Ladies and gentlemen, thank you for standing by for Cigna's Second Quarter 2019 Results Review. At this time all callers are in a listen-only mode. We will conduct a question-and-answer session later during the conference and review procedures on how to enter queue to ask question at that time. [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. Will McDowell. Please go ahead, Mr. McDowell.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. With me this morning are; David Cordani, our President and Chief Executive Officer; and Eric Palmer, Cigna's Chief Financial Officer. In our remarks today, David and Eric will cover a number of topics including Cigna's second quarter 2019 financial results, as well as an update on our financial outlook for 2019. As noted in our earnings release when describing our financial results, Cigna uses certain financial measures, adjusted income from operations and adjusted revenues which are not determined in accordance with Accounting Principles Generally Accepted in the United States otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders net income, and total revenues respectively is contained in today's earnings release which is posted in the Investor Relations section of cigna.com. We use the term labeled Adjusted Income from Operations and Earnings Per Share on this same basis as our principle measures of financial performance. I will remind you that as previously disclosed, we exclude contributions from transitioning clients from adjusted income from operations, and adjusted revenue. In our remarks today we will be making some forward-looking statements, including statements regarding our outlook for 2019 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 these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC. Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Regarding our results, in the second quarter we recorded an after tax special item charge of $115 million or $0.30 per share for integration and transaction related costs. We also recorded a special item charge of $64 million or $0.17 per share, for our litigation matter. As described in today’s earnings release, special items are excluded from adjusted income from operations, in our discussion of financial results. Please note that consistent with best practice, when we make prospective comments, regarding financial performance, including our full year 2019 outlook, we will do so on a basis that excludes the impact of any future share repurchases or additional prior year development of medical costs. And with that, I’ll turn the call over to David.

Thanks, Will. Good morning, everyone. And thank you for joining our call. Today I'll highlight Cigna's strong second quarter financial results, which reflect continued momentum across our businesses. I'll also discuss how our differentiated health service model fuels our ability to drive innovation and accelerated growth and build a more sustainable healthcare system. I'll begin with our second quarter performance, which included continued innovation, which drove strong revenue and earnings growth, exceptional service delivery, and deepening of our customer and client relationships. Cigna's consolidated adjusted revenue for the quarter was $34.4 billion, and we grew our earnings to $1.6 billion. Our results [indiscernible] Health Services and Integrated Medical segments, with Health Services delivering strong revenues and earnings that were modestly above our expectations and our Integrated Medical segment delivering a 10% increase in revenues with earnings growth of 8%. In addition, Cigna continue to deliver solid performance across our international markets and other businesses. Overall, we're pleased with our second quarter results, which continue to demonstrate momentum across our portfolio of businesses. We're also making very good progress on our integration priorities. As we continue to provide excellent services across our portfolio of businesses, retain and meaningfully grow our client relationships, deliver leading medical and pharmacy cost trend, drive medical and pharmacy synergies for the direct benefit of our customers and clients and deliver on our synergy capture for the benefit of our shareholders. All in we're on track to achieve our integration goals. Collectively, our second quarter performance gives us confidence to again raise our revenue in earnings outlook for 2019, representing 17% to 19% EPS growth over Cigna's strong 2018 performance. Our strong results and confidence in continued long-term sustainable growth are fueled by the same thing. Our portfolio of leading assets that we connect to provide better…

Thanks, David. Good morning everyone. In my remarks today, I will review key aspects of Cigna's second quarter results and discuss our updated outlook for the full year. Key consolidated financial highlights for second quarter 2019 include adjusted revenues of $34.4 billion, earnings of $1.6 billion after-tax, earnings per share of $4.30, reflecting continued growth and deepening of customer and client relationships across each of our businesses, underlying strength in medical and pharmacy cost performance, operating expense efficiencies, and the quarter was further aided by the favorable resolution of a tax matter. Second quarter results also included strong cash flow from operations, driven by continued strong execution across our businesses. Regarding our segments, I will first comment on Health Services. Second quarter revenues were $24 billion and pre-tax earnings were $1.16 billion. Results for second quarter reflect organic growth with the addition of 236,000 pharmacy customers in the quarter and $1.9 million customers on a year-to-date basis, strong volumes with 294 million adjusted pharmacy scripts fulfilled in the quarter and continued growth in specialty pharmacy, driven by strong volumes. Overall, Health Services performed very well in the second quarter. Consistent with the seasonal ramp of earnings in this business, Health Services earnings in the second quarter were significantly higher than the first quarter. And as expected, Health Services earnings for the second quarter 2019 were lower than the Express Scripts second quarter 2018 earnings on a comfortable basis. We remain on track for a full year outlook for this business, and I'll provide more commentary on this momentarily. The fundamentals if this business are strong, and we're driving innovation and growth with solutions that deliver differentiated value for our customers and clients. Turning to our Integrated Medical segment, second quarter revenues grew 10% to $9 billion, driven by customer growth…

Hi, thanks. Good morning. I guess, I'll start with David, you mentioned the thought around increasing the level of go deep markets by 25% over the next couple of years. I'm curious how we should be thinking about that in terms of what segments and products are going to be leaders and sort of how do you think about those specific markets in terms of identification process.

Josh, good morning, it’s David. First as you know, we've been very successful for quite some time with our go deep approach, in terms of looking at markets MSA by MSA to understand the characteristics the makeup of the client opportunities in those markets, the makeup of the delivery system configuration in those markets, taking into consideration the regulatory environment. And we pretty dynamically managed our portfolio of intense go deep markets and then cultivating additional market opportunities to bring into that portfolio. We see a meaningful growth in front of us so about 25%. As it relates to the products and solutions, you should think about it as from that standpoint, the core of the franchise being leveraged against it. So the select framework, the middle market framework, targeted national accounts opportunities, and very importantly, Medicare Advantage opportunity. So we cross reference all of those. And then finally, we look at the individual or the public exchange business. So this is more on the integrated approach and the integrated side of the house. They're separate initiatives and separate focus on the health services portfolio side of the house. So, successful past, attractive opportunities in front of us and the ability to leverage those product portfolios through core commercial, individual commercial and MA off of our successful collaborative accountable care relationships.

Got you. And then just a quick follow up, I got Eric here as well, just on the PBM retention, any more color on sort of bringing up the low end of the previous range is that sales driven, were there a couple of accounts just sort of weren't sure about that have signed on, et cetera?

Josh, it’s Eric. I would just think of the increase there as we've gotten additional visibility as we continue to move through the year and getting our clients lined up. We're really pleased with the progress that we've had and the dialogue that we've had with our clients, we think 97% to 98% is an outstanding result and pleased to be able to deliver that now two years running in terms of the retention in that segment.

Perfect. Thanks.

Thank you, Mr. Raskin. Our next question comes from Matt Borsch with BMO Capital Markets. You may ask your question.

Yes, just on that the more near-term, could you talk to the lower enrollment target on the medical side, and just related to that, how you're seeing the mix of preferences, if I could put it in terms of risk versus ASO and whether maybe the reintroduction of the Obamacare industry fee might be playing some role there? Thank you.

Good morning, it's David. So, relative to the membership outlook for the medical customers. First, to be clear, we're very pleased with our track record of sustained commercial growth now that spans 10 years of sustained organic growth. For 2019, we recognize that our outlook is lowered a bit to 200,000 lives still an attractive result that is largely driven by lower commercial national accounts, and a little lower performance at the upper end of the middle market portfolio. I’d remind you that those buyer groups are typically less integrated offerings. We’ve retained outstanding focus in select and core middle market and as such, continue to have strong underlying life growth as well as specialty growth including behavioral, dental, pharmacy, et cetera. As it relates for the mix of business, we have seen a bit more guaranteed cost our risk business over the recent past to complement our ASO strength. And as you recall, we go to market with a diverse portfolio of funding mechanisms and offer choice, it's an inherent strength of our organization. And we believe that the sustained strong medical costs trend performance we've been able to deliver in the marketplace again, posting the lowest rate of growth year-in year-out is resonating well and we’re complementing sustained ASO performance and Stop Loss performance with a bit higher guaranteed cost performance. We do not see that as a corollary to changes within the marketplace year-in year-out. That's a more sustained medical costs performance outlook for us. So good balance in funding mechanisms. And we think that'll continue to perform as we step into 2020.

Great, thank you.

Thank you, Mr. Borsch. Our next question comes from Justin Lake with Wolfe Research. You may ask your question.

Thanks. Good morning. Appreciate the comments on the healthcare services result being above expectations. Wanted to follow up there and ask whether you can tell us how this business looked on a year-over-year basis adjusted for all the moving parts. Basically the same way you indicated, it was down modestly in the first quarter, at the Investor Day. And then given we're more than halfway through the year and all the focus on the PBM, I was hoping you might give us a view on where you expect to come in relative to the guidance range at $5.05 to $5.2. Any thoughts whether we should expect to kind of higher end or lower end given we’re seven months into the year. Thanks.

Justin, it’s Eric. I'll start here. So first of all, just to reiterate the second quarter results were consistent with or even a bit ahead of our expectations, and reflect the strong performance of the businesses there. And particularly strong, especially pharmacy performance and the growth in the volumes as we had expected. As you alluded to, the number of different items in terms of adjusting comparability for this year's second quarter versus Express Scripts standalone items that were reported last year. And I’d point you back to the same factors that we talked about at our Investor Day in terms of that reconciliation is being present here. Also, as you might expect, there are number of different supply chain activities that were on hold kind of at the time period leading up to the close of the combination that we executed over the first part of this year. And we've got good visibility into those in terms of driving results in the back half of the year. So overall, that helps to inform the pattern. So year-on-year we’d characterize the results for the second quarter versus second quarter is down in the single-digits percentage for the quarter. And I’d note as we look ahead then, as you might expect in the third quarter, we expect the pattern to flip. We expect we'll be up mid-single digits, or single-digits in terms of the performance for the Health Services business relative to the Express Scripts piece from last year's third quarter. So we'll bring those capabilities online. The effect of the supply chain initiatives and such will drive us to the growth over the back half of the year.

And part of your question relative to the range, we're pleased to be performing solidly throughout the first half of the year, as Eric noted and see a ramp throughout the second half of the year. With the pattern flipping in the second half of the year, as relates to performance in the range. I mean, stay tuned for more. That's right in pace of our execution of our synergies that's in front of us and rate and pace of investments. And we see an exciting into the year and a good start to next year in front of us right now.

Okay. And, Eric, just to be clear, you said mid-single digits down in the second quarter?

Single digits down in the second quarter. Think about the single digits up in the third quarter.

Okay, thank you very much.

Thank you, Mr. Lake. Our next question comes from Sarah James with Piper Jaffray. You ask your question.

Thank you. When you talk about medical costs trends going to the CPI range in the next couple of years. Should we think about that being ratable so we could see a step down in 2020 cost trend outlook from what you're experiencing this year. And I know it's a small book for you guys where you take risk. But does the lower cost trend correlate to lower pricing? And could that create any SG&A de-levering? Thanks.

Sarah good morning. As you may recall from Investor Day, we walked through a little bit of a crosswalk of some of the tools, levers, initiatives we've been executing now for many years to generate a lower medical cost trend in the industry at large. And you may recall Matt Manders walked through a framework that over the last seven years or so we've delivered about a 4% medical cost trend with the last few years being a little closer to 3%. So point one is sustained, point two is trending downward or even more favorable going forward. We're not providing guidance for 2020. So I don't want to tell you anything is ratable. There's dynamism in the portfolio. We're pleased that here in 2019 we're setting about 3.5% to 4.5% medical cost trend outlook, which is by far and away best in the industry yet again, and we have a variety of tools and initiatives in front of us to step down that medical cost trend for the benefit of our clients, customers and patients as we look forward. So, again, I don't want to talk about ratability, rather, the trajectory is positive, it benefits our clients and customers and enhances our overall value proposition. To the last part of your comment, I would not correlate the size, shape and scope of our portfolio and diversity of our funding mechanisms, we do not -- to be very clear, we do not view that a lower medical cost trend environment could generate less revenue growth, could generate SG&A deleveraging, that is not an issue that we worry about. And I would encourage you not to worry about that, in terms of the diversity of our portfolio and how we deliver services.

That's helpful. Thank you.

Thank you, Ms. James. Our next question comes from Kevin Fischbeck with Bank of America. You may ask your question.

Great. Thanks. Just wanted to be -- you guys raised guidance by less like it’s in the upside that we saw in the quarter. So I just wanted to see how you were thinking about that. Is there anything in the back half of the year that you're kind of now incorporating into the outlook?

Kevin, it's Eric. Well, first, I just note, we're really pleased with the strong results in the quarter and with being in position to be able to raise the guidance again for full year 2019. So I think the 17% to 19% growth coming off of a strong 18% is a good result and reflects the accretion from -- Express Scripts coming through and good momentum and the underlying business. In terms of the outlook pieces, the main thing I’d note here would just be around us continuously managing the rate and pace of our investments and capabilities and such for the future. And so we're taking the opportunity to continue to invest into capabilities and the like. So that'd be the main thing I'd call out in terms of a difference of how we’re seeing the back part of the year versus our prior outlook.

I guess, one thing that you did kind of change was -- that you're I guess now taking on or including taking on Cigna’s, some of the Cigna’s volume. It sounds like you're just really updating the revenue in the script number, you're not updating the earnings contribution at all. How should we think about that, and does bringing Cigna on add earnings contribution at some point in 2020 or 2021?

Yes, and that one, go back to some of the dynamics we talked about at our Investor Day in terms of the impact of once we're through the transition and such. But overall, would note and I think you've got the major dynamics, correct there, that the update to revenues, the update to script counts this year primarily are the impacts of the transition do not think of that as a driver in terms of net income as it relates to 2019. Over time, we'd expect the transition to be slightly accretive as it gives us additional fixed cost leverage and the like, but in the short-term and the near-term, wouldn't really think of that as driving the bottom line income.

Thanks.

Thank you, Mr. Fischbeck. Our next question comes from Peter Costa with Wells Fargo. You may ask your question.

Good morning, my question is on Medicare Advantage growth for 2020. And I know you're not giving guidance for 2020, but you sort of open the door with your commentary. Are you expecting Medicare Advantage to grow about 10% to 15% in 2020 itself? Or was that something over the three to five years. was that -- appeared to me, whether three to five years just apply to the commercial part of your guidance? And then, with Part D, and also part of Medicare, bids came down 7.2% on average. Do you think you're going to get growth out of your Part D program given where the national average bids are?

Peter, good morning, it's David. Let me take the first part of your question. I'll ask Eric to take the second part of your question. First, to be very clear, the three to five years, as you recall that was specific to the timeframe to drive the 25% growth in our go deep market. So you're correct in terms of isolating that acceptable. To the specific part of your question, we see tremendous growth opportunity in MA, starting in 2020. It will be driven by further in market growth and traction. Expanding into new markets. We have multiple new HMO markets and even more markets from a PPO standpoint, which is topic three, expanding into the PPO space. We had highlighted that that 10% to 15% organic customer life growth is our customer life growth over the near-term to intermediate long-term range, that’s in front of us and we will be at the lower end of that range in 2020 as we ramp the initiatives going forward. o you don't have to wait three to five years. But think about it the lower end of the range as we step into 2020 and ramping up as we go forward. I'll ask Eric to answer the second part of the question.

Yes, Peter, on the Part D benchmarks again, not providing the specific guidance in terms of 2020 at this point. But I would just know that the benchmarks were actually quite consistent with how we were thinking about them. There weren't any big surprises in terms of our view of where the benchmarks came through. Overall, we'll be in a better position to provide customer growth guidance as the full visibility into all the competitors positioning is kind of region by region comes into view. And we work through our marketing plans there, but overall, no surprises in terms of where the benchmarks came through.

Thanks. That's helpful. Just as a follow up, David, the 10% or so growth, that you're talking about for 2020. You also talk about county expansions, the first year you see the growth in membership that’s usually not in Medicare, very profitable. And the county expansions are usually fairly costly. Can you -- so do you think Medicare can be a drag on your earnings in 2020 and then grow from there?

We haven’t provided 2020 earnings guidance, we will do that as the year comes to a close. Step up in the overall portfolio will have attractive growth in our overall enterprise earnings portfolio for 2020 that guides us to 2021. So stay tuned for the guidance as we provide for 2020 from that standpoint, but we think we have a very attractive both growth and overall fundamental earnings profile for the business.

Thank you.

Thank you, Mr. Costa. [Operator Instructions] Our next question comes from Ralph Giacobbe with Citi. You may ask your question.

Thanks, good morning. First just wanted to go to the MLR [ph] that came in a little bit higher, I know you contributed -- you attributed to a few of the different things it seemed like the incremental piece, maybe the individual business at least relative to kind of 1Q. If you could just maybe break out what you're seeing there, and maybe your commitment to expansion in that market? Thanks.

Yes, Ralph, it’s Eric. On the loss ratio, so a couple of different comparison points to think about there. The biggest driver from a sequential perspective versus 1Q is just up to the normal seasonality of things as we work through the customers kind of coming through deductibles and working through that ramp. In terms of the drivers, in terms of the second quarter year-on-year, really three things that I would point to, and they're each about the same impact. So roughly a 30 each, that's the inclusion of the Express Scripts is being part of the loss ratio this year and not part of the calculation last year, the Part D business specifically, one. Two, the pricing effects of the suspension of the industry fee. And third, is the IFP, the individual segment margin this year versus last year. Each one of those three factors is about a third of the variants when we think about things quarter versus quarter.

Okay, that's helpful. And then just quickly wanted, I hope, you could flush out the lower enrollment growth commentary, specifically in select middle markets. I think you said in the prepared remarks, you've obviously had a lot of success there for some time and done well with sort of bundling your specialty lines. A lot more recently your peers have talked more aggressively moving in that direction. So, just hoping if you could give us a little bit of sense as sort of the competitive dynamic there both as it relates to sort of the medical side as well as some of those specialty lines in terms of competition. Thanks.

Ralph, good morning, it's David. Very specifically our select portfolio continues to perform very well. And within the select portfolio, you're correct, we go to market with a fully integrated solution. We’d remind you that we use the full breadth of the funding mechanisms that exists if you will, asking and allowing and working consultatively with our employer clients one by one to determine how they want to best finance their solution that resonates quite well for us. And then we continue to drive very good targeted innovation in our clinical programs and our coaching programs and our service programs, et cetera. In the core middle market capabilities, we continue to perform very well, and as I noted in a prior question, we have seen a little lower performance in the high end or the upper end of the middle market, where there's a little less integrated offering. Lastly to the overall, point of your question, the marketplace is competitive has been competitive and will be competitive going forward. So it's a dynamic market. Our points of differentiation continue to resonate well. And importantly, our underlying fundamental medical costs performance continues to resonate well. And then, as Eric noted, we continue to invest in on ongoing innovation, so we're poised for continued strong growth in the space.

Thank you.

Thank you, Mr. Giacobbe. [Operator Instructions] Our next question comes from Gary Taylor with J.P. Morgan. You may ask your question.

Hey, good morning. I appreciate the commentary about the PBM and given how focused the Street is on that metric. I just want to clarify that we're on the same page. So if you look at the second quarter of 2018, ESI reported $1.395 billion of core EBITDA if we grow that mid-single digit 5%, that's about $1.465 billion, which would represent about a $250 million sequential increase. I just want to make sure those are sort of the numbers that we're talking about for the 3Q?

Yes, Gary, it's Eric. So I would say my commentary in terms of our expectation for growth on 3Q would be on an apples-to-apples basis. So once you take the Express Scripts reported numbers and adjust for the items that we talked about at the Investor Day our re-segmentation, the changes in terms of depreciation and amortization, the change in terms of the enterprise value initiative, and then the work from there. Once you get to that baseline, then we would grow from that baseline. That's the basis that we're speaking to.

So on an adjusted basis, not as reported basis, so I'm glad I clarified that then. Thank you very much.

Thank you, Mr. Taylor. Our next question comes from Steve Tanal with Goldman Sachs. You may ask your question.

Good morning, guys. You’ve obviously covered a lot of ground, I guess just one thing, maybe if you could give us a little bit more commentary on sort of MCR by line of business, maybe thinking year-on-year, but if you could just touch on sort of the key things there commercial, Medicare, Medicaid, how those performed relative to expectations. And then maybe just within that line thinking about all the good growth and market share gains you've had in the commercial risk side of the business, how are those margins sort of relative to the overall average or base business if you wouldn’t mind commenting there? Thanks a lot.

Steve, it's Eric. So on the loss ratio it’s kind of by business, actually, we really put both of them right down the middle. So consistent with expectations and consistent performance in both the commercial and the government business. So feel good about those. The Medicaid business is a small business for us, but has actually performed consistent with our targets as well. So, again, certainly no variation that I’d call out in terms of the commercial versus the government versus the Medicaid business, to note in the quarter.

And Steven, relative to the question relative to -- I think your -- second part of your question around the margins and margin differentiation by funding mechanism or type of business. If you step back from that, you may recall that our approach to the marketplace is such that we're a bit funding mechanism agnostic. So that enables our sales force our client managers, et cetera, toward client by client to determine the last step which is once the right solution is put in place in terms of clinical programs, network design, service program designs, et cetera. How do you want to fund and finance it. So backing into that, that means that when you look at on an apples-to-apples basis, in general, the margins and the returns across the various funding mechanisms are attractive and have some similarity relative to them. There are some nuances, but think about the margins as being strong and differentiated in guaranteed cost. Think about the margins, that are being strong and differentiated in our core packaged ASO Stop Loss portfolio businesses. Hope that helps.

Thank you, Mr. Tanal. Our next question comes from A.J. Rice with Credit Suisse. You may ask your question.

Hello, everybody, just maybe a post mortem on the selling season and a quick clarification with Eric, on the PBM selling season. I know when -- I think when I was out there, in a headquarter visit back in the spring, there was a discussion about the fact that this year there was less business in Express Scripts side up for renewal than there had been last year. So you'd be more on the offense and it sounded like that was the expectation for 2020. And I want to see if you still -- so next year selling season. And I also -- there has been some discussion by peers about people delay because of all the change in the marketplace, on RFPs and postponing for a year. I wanted to see, do we think that the RFPs have been pushed out till next year. And we'll see a big overall opportunity that way next year? And then just a quick point of clarification for some discussion on guidance, as Eric said, because I know you won't comment on it, if you don't comment on this call. Is there anything did you guys would say about the Q3 versus Q4 split, I know you're talking about synergies and PDB seasonality, which would tend to push people into the fourth quarter versus the third, relative to historic trends. Is there anything you want to say about the Q3-Q4 split?

A.J., it’s David, let me take your first question. And, obviously, Eric will take the second piece of it. So your recollection is pretty clear, the 2019 selling season for the core pharmacy services business had higher volume of business on a relative basis. That's cycle time. So there's cycles on the contracts and it was a more intense cycle. And as Eric noted, just outstanding client retention. 2020 selling season, which is far into the season right now. From that standpoint, is shaping up very favorably from a client retention level again, which underscores the strong sustained service level delivery, the strong sustained clinical delivery, the strong sustained overall cost delivery and continued investment from an innovation standpoint. And as articulated at I-Day we expect fundamentally to grow that portfolio businesses in 2020 aided by outstanding retention as well as new business growth. To the last part of your question, no, we don't believe or see any unique pent up volume for our fees being held back versus not because you're dealing with large sophisticated helpline contracts, large sophisticated commercial employer contracts that are typically on a multiyear cycle. So we do not see a bubble coming on the immediate horizon from that standpoint and see our value proposition is resonating very well as evidenced the growth in 2019 and our growth outlook for 2027. Eric, I'll ask you to take the second question.

Sure. A.J., just on your seasonality, we're not providing a specific guidance in terms of third quarter versus fourth quarter. But there are a handful of items I’d point you to as you think about the expectations over the back part of the year. First of all, our Integrated Medical segment, as you know, has income that tends to be bias towards the early part of the year, just given the normal seasonal impact of deductibles and such. Second of all, the Health Services business tends to be biased later in the year due to both customer behavior and growth in script volumes and just the timing of generic launches. And we've talked about the ramp that we’re on 1Q to 2Q to Q3 to Q4 over the year for that business. And additionally, this year specifically, you should expect the synergies to continue to build throughout the year and the impact of deleveraging to continue to play through the corporate segment over the course of the year. So those will be the major moving items that I’d think about as we look sequentially into the next couple of quarters.

Okay, thanks.

Thank you, Mr. Rice. Our next question comes from David Windley with Jefferies. You may ask your question.

Hi, there. Good morning. It's Dave Stybloin for Windley. Just want to come back to the MLR. It sounds like overall that was largely in-line with how you guys were thinking it would be. I guess, maybe you could help us understand how it's changed a little bit in the first couple of quarters because as we look at that in the first quarter, it was up 140 basis points year-over-year, and then this quarter, it's up 260 basis points. So wondering, what explains that increase? And then, I guess, guidance implies for the rest of the year that it would come back down to right around 200 basis points. So, maybe just understanding the cadence of the spike up in 2Q would be helpful.

Dave, it's Eric. So just on those pieces, I think you've got the math right there in terms of the moving pieces and the components. The things I would point you toward would be just the timing of which the prior year reserve development has kind of unfolded and in year development of cost, this year's second quarter versus last year's second quarter. Last year's second quarter, we had more in year development in the second quarter than we had this year, just to given the favor ability that we experienced an individual book of business last year. So I really think of it more as an adjustment to the last year first Q -- first quarter to second quarter dynamic versus anything else going on this year, broadly would characterize the loss ratio dynamics in our second quarter this year is aligned with our expectations.

Okay, great. Thanks. And then any quick color on the national accounts since the enrollments been down sequentially, both in the first couple quarters is there something on the competitive front side or maybe just elaborate there on the erosion?

Good morning, it's David. So specific to national accounts first in the commercial space, so not in the server side of the equation, but in the commercial space. Let me remind you how we define national accounts because we define it differently than the marketplace. It’s commercial only 5,000 or more employees that are multi-state. So very specifically that excludes large single state blocks of business where that's a fundamental part of our middle market business. For the past year we saw an elevated RFP volume, the cycle we are in, we saw a little bit more elevated RFP volume. We saw reasonable retention levels across our portfolio and reasonable new penetration levels in the portfolio and some new business wins, which resulted in some net overall loss in the portfolio. I would note that our strategy have continuing to deepen our relationship in our clients is working well. So we're deepening the relationship in our existing national account clients with our specialty portfolio, which result in more value we can deliver for them, as well as an enhanced overall earnings profile. We do not see an overall change in the market behavior from a purchasing standpoint. We do not see any unique different value propositions resonating in the market. We just saw a little lower retention level and a little lower new business adds for 2019 than we had anticipated.

Thank you Mr. Windley. Our next question comes from Steven Valiquette with Barclays. You may ask your question.

Thanks. Good morning, everybody. So not to beat the MLR topic with that. But since you did sort of touch on seasonality and sequential comparison factors, with the 2Q MLR coming in slightly above the full year range and was it always contemplated, internally assuming that 2Q would be above the full year range. And should we expect that sort of seasonal pattern on an annual basis going forward? And then just quickly within the individual medical business since you flag that just in the context of the MLR, curious if you received any sort of risk adjustment true up in 2Q 2019 and how that might have compared versus anything you've received in the same quarter last year. And was right in line with your expectations? Thanks.

Steve, it's Eric. So overall, with respect to the loss ratio, we continue to be on track for our full year guidance. We've got good visibility to achieving the loss ratio guidance. So, no change there. And as I pointed out, the dynamics in terms of the second quarter were fully contemplated. Now, specifically on a risk adjustment true up, we did record a risk adjustment item in the individual business in the second quarter this year, order of magnitude $40 million to $50 million pre-tax. So -- and that's an unfavorable true up, that was in the result this year. But again, in line with the expectations in terms of the margin being a bit more compressed in the individual business this year. And we continue to be on track for the full year outlook.

Okay.

Thank you, Mr. Valiquette. Our next question comes from Ricky Goldwasser with Morgan Stanley. You may ask your question.

Hi, this is Alexa [ph] in for Ricky. Thanks for taking my question. Just to clarify, you guys talked about third quarter being up single digits from an adjusted EBITDA per script perspective. That include the influencing of the Cigna business, or is that just on an apples-to-apples basis?

Alexa, it's Eric. So just to be clear, we did not say on a per script basis. We just talked about the aggregate dollars reported in the Health Services segment compared to an adjusted or recast, Express Scripts number to get it to an apples-to-apples basis. We're just talking about the total adjusted income from operations pre-tax will have growth in Health Services segment in the third quarter.

Thank you, Mr. Goldwasser. Our next question comes from Lance Wilkes with Bernstein. You may ask your question

Yes, just a couple clarifications or questions on the PBM more on the Health Services segment. For the strength you shown in specialty pharmacy, could you just talk a little bit about how you're achieving that if that is related to sort of supply chain initiatives or steerage and leakage or if it is more OpEx kind of synergies related to consolidation with the Cigna book? And then, I guess, also just interested in your outlook for cross sales in PBM for 2020, in particular, with a stronger capability as you look up market in that segment?

Hi Lance, it's David. First specific to specialty pharmacy, we're extremely pleased with the performance of our specialty pharmacy services that are delivered through Accredo. Just stepping back for a moment, as you know we deliver an exceptional patient clinical outcome and service outcome one patient at a time. And as such work to deliver the right affordability outcome and our overall costs outcome leads the industry from that standpoint. And this is a validation of the kind of satisfaction level. We have NPS approaching 80 patients that are in our high clinical coordination programs. As it relates to the growth, think about underlying fundamental growth. So in addition to specialty pharmaceutical costs being the fastest cost growth sector. We have deepening relationships in terms of growing the overall portfolio, legacy attached to the PBM business, we start to convert over the Cigna business. And then importantly, because of the robustness of the Accredo value proposition, Accredo is sold on a standalone basis on a day-in day-out basis to both employers as well as health plans in terms of helping to coordinate the specialty services. So strong underlying fundamentals is what you should think about growing it. Not expenses or otherwise through that lens. As it relates to your forward looking question, we do say the opportunity for further -- to your point either cross seller penetration opportunities. Because we're able to get the best of both companies. indisputably we get both more structural flexibility in terms of benefit and solution design, attached to the broad portfolio of Express Scripts capabilities, as well as even a further step function to the overall affordability proposition and clinical services proposition. And we believe to your point that will serve us well, if you will, up market as it relates to cross selling, that standalone value proposition continues to resonate, it continues to resonate in the health plan marketplace, and some of those capabilities will help our commercial sector as well.

Thank you, Mr. Wilkes. Our next question comes from Charles Rhyee with Cowen. You may ask your question.

Yes, thanks. Just two quick ones here. One, can you give us a sense on sort of the pacing we should think about as the -- as you kind of in-source your -- the signal volumes onto the Express platform. And how should we still break it up between maybe think about it between third quarter and fourth quarter the models? And then, secondly, I apologize, I missed it earlier. Can you give your thoughts on sort of the Senate Finance Committee bill here, particularly as it relates to Part D, sort of the re-envisioning how the structure of it getting rid of the donor hole putting more a larger catastrophic and what that means sort of from the plan perspective, and do you think that that will lead to more utilization as a result of lower cost for seniors? Thanks.

Charles, it’s Eric. I'll start on the kind of pacing item. We haven't provided any specific expectations there other than just the aggregate numbers that we’ve talked about. So as I noted in my prepared remarks, think about the in-sourcing is worth $1.5 billion over the back half of the year, and $40 million to $45 million in scripts coming through over the back half of the year associated with the transition. I'd also refer you back to the material we used at our Investor Day a couple of months back now in terms of the complete impact once we get to 2021, in terms of the volumes and such there. I’ll let David take the second part of your question.

Charles, good morning. As it relates to specifically the Senate Finance bill or if you step back more broadly, continues to be a significant amount of public policy and legislative activity under consideration that seeks to improve overall affordability and improve specifically overall affordability relative to pharmaceutical services. Everything we are seeking to do in terms of leveraging the best of both companies is seeking to deliver improved affordability off of a basis of strength. So, importantly, directionally aligned with the initiatives to seek to improve more affordability and choice from that standpoint. As it relates to the specificity of your question down to PDP, donut hole, et cetera. Once the final terms of a bill, if a bill was to be passed, or determined, we would obviously react an engage from that standpoint. I think more broadly, I'd asked you to think about the capabilities the corporation has are well positioned to make sure we're able to deliver the best possible value, in this case for individual Medicare PDP customers over whether it's pre-donut hole, during donut hole or post donut hole from that standpoint, from a framing around the clinical coordination, access and overall affordability standpoint. So we're highly engaged and aligned with improving overall affordability. And the structure of our technology and innovative solutions puts us in good position, not just to react to but actually be in a leadership position as the programs change.

Thank you, Mr. Rhyee. Our last question comes from David McDonald with SunTrust. You may ask your question.

Good morning. David, just two quick questions. First on the PBM selling ciders and anything of note that you would call out in terms of plan design changes that you guys are seeing? And I guess to build on Lance's question, are you continuing to see narrowing of specialty networks in the business that you can? And then secondly, any initiatives in terms of trying to drive incremental mail, just given the likely adherence benefits and the connectivity opportunity it offers with the patients, especially the chronics?

David, good morning. So, a variety of attributes in your question. Stepping back, our orientation relative to benefit design, specialty design, mail order incentive, or design, et cetera. It's a one client at a time approach. So I'll try to give you a macro piece, but really importantly, we do not go to market with a product or a preferred solution offering and try to force it, we try to work one client at a time, whether it's a commercial client or health plan client from that standpoint, and try to design what works for them based upon the strategy, the culture, the need set, et cetera. And to your point, we pull from a broad portfolio of capabilities around that. As it relates to design, more receptivity today than ever relative to pursuing value based care or value based reward configurations, especially in the specialty environment. That may lead to a little bit more focused on some of the subspecialties and recall that Accredo is not for example, one Specialty Pharmacy, there’s 15 sub-specialty pharmacies within that that specialize based on health or disease burden from that standpoint. Similarly as it comes to mail, you're correct, the -- it's indisputable the dispensing accuracy and the clinical compliance is higher in that highly coordinated fashion of what's delivered there. And in many cases, clients are revisiting that seeking a further step function or value creation for the benefit of their employees, our customers or our patients. And we see good receptivity around that. But I can't tell you that mail order is kind of binary going from more intensified approach in 2020 than it was in 2019. There is receptivity, but it's client-by-client from that standpoint. And we think that's an inherent strength of our company to be consultative from that standpoint.

Thank you Mr. McDonald. At this time, I'll turn the call back over to David Cordani for closing remarks.

Thank you. So briefly just to wrap up our call, I'd like to highlight some of the key points from our discussion. Overall, we're very pleased with our second quarter results, which continue to demonstrate momentum across our portfolio of businesses. We are also making very good progress against each of our integration priorities and are on track to achieve our integration goals. Looking ahead, our second quarter results and our integration progress gives us confidence to again raise our revenue and earnings outlook for 2019, representing a 17% to 19% EPS growth rate off of Cigna's strong 2018 performance. And we are on track to deliver our $20 to $21 EPS objective in 2021 as we expect to deliver 10% to 13% on average annual EPS growth over the long-term. In addition, we continue to drive cost trend to a level in line with CPI by 2021. We thank you for joining our call today. And we look forward to our further discussions.

Ladies and gentlemen, this concludes Cigna's second quarter 2019 results review. Cigna Investor Relations will be available to response 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 800-272-5965 or 402-220-9721 no passcode is required for the replay. Thank you for participating. We will now disconnect.