Cigna Corporation: Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Cigna is a global health services organization operating primarily through Evernorth, Cigna Healthcare, Other Operations and Corporate. The filing covers the quarter and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods. The financial statements are unaudited and prepared under U.S. GAAP.
On July 1, 2022, Cigna completed the approximately $5.4 billion cash sale of its life, accident and supplemental benefits businesses in six countries to Chubb. The related assets and liabilities were classified as held for sale at June 30, 2022.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Total revenues | $45.5 billion | $43.1 billion | $89.5 billion | $84.1 billion |
| Income from operations | $2.4 billion | $2.1 billion | $4.5 billion | $4.1 billion |
| Shareholders’ net income | $1.56 billion | $1.47 billion | $2.74 billion | $2.63 billion |
| Diluted EPS | $4.90 | $4.25 | $8.57 | $7.54 |
| Adjusted income from operations | $1.98 billion | $1.81 billion | $3.91 billion | $3.47 billion |
| Adjusted diluted EPS | $6.22 | $5.24 | $12.23 | $9.96 |
| Net cash from operating activities | Not separately provided | Not separately provided | $3.27 billion | $0.80 billion |
Q2 revenue increased 5%, shareholders’ net income increased 6%, and adjusted income from operations increased 10%. For the first six months, revenue increased 6%, shareholders’ net income increased 4%, and adjusted income from operations increased 13%.
The Q2 income from operations margin was approximately 5.2%, compared with approximately 5.0% in the prior-year quarter. The six-month income from operations margin was approximately 5.1%, compared with approximately 4.9% in 2021. Cigna Healthcare’s pre-tax adjusted margin improved to 10.9% in Q2 from 9.4% and to 11.1% for the six months from 9.4%.
Segment Performance and Material Changes
- Evernorth: Adjusted revenue increased 7% in Q2 and 8% year to date. Pre-tax adjusted income increased 4% in Q2 and 5% year to date. Growth reflected higher specialty claims volume, the Prime Therapeutics collaboration, branded-drug price increases, Pharmacy Rebate Program growth, MDLIVE growth and contract affordability improvements. Total adjusted scripts declined 4% in Q2 and 3% year to date, while the overall generic fill rate increased to 87.5% in Q2 from 85.4%.
- Cigna Healthcare: Adjusted revenue increased 2% in both Q2 and the first six months. Pre-tax adjusted income increased 18% in Q2 and 20% year to date. The medical care ratio improved to 80.7% in Q2 from 84.4% and to 81.1% year to date from 82.7%, primarily reflecting lower direct COVID-19 costs, pricing and affordability initiatives, and improved Medicare Advantage risk-adjustment revenue.
- Customers: Total medical customers increased 5% to 17.8 million at June 30, 2022. Growth in Middle Market, Select and International Health was partly offset by the Medicaid business disposition.
- Other Operations: Adjusted revenue declined 4% in Q2 and 3% year to date, while pre-tax adjusted income increased 8% and 3%, respectively. Most of this segment’s revenue and earnings came from businesses sold to Chubb and will therefore decline in future periods.
- Investments: Net realized investment losses were $95 million in Q2 and $414 million year to date, compared with gains of $59 million and $60 million, respectively, in 2021. The losses primarily reflected mark-to-market losses on a strategic health care equity investment and broader market declines.
Cash Flow, Debt and Liquidity
- Operating cash flow was $3.27 billion for the six months ended June 30, compared with $797 million in 2021, aided by a delayed 2021 CMS Part D settlement, lower tax payments and working-capital timing.
- Investing cash flow was negative $732 million, compared with negative $3.02 billion in 2021, which included the MDLIVE acquisition.
- Financing cash flow was negative $3.09 billion, including $2.37 billion of share repurchases and $709 million of dividends.
- Cash and cash equivalents were $4.42 billion at June 30, 2022, compared with $5.08 billion at December 31, 2021. Cash and short-term investments available for liquidity were approximately $4.6 billion.
- Short-term debt was $2.40 billion and long-term debt was $30.98 billion at June 30, 2022. The debt-to-capitalization ratio was 42.1%, compared with 41.7% at year-end 2021.
- Cigna had $5.0 billion of undrawn revolving credit capacity, $3.2 billion of remaining commercial-paper capacity and an additional $2.5 billion of borrowing capacity from subsidiaries without further approvals. The company was in compliance with debt covenants.
- Cigna repurchased approximately 9.7 million shares for $2.3 billion during the first six months. In July 2022, it funded a $3.5 billion accelerated share repurchase agreement and initially received 10.4 million shares.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $5.1 billion of net after-tax proceeds from the Chubb transaction, primarily for share repurchases. The transaction was completed after quarter-end.
- The organizational efficiency plan generated a $22 million pre-tax charge in Q2 2022, with expected annualized after-tax savings of $184 million. Most savings were expected to be realized in 2022.
- Management stated that 2023 Medicare Advantage rates were not expected to have a material impact on consolidated 2023 results. The percentage of Medicare Advantage customers in plans eligible for quality bonuses was expected to decline to 85% for 2023 bonus payments from approximately 89% for 2022.
- Management reported no material inflation impact on results or cash flow through June 30, but identified provider costs, vendor costs and drug pricing as areas under monitoring. COVID-19 impacts remained uncertain.
- Material risks include medical-cost estimates and trends, drug pricing and manufacturer relationships, inflation, regulatory changes, Medicare programs, cybersecurity and technology risks, investment-market volatility, interest rates, foreign currency, reinsurance credit risk, leverage, and litigation or government investigations.
- Elevance’s prior claims for $14.8 billion in pricing-related damages were dismissed on summary judgment in March 2022; certain prior-authorization service claims remained pending. A DOJ-related Medicare Advantage qui tam matter and civil investigative demands concerning risk-adjustment practices also remained unresolved. The filing states that aggregate potential losses cannot currently be estimated.
- The company was implementing the long-duration targeted improvements accounting standard, with adoption planned for January 1, 2023. The filing does not provide a clear quantified adoption impact.
Important Facts for Investors to Verify
- Confirm the final accounting, tax effects and use of proceeds from the Chubb transaction.
- Assess whether Cigna Healthcare’s improved medical care ratio is sustainable as utilization, COVID-19 effects and medical-cost trends normalize.
- Monitor the impact of branded-drug inflation, specialty-pharmacy volume, generic utilization and client contract economics on Evernorth margins.
- Evaluate the effect of the $3.5 billion ASR, final share settlement and continuing repurchase activity on share count, leverage and capital allocation.
- Review pending Medicare Advantage litigation and DOJ investigations, including potential regulatory penalties or changes to risk-adjustment practices.
- Track investment-market losses, unrealized losses in the debt portfolio, interest-rate exposure and the effects of the planned LDTI adoption.
- Reconcile non-GAAP adjusted income and adjusted EPS to GAAP results, particularly the effects of investment losses, amortization, litigation items and efficiency-plan charges.