't really made any change in direction.

Operator

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

David M. Cordani

Thank you for joining today's call. To conclude, I'd like to emphasize just a few key points from our discussion this morning. Cigna's second quarter results were strong, and reflect meaningful revenue and earnings contributions from each of our business segments. Our performance was driven by the continued effective execution of our clear and focused strategy, and the contributions of our more than 35,000 talented colleagues that work around the world. We continue to strengthen our differentiated distribution capabilities across our diversified businesses to improve the health, well-being and sense of security of the people we serve around the globe. Based in part on our first half performance, we are confident in achieving our increased outlook for 2014 on a full year basis, and we remain committed to achieving our long-term average annual EPS growth of 10% to 13%.

Thank you, again, for joining us this morning and your continued interest in Cigna, and we look forward to continuing our discussion in the future.

Operator

Ladies and gentlemen, this concludes Cigna's Second Quarter 2014 Results Review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days, following this call. You may access the recorded conference by dialing (866) 513-4389 or (203) 369-1987. No pass code is required. Thank you for participating. We will now disconnect.

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