Cigna Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Cigna Corporation is a global health services organization providing pharmacy benefit management, medical, dental, disability, life and related insurance products. The filing covers the three and six months ended June 30, 2020, compared with the same periods in 2019, and reflects the continuing impact of COVID-19, including deferred medical care and economic disruption.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $39.265 billion, up 1% | $77.734 billion, up 1% |
| Shareholders’ net income | $1.754 billion, up 25% | $2.935 billion, up 6% |
| Diluted EPS | $4.73, up 28% | $7.88, up 9% |
| Income from operations | $2.639 billion, up 22% | $4.700 billion, up 7% |
| Adjusted income from operations | $2.152 billion, up 31% | $3.910 billion, up 25% |
| Adjusted diluted EPS | $5.81, up 35% | $10.49, up 28% |
| Operating cash flow | Not separately provided | $5.161 billion, versus $4.231 billion |
Pharmacy revenues were $26.564 billion in the second quarter and $51.662 billion year to date. Premiums were $10.406 billion and $21.246 billion, respectively, while fees and other revenues declined 13% and 12% to $2.072 billion and $4.250 billion. Net investment income declined 34% in the quarter and 16% year to date, partly due to COVID-19-related weakness in securities partnerships and low interest rates.
Second-quarter adjusted pre-tax margins were 4.4% for Health Services, 16.5% for Integrated Medical and 22.3% for International Markets. Integrated Medical’s medical care ratio improved to 70.5% from 81.6%, and its adjusted pre-tax income increased 54% to $1.523 billion. These results benefited materially from deferred care exceeding COVID-19 treatment costs and were partly offset by premium relief and cost-sharing waivers.
Cash, cash equivalents and restricted cash were $7.503 billion at June 30, 2020, compared with $3.610 billion at June 30, 2019. Total debt was approximately $36.5 billion, consisting of $4.750 billion of short-term debt and $31.774 billion of long-term debt. Debt-to-capitalization was 43.5%, down from 45.2% at December 31, 2019. Cigna reported $4.25 billion of undrawn revolving credit capacity, $3.25 billion of remaining commercial paper capacity and approximately $7.6 billion of cash and short-term investments.
Material changes versus the prior comparable period
- Adjusted income from operations increased 31% in the quarter and 25% year to date, primarily from higher Integrated Medical and International Markets earnings.
- COVID-19-related care deferrals significantly reduced medical utilization, particularly in April and May, with utilization approaching normal levels by the end of June.
- Health Services benefited from customer transitions, higher claim volumes, supply-chain management and favorable claims mix, although its adjusted pre-tax margin declined 50 basis points to 4.4%.
- Amortization of acquired intangible assets decreased 33% due primarily to lower amortization associated with transitioning clients.
- Fees and other revenues decreased following the transition of certain commercial customers to the Health Services pharmacy network and lower cost-containment fees.
- Cigna issued $3.5 billion of senior notes, repaid $4.8 billion of long-term debt and recorded $199 million of debt extinguishment costs during the first six months.
- Share repurchases totaled $1.324 billion for the first six months, or 7.2 million shares. Repurchase authority was $4.4 billion as of July 31, 2020.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a clear full-year earnings guidance figure in the filing. It expects to continue deleveraging toward the upper 30% debt-to-capitalization range by year-end, using operating cash flow and proceeds from the planned sale of the U.S. Group Disability and Life business.
Cigna agreed to sell that business to New York Life for $6.3 billion. Closing was expected in the third quarter of 2020, subject to regulatory approvals and other conditions. Cigna estimated approximately $5.3 billion of net after-tax proceeds and expected to use them primarily for share repurchases and debt repayment.
Management expects continued pressure on net investment income for the balance of 2020 and potentially beyond. Additional investment losses remain possible, particularly in retail, hospitality, aviation and energy. Management nevertheless stated that it does not expect investment losses to have a material adverse effect on financial condition or liquidity.
COVID-19 remains the principal operating uncertainty. Potential adverse effects include higher treatment costs, renewed deferral or later return of care, lower customer volumes from unemployment, premium relief, regulatory changes and disruption to investment markets. Cigna deferred approximately $900 million of income and payroll tax payments in the second quarter, approximately $825 million of which was expected to be paid in the third quarter. The company returned a $41 million provider relief fund payment and did not request CARES Act funding.
Unusual and excluded items included $199 million of debt extinguishment costs, $227 million of integration and transaction-related costs, a $31 million organizational efficiency charge, $25 million of litigation-related charges and an $87 million favorable contractual adjustment for a former client during the six months. The organizational efficiency plan is expected to generate approximately $200 million of annualized after-tax savings, with a substantial portion expected in 2020.
Material contingencies include litigation against the federal government seeking more than $315 million of ACA risk-corridor and cost-sharing-reduction payments, ongoing litigation with Anthem involving substantial claimed damages, an Anthem-Express Scripts pricing dispute, and a Department of Justice investigation of Medicare Advantage risk-adjustment practices. The filing states that aggregate potential losses cannot currently be estimated and that an adverse outcome could be material.
Important facts for investors to verify
- Whether deferred care and unusually low medical utilization reverse in the second half of 2020 and materially increase medical costs.
- Completion, timing and net proceeds of the $6.3 billion Group Disability and Life divestiture.
- Actual use of divestiture proceeds between debt repayment and share repurchases.
- Progress toward the targeted upper-30% debt-to-capitalization ratio and refinancing requirements for near-term maturities.
- Trends in net investment income, credit losses and valuations of private equity, real estate, aviation, energy and hospitality investments.
- Outcomes of the ACA recovery litigation, Anthem-related litigation and the DOJ Medicare Advantage investigation.
- Potential effects of Medicare Advantage risk-adjustment audits, ACA litigation, drug-pricing regulation and additional COVID-19 regulatory actions.
- Reconciliation of GAAP earnings with adjusted income from operations, particularly the effect of special items and amortization.