Cigna Corporation: FY2020 Form 10-K Summary
Business context and reporting period
Cigna is a global health services organization operating through Evernorth, U.S. Medical, International Markets, and Group Disability and Other. This Form 10-K covers the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. The filing is an annual report, not a quarterly Q4 filing, although management discusses fourth-quarter COVID-19 effects.
During 2020, Cigna launched the Evernorth platform, completed the sale of its U.S. Group Disability and Life business to New York Life for $6.2 billion, and continued integrating the 2018 Express Scripts acquisition.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $160.4 billion | $153.6 billion | Up 4% |
| Shareholders’ net income | $8.46 billion | $5.10 billion | Up 66% |
| Diluted EPS | $22.96 | $13.44 | Up 71% |
| Adjusted income from operations | $6.80 billion | $6.48 billion | Up 5% |
| Adjusted diluted EPS | $18.45 | $17.05 | Up 8% |
| Net cash from operating activities | $10.35 billion | $9.49 billion | Up 9% |
| Cash and cash equivalents | $10.18 billion | $4.62 billion | Up $5.56 billion |
| Total debt | Approximately $32.9 billion | Approximately $37.4 billion | Down |
| Shareholders’ equity | $50.32 billion | $45.34 billion | Up 11% |
GAAP income before taxes was $10.87 billion, including a $4.20 billion pre-tax gain on the Group Disability and Life sale. The effective tax rate was 21.9%, compared with 22.1% in 2019.
Segment performance and margins
| Segment | 2020 adjusted revenue | 2020 pre-tax adjusted income | 2020 margin | Change in income |
|---|---|---|---|---|
| Evernorth | $116.1 billion | $5.36 billion | 4.6% | Up 5% |
| U.S. Medical | $38.5 billion | $3.81 billion | 9.9% | Down 1% |
| International Markets | $5.9 billion | $900 million | 15.3% | Up 18% |
| Group Disability and Other | $5.3 billion | $290 million | 5.5% | Down 42% |
- Evernorth adjusted revenue increased 20%, with adjusted pharmacy scripts up 22% to 1.49 billion and the overall generic fill rate rising to 87.2% from 86.8%.
- U.S. Medical revenue increased 5%, but customers declined 3% to 15.0 million. The medical care ratio was 79.4%, compared with 80.8% in 2019.
- International Markets revenue rose 5% and income rose 18%; South Korea generated 38% of segment revenue and 60% of segment pre-tax adjusted income.
- Group Disability and Other income fell sharply because of elevated life claims associated with COVID-19, unfavorable disability claims experience, and lower investment income. Most of this business was sold on December 31, 2020.
Material changes versus the prior comparable period
- Net income growth was primarily driven by the $4.2 billion divestiture gain, lower amortization of acquired intangibles, and modestly higher adjusted operating income.
- Operating cash flow increased to $10.35 billion, aided by higher pharmacy and service-cost payables and business growth.
- Cigna received $5.59 billion of net cash proceeds from the Group Disability and Life sale and used approximately $3.0 billion of divestiture proceeds for debt repayment.
- Debt-to-capitalization improved to 39.5% from 45.2%. Short-term debt declined to $3.37 billion from $5.51 billion, while long-term debt declined to $29.55 billion from $31.89 billion.
- Cigna repurchased 21.9 million shares for approximately $4.1 billion in 2020. The company paid a $0.04 per-share annual dividend and initiated a quarterly dividend of $1.00 per share in January 2021.
- Investment income declined 11% to $1.24 billion because of lower yields and weaker partnership income. Goodwill and other intangible assets totaled approximately $79.8 billion, or 51% of consolidated assets.
COVID-19, outlook, risks, and contingencies
COVID-19 caused substantial care deferrals beginning in April 2020. By the fourth quarter, costs for testing and treatment exceeded savings from deferred care, pressuring U.S. Medical earnings. Cigna also incurred premium relief, cost-sharing waivers, vaccine-related and employee/provider support costs. Management expects future results could be affected by renewed medical utilization, vaccine costs, continued care deferrals, lower employment and membership, disrupted Medicare risk-adjustment documentation, and investment-market conditions.
The company stated that available liquidity and projected operating cash flows were sufficient to meet obligations. At December 31, 2020, it had $10.5 billion of cash and short-term investments, $4.25 billion of undrawn revolving credit capacity, and $3.2 billion of remaining commercial-paper capacity. Cigna was in compliance with its debt covenants.
- Material regulatory and legal matters include DOJ and qui tam scrutiny of Medicare Advantage risk-adjustment practices, CMS and OIG RADV audits, ACA cost-sharing-reduction litigation, and ongoing Anthem-related litigation.
- Cigna’s CSR claim exceeded $195 million and remained stayed; its $120 million risk-corridors claim was paid in September 2020.
- Anthem separately claimed up to $13 billion in pricing concessions and other damages in litigation involving Express Scripts. The filing states that the ultimate outcome cannot be predicted.
- Management identified no material goodwill impairment in 2020, but impairment remains sensitive to future cash flows, discount rates, competition, regulation, and pandemic effects.
- Other principal risks include medical-cost estimation, pharmacy pricing and rebate regulation, provider and pharmaceutical-manufacturer concentration, cybersecurity, government-program funding, interest rates, credit markets, reinsurer credit risk, and substantial indebtedness.
Most important facts for investors to verify
- Whether the 2020 earnings increase is sustainable after excluding the $4.2 billion divestiture gain and other special items.
- The effect of post-pandemic medical utilization, COVID-19 claims, premium relief, and deferred care on U.S. Medical margins.
- Evernorth’s ability to sustain script growth, client retention, pricing, rebates, and supply-chain benefits amid regulatory and competitive pressure.
- The financial and operational impact of the Group Disability and Life divestiture, including the future size of Group Disability and Other.
- Progress and potential exposure from Medicare RADV audits, DOJ investigations, ACA litigation, and the Anthem disputes.
- Debt maturities, capital deployment, share repurchases, dividend commitments, and the availability of parent-company liquidity subject to regulatory restrictions.
- Goodwill and intangible-asset carrying values, particularly the Evernorth and U.S. Medical reporting units.