Cigna Corporation Form 10-Q Summary
Business context and reporting period
Cigna Corporation is a global health services organization providing pharmacy benefit management, medical, dental, behavioral health, disability, life and related services. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. Operations are reported through Health Services, Integrated Medical, International Markets, Group Disability and Other, and Corporate.
The first quarter included the continuing integration of Express Scripts, completion of the Anthem and Coventry client transition, the planned sale of the U.S. Group Disability and Life business, and the initial effects of COVID-19.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $38.469 billion | $37.946 billion | 1% |
| Shareholders’ net income | $1.181 billion | $1.368 billion | (14%) |
| Diluted EPS | $3.15 | $3.56 | (12%) |
| Adjusted income from operations | $1.758 billion | $1.498 billion | 17% |
| Adjusted diluted EPS | $4.69 | $3.90 | 20% |
| Income from operations | $2.061 billion | $2.230 billion | (8%) |
| Net income | $1.189 billion | $1.372 billion | (13%) |
| Effective tax rate | 14.9% | 23.3% | Down 840 bps |
| Operating cash flow | $1.887 billion | $3.192 billion | (41%) |
Pharmacy revenues were $25.098 billion, essentially flat year over year. Premiums increased 9% to $10.840 billion, while fees and other revenues declined 11% to $2.178 billion. Medical costs and other benefit expenses increased 9% to $8.322 billion; pharmacy and other service costs increased 1% to $24.190 billion.
Adjusted revenues increased 15% to $38.392 billion, reflecting the inclusion of previously transitioning clients in the 2020 non-GAAP presentation. Adjusted income from operations benefited from higher earnings in Health Services, Integrated Medical and International Markets.
- Health Services adjusted revenues increased 21% to $27.168 billion; pre-tax adjusted income increased 9% to $1.082 billion, with a 4.0% margin versus 4.4%.
- Integrated Medical adjusted revenues increased 7% to $9.860 billion; pre-tax adjusted income increased 2% to $1.199 billion, with a 12.2% margin versus 12.7%.
- International Markets adjusted revenues increased 5% to $1.470 billion; pre-tax adjusted income increased 37% to $282 million.
- Group Disability and Other adjusted revenues increased 3% to $1.339 billion; pre-tax adjusted income declined 8% to $77 million.
Liquidity, capital and debt
Cash and cash equivalents were $4.452 billion at March 31, 2020, compared with $4.619 billion at December 31, 2019. Total assets were $154.711 billion and total shareholders’ equity was $45.079 billion. Short-term debt was $4.340 billion and long-term debt was $32.147 billion. The debt-to-capitalization ratio was 44.7%, compared with 45.2% at year-end 2019.
Operating cash flow declined primarily because 2019 included cash receipts from transitioning clients and because of higher inventory purchases. Financing cash outflows included $4.209 billion of long-term debt repayments, $956 million of share repurchases and $192 million of debt-extinguishment payments, partially offset by $3.470 billion of net long-term debt issuance.
On March 16, 2020, Cigna issued $3.5 billion of senior notes and completed approximately $3.2 billion of debt tender and redemption transactions, recording a $185 million pre-tax extinguishment cost. On April 1, 2020, after the reporting date, Cigna borrowed $1.4 billion under a new 364-day term loan to enhance liquidity and reduce commercial paper exposure.
At March 31, management reported $4.25 billion of undrawn committed revolving capacity, $2.5 billion of remaining commercial paper capacity and approximately $4.8 billion of cash and short-term investments. Management expected to deleverage into the upper 30% range by year-end 2020, using operating cash flow and proceeds from the planned divestiture.
Material changes versus the prior comparable period
- GAAP earnings declined despite higher underlying operating earnings, primarily because 2019 included transitioning-client earnings, while 2020 included debt-extinguishment costs and realized investment losses.
- Adjusted operating income increased 17%, supported by Health Services growth, higher pharmacy script volume, customer growth and supply-chain benefits.
- The 2019 transitioning-client adjustment was eliminated from 2020 non-GAAP results after the transition was substantially completed.
- Amortization of acquired intangible assets declined 33% to $498 million.
- Net realized investment results shifted from a $10 million gain to an $88 million loss, including $55 million of credit-loss expense associated with investments affected by COVID-19-related economic concerns.
- Other comprehensive income shifted to a $590 million loss from $427 million of income, driven by unrealized securities depreciation and foreign-currency translation losses.
- Cigna adopted expected-credit-loss accounting on January 1, 2020, recording a $30 million after-tax reduction to retained earnings. COVID-19-related incremental allowances included $55 million for investments and $13 million for accounts receivable.
- Cigna repurchased approximately $980 million of common stock during the quarter and paid a quarterly dividend of $0.04 per share.
Guidance, outlook, risks and unusual items
The filing does not provide a specific full-year earnings guidance figure. Management stated that COVID-19 had not materially affected first-quarter results, but the pandemic could materially affect future medical utilization, customer volumes, unemployment-related enrollment, disability claims, operating costs, investment valuations, cash flows and liquidity. Lower elective procedures could partially offset higher COVID-19 treatment costs.
Management expected approximately $200 million of annualized after-tax savings from the organizational efficiency plan, with a substantial portion expected in 2020. The plan generated a $31 million pre-tax charge in the quarter, primarily for severance.
Cigna agreed to sell its U.S. Group Disability and Life business to New York Life for $6.3 billion, subject to regulatory approvals and other closing conditions, with closing expected in the third quarter of 2020. Management estimated approximately $5.3 billion of net after-tax proceeds and expected to use them for share repurchases and debt repayment.
Material legal and regulatory matters include Cigna’s claims against the federal government for at least $120 million of ACA risk-corridor payments and more than $195 million of cost-sharing-reduction payments; litigation with Anthem related to the terminated merger and Express Scripts pricing claims; and a Department of Justice investigation into Medicare Advantage risk-adjustment practices. The filing states that accruals for identified litigation and regulatory matters were immaterial, but aggregate potential losses could not be estimated and adverse outcomes could be material in a particular period.
Investment risks include widening credit spreads, market volatility, potential declines in private equity and real estate partnership values, foreign-currency movements and credit deterioration in sectors affected by the economic shutdown. Approximately 90% of the debt securities portfolio was investment grade at March 31, 2020.
Most important facts for investors to verify
- Whether COVID-19 materially changes medical utilization, claims costs, enrollment and disability experience after March 31, 2020.
- Completion timing, regulatory approvals, final proceeds and use of proceeds from the Group Disability and Life sale.
- Progress toward the stated deleveraging target and the effect of the April 1, 2020 $1.4 billion term loan.
- Whether investment impairments, credit-loss allowances and unrealized losses increase as the economic disruption continues.
- Outcomes and timing of the ACA payment litigation, Anthem litigation and Department of Justice Medicare Advantage investigation.
- Realization of the organizational efficiency plan’s expected $200 million annualized after-tax savings.
- Comparability of future non-GAAP results, given the cessation of the transitioning-client adjustment beginning in 2020.