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Cigna Corporation 2019 Second-Quarter Form 10-Q Summary

Business Context and Reporting Period

Cigna Corporation is a global health services organization offering pharmacy benefit management, medical, dental, disability, life and related insurance products. This unaudited Form 10-Q covers the three and six months ended June 30, 2019.

Cigna completed its $52.8 billion acquisition of Express Scripts on December 20, 2018. Accordingly, 2019 results include Express Scripts, while the comparable 2018 periods primarily reflect Cigna on a standalone basis; year-over-year revenue comparisons are therefore substantially affected by the acquisition. Prior-year segment information was restated for the new segment presentation.

Financial Performance and Key Metrics

Premiums increased 9% in the quarter and 10% year to date, while fees and other revenues increased 76% and 77%, respectively. Pharmacy revenues were $26.288 billion in the quarter and $51.467 billion year to date, primarily reflecting the acquired Express Scripts business.

Operating income growth benefited from Express Scripts and stronger Integrated Medical results. These gains were partly offset by higher interest expense on acquisition-related debt, increased amortization of acquired intangible assets and integration costs.

Six-month operating cash flow was $4.231 billion, compared with $3.020 billion in 2018. Investing activities used $159 million, compared with $1.799 billion in the prior-year period, while financing activities used $4.307 billion, primarily for debt repayment and share repurchases. Cash and cash equivalents were $3.610 billion at June 30, 2019, versus $3.855 billion at December 31, 2018.

At June 30, 2019, total assets were $154.401 billion and shareholders’ equity was $43.815 billion. Short-term debt was $2.310 billion and long-term debt was $36.885 billion. The debt-to-capitalization ratio was 47.2%, down from 50.9% at year-end 2018. Cigna had approximately $3.9 billion of cash and short-term investments, approximately $870 million of which was held by the parent company or nonregulated subsidiaries.

Material Changes Versus the Prior Comparable Period

• Express Scripts contributed substantially to pharmacy revenue, Health Services earnings and consolidated expenses in 2019; the 2018 comparison does not include the acquired business for the comparable periods.
• Health Services six-month pre-tax adjusted income from operations was $2.156 billion, compared with $160 million, primarily due to the acquisition.
• Integrated Medical six-month adjusted revenue increased 11% to $18.163 billion and pre-tax adjusted income increased 12% to $2.160 billion. The medical care ratio increased to 80.3% from 78.3%, while the expense ratio improved to 21.9% from 24.1%.
• International Markets six-month adjusted income declined 2% to $413 million, reflecting higher expenses, acquisition costs and unfavorable foreign currency movements.
• Group Disability and Other six-month adjusted income declined 16% to $233 million, primarily due to unfavorable disability claims experience and run-off operations.
• Corporate adjusted losses increased to $943 million year to date from $172 million, primarily due to acquisition-related interest expense.
• Cigna repaid $2.740 billion of long-term debt in the first half of 2019, including $1.4 billion of term-loan principal, and repurchased approximately $870 million of common stock.

Outlook, Commentary, Risks and Unusual Items

Management expects to reduce the debt-to-capitalization ratio to the upper 30% range by the end of 2020 using operating cash flow. The company had a $3.25 billion revolving credit facility, with $21 million of letters of credit outstanding at June 30, 2019, and was in compliance with its debt covenants.

Anthem terminated its pharmacy benefit management agreement effective March 1, 2019, subject to a 12-month transition period. Cigna excludes Anthem and Coventry results from adjusted revenues and adjusted income from operations as transitioning-client activity. Transitioning-client revenue was $4.450 billion in the second quarter and $8.939 billion for the first six months.

Special items included $155 million of pre-tax Express Scripts integration and transaction-related costs in the quarter and $291 million year to date, plus an $81 million pre-tax litigation-related charge in the second quarter. The company also recorded $1.480 billion of acquired-intangible amortization year to date.

The health insurance industry tax was suspended for 2019, reducing expenses and contributing to the lower effective tax rate; current legislation contemplated its return in 2020. Approximately 73% of Medicare Advantage customers were in plans eligible for 2019 quality bonus payments, and management expected that percentage to increase to 77% for 2020 payments.

Material contingencies include litigation with Anthem concerning the terminated merger agreement and Express Scripts’ separate contract dispute with Anthem. Cigna is also responding to Department of Justice information requests regarding Medicare Advantage risk-adjustment practices. The filing states that an aggregate loss range for certain legal and regulatory matters cannot currently be estimated and that an adverse outcome could materially affect a particular period.

Other risks include medical and pharmacy cost trends, drug pricing, government regulation, Medicare and Medicaid program changes, integration and realization of Express Scripts synergies, debt-service obligations, investment-market volatility, foreign currency movements, cybersecurity and operational execution.

Investor Verification Checklist

• Verify the comparability of 2019 and 2018 results, particularly the inclusion of Express Scripts and the treatment of transitioning Anthem and Coventry business.
• Reconcile GAAP net income and EPS to adjusted income from operations and adjusted EPS, including amortization, special items and transitioning-client adjustments.
• Monitor debt repayment, interest expense, covenant compliance and progress toward the targeted upper-30% debt-to-capitalization ratio by year-end 2020.
• Assess Health Services margins excluding transitioning clients and the sustainability of Express Scripts earnings after the Anthem contract transition ends.
• Track Integrated Medical medical care ratios, risk-adjustment charges and Medicare Advantage Star Ratings.
• Review the outcomes and potential financial exposure from Anthem litigation, the DOJ investigation and disability-claims regulatory matters.
• Confirm the effect of the health insurance industry tax suspension in 2019 and any subsequent legislative or regulatory changes.