Cigna Corporation: Q1 2022 Form 10-Q Summary
Business context and reporting period
Cigna is a global health services organization operating primarily through Evernorth, which provides pharmacy, benefits management, care delivery and related services, and Cigna Healthcare, which provides commercial, government and international health products. The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Prior-year segment results were restated to reflect the reporting structure adopted in the fourth quarter of 2021.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $44.005 billion | $40.971 billion | 7% |
| Shareholders’ net income | $1.183 billion | $1.161 billion | 2% |
| Diluted EPS | $3.68 | $3.30 | 12% |
| Adjusted income from operations | $1.931 billion | $1.664 billion | 16% |
| Adjusted diluted EPS | $6.01 | $4.73 | 27% |
| Income from operations | $2.167 billion | $1.957 billion | 11% |
| Net cash provided by operating activities | $2.030 billion | $1.093 billion | Up $937 million |
- Pharmacy revenues increased 10% to $30.697 billion, premiums increased 1% to $10.356 billion, and fees and other revenues increased 8% to $2.538 billion.
- Pharmacy and other service costs increased 9% to $29.813 billion; medical costs and other benefit expenses increased 3% to $8.268 billion.
- The GAAP operating margin was approximately 4.9%, calculated as income from operations divided by total revenues. Net margin attributable to shareholders was approximately 2.7%.
- Adjusted income from operations increased primarily because of improved Evernorth and Cigna Healthcare results. Adjusted consolidated margin was approximately 4.4%, based on adjusted income from operations divided by adjusted revenues of $44.108 billion.
- The effective tax rate was 22.7%, compared with 22.6% in the prior-year quarter.
- Medical customers increased 7% to 17.779 million. Cigna Healthcare’s medical care ratio increased to 81.5% from 80.9%, while its adjusted expense ratio improved to 20.7% from 22.2%.
Liquidity, capital and balance sheet
- Cash and cash equivalents were $4.424 billion at March 31, 2022, compared with $5.081 billion at December 31, 2021. Total assets were $152.610 billion and shareholders’ equity was $46.087 billion.
- Total debt was approximately $33.186 billion, consisting of $2.173 billion of short-term debt and $31.013 billion of long-term debt. The debt-to-capitalization ratio was 41.9%, compared with 41.7% at year-end 2021.
- As of March 31, Cigna reported $4.6 billion of cash and short-term investments, $3.4 billion of remaining commercial paper capacity and $5.0 billion of undrawn committed revolving credit capacity. The filing states that the company was in compliance with its debt covenants.
- Financing cash outflows were $2.171 billion, including $1.368 billion of share repurchases and $357 million of common dividends. Cigna repurchased approximately 5.8 million shares under its repurchase program during the quarter.
- Operating cash flow increased substantially, primarily due to receipt of a delayed 2021 CMS Part D settlement and the timing of accrued liability payments.
Material changes versus the prior comparable period
- Adjusted income from operations rose 16%, led by 6% growth in Evernorth pre-tax adjusted income and 23% growth in Cigna Healthcare pre-tax adjusted income.
- Evernorth revenue increased 10% to $33.586 billion. Growth reflected higher specialty claims volume, branded-drug price inflation, formulary rebate administrative services and business growth. Its pre-tax adjusted margin declined to 3.9% from 4.0%.
- Cigna Healthcare revenue increased 3% to $11.392 billion, while pre-tax adjusted income increased 23% to $1.279 billion. Its pre-tax adjusted margin improved to 11.2% from 9.4%.
- GAAP earnings benefited from the absence of $131 million of debt extinguishment costs recorded in Q1 2021, but this benefit was largely offset by $319 million of net realized investment losses in Q1 2022 versus a $1 million gain in Q1 2021.
- Net realized investment losses primarily reflected mark-to-market losses on equity securities in a strategic health care sector investment. Other comprehensive loss increased to $610 million from $374 million, primarily due to securities depreciation and foreign currency losses.
- Share repurchases declined from approximately $2.8 billion in Q1 2021 to approximately $1.3 billion in Q1 2022. The quarterly dividend increased to $1.12 per share from $1.00.
Guidance, outlook, commentary and unusual items
- Cigna expected to complete the sale of its international life, accident and supplemental benefits businesses in six countries to Chubb for $5.72 billion in cash during Q2 2022, subject to regulatory approvals and customary closing conditions. Estimated net after-tax proceeds were approximately $5.4 billion, expected to be used primarily for share repurchases.
- The organizational efficiency plan is expected to produce approximately $180 million of annualized after-tax savings, with a substantial portion expected in 2022. Additional charges were expected in Q2 2022 as plans were finalized after the divestiture.
- Cigna expected 85% of Medicare Advantage customers to be in plans eligible for 2023 quality bonus payments, down from approximately 89% for 2022 payments. Management did not expect the final 2023 Medicare Advantage rates to materially affect consolidated 2023 results.
- The company entered into a five-year agreement with Kaiser Permanente in April 2022 covering access to Cigna’s PPO network for out-of-area care and specialty pharmacy services.
- Management reported no material operating or financial impact from inflation or the Russia-Ukraine conflict through March 31, 2022, but identified both as ongoing sources of uncertainty. COVID-19 effects also remained difficult to predict.
- Material legal and regulatory matters include the Medicare Advantage risk-adjustment qui tam action and related Department of Justice investigation. Cigna stated that accruals were not material, but an adverse outcome in one or more matters could materially affect a particular reporting period. In March 2022, the court granted summary judgment for Express Scripts on Anthem’s claims for $14.8 billion in pricing-related damages; one service-related claim remained.
- Other risks include medical cost trend, pharmacy pricing and manufacturer relationships, government regulation, Medicare program exposure, cybersecurity, competition, reinsurance credit risk, market volatility and the company’s significant indebtedness.
Important facts for investors to verify
- Completion timing, regulatory approval and net proceeds from the planned $5.72 billion Chubb transaction.
- Actual share repurchases and capital deployment following receipt of divestiture proceeds; repurchase authority was $9.4 billion as of May 5, 2022.
- Whether Evernorth’s specialty growth and contract-affordability improvements offset drug-price inflation, lower script volume and margin pressure.
- Medical cost trends, Medicare Advantage risk adjustment, Star Ratings and the effect of the expected decline in 2023 bonus-eligible customers.
- Investment portfolio sensitivity to rising interest rates, credit spreads, equity valuations and foreign currency movements, including the $319 million Q1 realized investment loss.
- Developments in the Medicare Advantage investigation and litigation, Anthem’s remaining service claim, and other legal or regulatory matters for which the filing states that aggregate losses cannot currently be estimated.
- Implementation of the long-duration insurance accounting standard, LDTI, scheduled for January 1, 2023; the filing does not provide a clear quantified estimate of its eventual financial statement impact.