Cigna Group quarterly report, Q2 FY2021

Cigna Corporation Form 10-Q Summary

Business context and reporting period

Cigna is a global health services organization offering pharmacy, medical, dental, behavioral health, insurance and related services. Its principal reporting segments are Evernorth, U.S. Medical, International Markets, Other Operations and Corporate. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the same periods in 2020, and financial position as of June 30, 2021 compared with December 31, 2020.

Key financial metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenues	$43.131 billion	$39.265 billion	$84.102 billion	$77.734 billion
Income from operations	$2.147 billion	$2.639 billion	$4.104 billion	$4.700 billion
Shareholders’ net income	$1.467 billion	$1.754 billion	$2.628 billion	$2.935 billion
Diluted EPS	$4.25	$4.73	$7.54	$7.88
Adjusted income from operations	$1.808 billion	$2.152 billion	$3.472 billion	$3.910 billion
Adjusted diluted EPS	$5.24	$5.81	$9.96	$10.49
Net cash from operating activities	—	—	$797 million	$5.161 billion

Q2 operating margin was approximately 5.0%, compared with 6.7% in the prior-year quarter. Six-month operating margin was approximately 4.9%, compared with 6.0%. Adjusted income from operations represented approximately 4.2% of adjusted revenues in Q2, compared with 5.5% in Q2 2020.

Pharmacy revenues increased 13% in Q2 and 12% for the six months, driven by higher claims volume, pricing, specialty pharmacy growth and business growth in Evernorth.
Premiums declined 1% in Q2 and 3% for the six months, primarily because of the sale of the U.S. Group Disability and Life business.
Fees and other revenues increased 18% in Q2 and 13% for the six months.
Net investment income increased 39% in Q2 and 22% for the six months, supported by returns on partnership investments.
Medical costs and other benefit expenses increased 19% in Q2 and 7% for the six months. The U.S. Medical medical care ratio rose to 85.4% in Q2 from 70.5% and to 83.6% for the six months from 74.5%.
Selling, general and administrative expenses decreased 12% in Q2 and 8% for the six months.

Liquidity, debt and capital resources

At June 30, 2021, cash and cash equivalents were $3.821 billion, total investments were $24.927 billion, total assets were $154.207 billion and shareholders’ equity was $48.709 billion. Short-term debt was $1.532 billion and long-term debt was $31.606 billion. The debt-to-capitalization ratio was 40.5%, compared with 39.5% at December 31, 2020.

Operating cash flow fell to $797 million from $5.161 billion, primarily because of higher tax payments, including approximately $800 million related to the Group Disability and Life sale, increased accounts receivable and timing of payables and accrued liabilities.
Investing cash outflows were $3.024 billion, including $1.836 billion for acquisitions, principally MDLIVE.
Financing cash outflows were $4.113 billion, including $3.710 billion of share repurchases, $687 million of dividends and net debt repayments.
Cigna issued approximately $4.3 billion of senior notes and redeemed approximately $4.5 billion of outstanding debt during the first six months.
As of June 30, Cigna reported $5.0 billion of undrawn committed revolving credit capacity, $2.7 billion of remaining commercial paper capacity and $4.2 billion of cash and short-term investments. It also reported approximately $700 million held by the parent or certain nonregulated subsidiaries.
Cigna repurchased 16.3 million shares for approximately $3.7 billion during the first six months. The quarterly dividend was $1.00 per share.

Material changes versus the prior comparable period

Revenue grew, but shareholders’ net income declined 16% in Q2 and 10% for the six months. Adjusted income from operations declined 16% and 11%, respectively.
Evernorth pre-tax adjusted income increased 13% in both periods, reflecting supply-chain management, specialty pharmacy performance, customer growth and higher script volumes.
U.S. Medical pre-tax adjusted income declined 33% in Q2 and 26% for the six months. The margin fell to 9.7% from 16.5% in Q2 and to 9.6% from 14.3% for the six months.
International Markets pre-tax adjusted income declined 27% in Q2 and 17% for the six months, primarily because of higher loss ratios and COVID-19-related claims.
Other Operations revenue and pre-tax adjusted income declined approximately 90% and 90% in Q2, largely reflecting the December 31, 2020 sale of the U.S. Group Disability and Life business.
Cigna acquired MDLIVE on April 19, 2021 for approximately $2.028 billion of purchase price, funded with cash and commercial paper. MDLIVE’s reported operating results were not material to the period.
The effective tax rate was 22.4% for the first six months of 2021, compared with 20.0% in 2020, primarily because favorable 2020 tax items did not recur.

Outlook, commentary, risks and unusual items

The filing does not provide a specific full-year earnings or revenue guidance range. Management stated that liquidity and current projected operating cash flows are expected to support operations and obligations, but cautioned that COVID-19 conditions, variants, vaccination rates and medical utilization remain uncertain.

COVID-19 negatively affected U.S. Medical results through the return of medical care toward pre-pandemic levels, testing, treatment and vaccine costs, lower Medicare Advantage risk-adjusted revenue and pandemic-related disenrollment. These effects were partly offset by the absence of 2020 premium relief programs.
Management identified risks from medical-cost volatility, pricing pressure, pharmaceutical manufacturer and network relationships, government regulation, Medicare programs, litigation and investigations, cybersecurity, competition, reinsurance credit exposure, debt levels and capital-market disruption.
Special items reduced six-month 2021 results by $125 million after tax, including $110 million of debt extinguishment costs and $36 million of integration and transaction-related costs, partly offset by a $21 million benefit from litigation matters.
Cigna’s claim for more than $195 million of ACA cost-sharing-reduction payments remains pending. Its appeal seeking the $1.85 billion Anthem reverse termination fee was denied by the Delaware Supreme Court in May 2021.
Anthem’s litigation against Express Scripts alleges potential damages of up to approximately $14.95 billion; the case remained pending, with summary-judgment briefing scheduled through November 2021. Cigna stated that accruals for disclosed litigation and regulatory matters were not material, but aggregate potential losses could not be estimated.
The DOJ continues investigating Medicare Advantage risk-adjustment practices involving Cigna, and a related qui tam action remains pending without DOJ intervention as of the filing.

Important facts for investors to verify

Reconcile GAAP results with management’s non-GAAP adjusted income, adjusted EPS and adjusted revenue measures.
Assess whether U.S. Medical utilization, COVID-19 costs, Medicare risk adjustment and customer enrollment support recovery in medical margins.
Monitor Evernorth growth, generic-fill rates, pharmacy pricing, manufacturer rebates and client performance-guarantee exposure.
Verify the sustainability of cash generation after MDLIVE acquisition spending, debt refinancing, dividends and substantial share repurchases.
Review debt maturities, commercial paper reliance, revolving-credit capacity and the 40.5% debt-to-capitalization ratio.
Track the ACA cost-sharing-reduction claim, Express Scripts litigation, DOJ Medicare risk-adjustment investigation and other regulatory matters.
Consider the comparability impact of the 2020 Group Disability and Life divestiture when evaluating year-over-year trends.