Cigna Group quarterly report, Q3 FY2020

Cigna Corporation 2020 Q3 Form 10-Q Summary

Business context and reporting period

Cigna Corporation is a global health services organization providing pharmacy benefit management, medical, dental, disability, life, accident and related insurance and health services. Effective in the third quarter, the Health Services segment was renamed Evernorth and Integrated Medical was renamed U.S. Medical; underlying businesses were unchanged. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the same periods in 2019, and the balance sheet as of September 30, 2020 compared with December 31, 2019.

Financial performance and key metrics

Metric	Q3 2020	Q3 2019	YTD 2020	YTD 2019
Total revenues	$41.0 billion	$38.6 billion	$118.7 billion	$115.3 billion
Shareholders’ net income	$1.388 billion	$1.351 billion	$4.323 billion	$4.127 billion
Diluted EPS	$3.78	$3.57	$11.66	$10.83
Income from operations	$2.108 billion	$2.123 billion	$6.808 billion	$6.516 billion
Adjusted income from operations	$1.618 billion	$1.718 billion	$5.528 billion	$4.856 billion
Diluted adjusted EPS	$4.41	$4.54	$14.91	$12.74
Operating cash flow	Not provided for the quarter	Not provided for the quarter	$6.056 billion	$6.692 billion

Q3 revenue increased 6%, while year-to-date revenue increased 3%. Pharmacy revenue increased 7% in Q3 and 3% year to date; premiums increased 8% in Q3 and 7% year to date.
Q3 shareholders’ net income increased 3%, and year-to-date shareholders’ net income increased 5%. Q3 adjusted income from operations declined 6%, while year-to-date adjusted income from operations increased 14%.
Q3 adjusted operating margin was approximately 4.0% of adjusted revenue, compared with approximately 4.8% in the prior-year quarter. Year-to-date adjusted operating margin was approximately 4.7%, compared with 4.7% in 2019.
Net investment income declined 15% in Q3 and 16% year to date because of lower yields and weaker partnership investment income.
Medical customers totaled 17.0 million at September 30, 2020, down 1% from the prior-year period. U.S. Medical customers declined 1%, while International Markets customers increased 6%.
Cash, cash equivalents and restricted cash were $5.406 billion at September 30, 2020, compared with $4.577 billion at September 30, 2019. Total assets were $160.044 billion and shareholders’ equity was $48.032 billion.

Segment results and material changes

Evernorth: Q3 adjusted revenue increased 20% to $29.827 billion and pre-tax adjusted income from operations increased 3% to $1.443 billion. Year-to-date adjusted revenue increased 21% and pre-tax adjusted income increased 6%. Results benefited from customer growth, higher script volumes, supply-chain management and favorable claims mix.
U.S. Medical: Q3 adjusted revenue increased 5% to $9.629 billion, but pre-tax adjusted income declined 21% to $757 million. The medical care ratio increased to 82.6% from 80.5%, and adjusted margin declined to 7.9% from 10.4%. Year-to-date income increased 12% to $3.479 billion, reflecting deferred care in April and May that exceeded COVID-19-related costs and premium relief programs.
International Markets: Q3 adjusted revenue increased 3% and pre-tax adjusted income increased 7% to $208 million. Year-to-date pre-tax adjusted income increased 33% to $809 million, supported by business growth and improved loss and acquisition ratios.
Group Disability and Other: Q3 pre-tax adjusted income declined 51% to $70 million, and year-to-date income declined 26% to $279 million, primarily because of elevated COVID-19-related life claims and lower investment income.
Q3 results included a $101 million pre-tax risk-corridors recovery and a $117 million pre-tax contractual adjustment for a former client. Year-to-date special items also included $199 million of debt extinguishment costs, $31 million for the organizational efficiency plan, and $339 million of integration and transaction-related costs.
Amortization of acquired intangible assets decreased 33% in both Q3 and the first nine months, primarily because of lower amortization associated with transitioning clients.

Cash flow, debt and liquidity

Year-to-date operating cash flow was $6.056 billion, down from $6.692 billion in 2019, primarily due to higher accounts receivable and inventory-related cash usage, partly offset by higher pharmacy and service costs payable.
Investing activities used $1.444 billion, compared with $463 million in 2019. Financing activities used $3.812 billion, compared with $5.480 billion in 2019.
Total debt was approximately $35.986 billion, consisting of $6.449 billion of short-term debt and $29.537 billion of long-term debt, compared with $37.407 billion at December 31, 2019. The debt-to-capitalization ratio was 42.8%, down from 45.2%.
Cigna issued $3.5 billion of senior notes in March 2020, repaid or redeemed $3.5 billion of debt in March and April, and repaid $6.9 billion of long-term debt during the first nine months. It also borrowed $1.4 billion under a new 364-day term loan to strengthen liquidity.
At September 30, Cigna had no borrowings under its revolving credit facilities, $4.25 billion of undrawn committed revolving capacity, approximately $1.7 billion of remaining commercial paper capacity and approximately $5.8 billion of cash and short-term investments.
The pending sale of the U.S. Group Disability and Life business to New York Life is valued at $6.3 billion and was expected to close in the fourth quarter of 2020. Cigna estimated approximately $5.3 billion of net after-tax proceeds, intended primarily for share repurchases and debt repayment.
Cigna repurchased 13.2 million shares for approximately $2.4 billion during the first nine months. Repurchase authority was $3.1 billion as of November 4, 2020.

Guidance, outlook, risks and contingencies

Management expected organizational efficiency initiatives to produce approximately $200 million of annualized after-tax savings, with a substantial portion realized in 2020.
Management did not provide a specific full-year earnings guidance figure in the provided filing text. It cautioned that interim results should not be extrapolated because of seasonality, estimates and COVID-19 uncertainty.
COVID-19 caused significant deferred care in April and May, followed by more typical utilization in the third quarter. Management identified potential future risks from renewed care deferrals, higher COVID-19 treatment costs, higher life claims, unemployment-related customer declines, lower investment returns and disrupted medical documentation affecting risk-adjustment revenue.
Investment income remains pressured by historically low interest rates. Management also identified credit and valuation risks in aviation, energy, hospitality, retail and other pandemic-affected sectors, although it did not expect resulting losses to have a material adverse effect on liquidity or financial condition.
Cigna received $120 million in September 2020 for its ACA risk-corridors claim. Its separate claim for more than $195 million of cost-sharing reduction payments remained stayed pending related Federal Circuit proceedings.
Cigna appealed an August 2020 Delaware Chancery Court decision denying its claim for Anthem’s $1.85 billion reverse termination fee and additional damages. Separately, Anthem’s litigation against Express Scripts seeks alleged pricing concessions and damages totaling substantial amounts; the filing states that the matters’ aggregate potential loss cannot currently be estimated.
The Department of Justice is investigating Medicare Advantage risk-adjustment practices, and a related qui tam action involving Cigna’s Medicare Advantage business was unsealed. Cigna is cooperating with the investigation and intends to defend the claims.
Management stated that no material changes occurred to previously reported risk factors and that disclosure controls and procedures were effective as of September 30, 2020.

Important facts for investors to verify

Whether the New York Life transaction closed as expected and how its proceeds were allocated between debt repayment and share repurchases.
The progression and financial impact of COVID-19-related utilization, premium relief, medical costs and life claims.
Future adjusted operating earnings, particularly U.S. Medical margins and Evernorth profitability, while distinguishing non-GAAP adjusted results from GAAP income.
Developments in the Anthem litigation, Express Scripts litigation, ACA cost-sharing reduction claim and Medicare Advantage risk-adjustment investigation.
Debt repayment, refinancing needs, commercial paper usage and compliance with the 60% leverage covenant.
Credit deterioration, realized losses and valuation changes in pandemic-affected investment sectors.