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Cigna Corporation 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report rather than a standalone quarterly filing; fourth-quarter figures are included where disclosed. Cigna completed its $52.8 billion acquisition of Express Scripts on December 20, 2018, and included 11 days of Express Scripts activity in 2018 results.

Business Context

Cigna is a global health services organization providing medical, pharmacy benefit management, specialty pharmacy, dental, behavioral, disability, life and accident insurance, and related services. Following the Express Scripts acquisition, the principal segments are Integrated Medical, Health Services, International Markets, and Group Disability and Other.

• Integrated Medical: commercial and government medical coverage, including Medicare, Medicaid, Medicare Part D and individual products.
• Health Services: Express Scripts pharmacy benefit management, specialty pharmacy, medical benefit management and legacy home delivery pharmacy operations.
• International Markets: global health, supplemental health, life and accident products in more than 30 countries or jurisdictions.
• Group Disability and Other: disability and life products, corporate-owned life insurance and run-off operations.

Key Financial Metrics

Revenue consisted primarily of $36.113 billion of premiums, $5.578 billion of fees and other revenue, $5.479 billion of pharmacy revenue and $1.480 billion of net investment income. Income before taxes was $3.581 billion, compared with $3.606 billion in 2017, as higher operating earnings were offset by lower realized investment results and higher transaction-related charges.

Segment Performance

• Integrated Medical adjusted pre-tax margin was 10.7%, up from 10.1%. The medical care ratio improved to 78.9% from 81.0%, while the expense ratio increased to 24.7% from 24.1%.
• Health Services adjusted pre-tax margin was 5.8%, down from 6.8%; results included only 11 days of Express Scripts operations and $459 million of revenue from transitioning clients excluded from adjusted revenue.
• International Markets adjusted pre-tax margin increased to 13.7% from 13.3%. South Korea represented 40% of segment revenue and 68% of segment pre-tax adjusted income.

Fourth-Quarter Information

For the three months ended December 31, 2018, consolidated revenue was $14.300 billion, income before taxes was $228 million, shareholders’ net income was $144 million, and diluted shareholders’ EPS was $0.55. The fourth quarter included Express Scripts beginning December 21 and substantial transaction-related and other special items.

Material Changes Versus the Prior Comparable Period

• Express Scripts was acquired for estimated consideration of $52.8 billion, including $27.6 billion of cash and $24.7 billion of stock consideration. Cigna issued approximately 137.6 million shares to Express Scripts shareholders and assumed approximately $12.8 billion of Express Scripts debt.
• Express Scripts contributed approximately $2.6 billion of 2018 revenue but had an immaterial effect on Cigna’s 2018 net income because it was consolidated for only 11 days.
• Goodwill increased to $44.505 billion from $6.164 billion and other intangible assets increased to $39.003 billion from $345 million, primarily because of the acquisition.
• Debt issued or assumed to finance the transaction materially increased interest expense, which rose to $498 million from $252 million.
• Transaction-related costs were $852 million before tax and $669 million after tax, compared with $126 million before tax and $33 million after tax in 2017.
• The effective tax rate declined to 26.1% from 38.1%, primarily because the U.S. federal corporate tax rate fell to 21%.
• The health insurance industry tax resumed in 2018 and cost Cigna $370 million before tax, although the impact was substantially reflected in commercial premium rates.
• Cash flow from operations declined by $316 million, primarily because of the timing of pharmacy payable settlements.

Debt, Liquidity and Capital Resources

• Total debt, including short-term debt, was approximately $42.478 billion at year-end; long-term debt was $39.523 billion and short-term debt was $2.955 billion.
• The debt-to-capitalization ratio was 50.9%. Management expected to reduce it to the upper 30% range within 18 to 24 months using operating cash flow.
• Cigna reported approximately $4.2 billion of cash and short-term investments, including $1.2 billion held by the parent or subsidiaries without regulatory or other transfer restrictions.
• Management expected approximately $6.2 billion of additional capital available for deployment in 2019, including $2.1 billion of dividends from regulated insurance subsidiaries without prior regulatory approval.
• The company had a $3.25 billion revolving credit agreement, with $22 million of letters of credit outstanding, and reported compliance with debt covenants.
• Unfunded pension liability was $590 million at December 31, 2018, down from $688 million.

Outlook, Risks and Unusual Items

• Management expected sufficient liquidity to meet 2019 obligations, but cautioned that earnings shortfalls, adverse operating developments or capital-market disruption could reduce available funds.
• Anthem terminated its pharmacy benefit management agreement effective March 1, 2019, with a 12-month transition period. The filing excludes the Anthem relationship from certain adjusted performance measures.
• Key risks include integrating Express Scripts, achieving expected synergies, retaining clients and employees, managing pharmacy pricing and rebates, and controlling medical and pharmacy cost trends.
• The company faces extensive federal, state and international regulation, including CMS requirements, Medicare risk-adjustment audits, ACA changes, pharmacy benefit management regulation, privacy laws and cybersecurity requirements.
• The Department of Justice was reviewing Medicare Advantage risk-adjustment practices, including Cigna’s medical-chart and health-exam processes.
• Cigna carried a $109 million allowance related to the ACA risk-corridor program and reported a net risk-adjustment payable balance of $155 million at year-end.
• Legal matters included ongoing litigation with Anthem, Express Scripts’ litigation with Anthem, and the Amara pension litigation. Cigna had accrued approximately $190 million before tax for specified litigation and related matters, but stated that an aggregate potential loss range could not be estimated.
• The filing identifies material sensitivity to medical claim reserves, long-term disability assumptions, interest rates, foreign exchange, investment valuations, goodwill impairment and pharmaceutical manufacturer receivables.

Most Important Facts for Investors to Verify

• Whether Express Scripts integration delivers the anticipated cost savings, revenue growth and operating synergies.
• The pace of deleveraging and the effect of debt service on repurchases, dividends, acquisitions and other capital deployment.
• The financial impact of Anthem’s PBM contract termination and the transition of its customers through March 2020.
• Changes in medical care ratios, pharmacy margins, rebate economics and prescription drug utilization.
• CMS developments involving Medicare reimbursement, Star Ratings and risk-adjustment data validation.
• Potential outcomes and cash requirements related to Anthem litigation, DOJ inquiries, regulatory audits and other legal matters.
• Goodwill and intangible-asset carrying values, particularly the $33.7 billion of goodwill assigned to Health Services.
• The filing’s non-GAAP adjusted income measures and the reconciliation to GAAP results, including transaction-related costs, amortization, realized investment results and transitioning-client adjustments.