The Cigna Group 2023 Q2 Form 10-Q Summary
Business context and reporting period
The Cigna Group is a global health company operating primarily through Evernorth Health Services, Cigna Healthcare, Other Operations and Corporate. Evernorth provides pharmacy, specialty pharmacy, distribution, care delivery and management services. Cigna Healthcare provides commercial, government and international medical and related products. This filing covers the quarter and six months ended June 30, 2023, with prior periods retrospectively adjusted for adoption of long-duration contract accounting guidance (LDTI).
Key financial metrics
| Metric | Three months ended June 30, 2023 | Year-over-year change | Six months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $48.6 billion | 7% | $95.1 billion | 6% |
| Income from operations | $2.2 billion | (6%) | $4.2 billion | (7%) |
| Shareholders’ net income | $1.46 billion | (6%) | $2.73 billion | (1%) |
| Diluted EPS | $4.92 | 1% | $9.15 | 6% |
| Adjusted income from operations | $1.82 billion | (8%) | $3.44 billion | (12%) |
| Adjusted diluted EPS | $6.13 | (1%) | $11.54 | (6%) |
| Net cash from operating activities | Not separately provided for the quarter | — | $7.52 billion | Up from $3.27 billion |
Second-quarter operating margin was approximately 4.6%, compared with approximately 5.2% in the prior-year period. Net margin was approximately 3.0%, compared with approximately 3.4%.
- Pharmacy revenue increased 6% in the quarter and 5% year to date, driven by specialty growth and branded-drug inflation.
- Premiums increased 6% in both periods, reflecting customer growth and higher premium rates.
- Fees and other revenues increased 20% in both periods, primarily from Evernorth affordability services and client growth.
- Medical costs and other benefit expenses increased 10% in both periods; pharmacy and other service costs increased 7% and 6%, respectively.
- Medical customers increased 10% to 19.5 million at June 30, 2023, driven by fee-based, Individual and Medicare Advantage growth.
- Adjusted income from operations by segment was $1.52 billion for Evernorth, $1.17 billion for Cigna Healthcare and $29 million for Other Operations in the quarter.
- Evernorth’s second-quarter adjusted revenue increased 10%, while pre-tax adjusted income increased 3%; its adjusted margin declined to 4.0% from 4.2%.
- Cigna Healthcare’s adjusted revenue increased 12%, but pre-tax adjusted income declined 5%; its adjusted margin declined to 9.2% from 10.9%. The medical care ratio increased to 81.2% from 80.7%.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $9.6 billion at June 30, 2023, compared with $5.9 billion at December 31, 2022. Cash, cash equivalents and restricted cash totaled $9.6 billion.
- Operating cash flow was $7.5 billion for the first six months, versus $3.3 billion in the prior-year period. Management attributed the increase primarily to timing of receivables, higher insurance liabilities, early receipt of July Medicare premiums and a higher Medicare Part D settlement.
- Investing cash outflow was $3.4 billion, including the $2.7 billion investment in VillageMD and $805 million of property and equipment purchases.
- Financing cash outflow was $472 million and included $1.1 billion of share repurchases, $730 million of dividends paid and $1.5 billion of net proceeds from long-term debt issuance.
- Total debt was approximately $32.7 billion, consisting of $4.6 billion of short-term debt and $28.1 billion of long-term debt. Debt-to-capitalization was 41.9%, compared with 41.0% at year-end 2022.
- The company had $5.0 billion of undrawn revolving credit capacity, $4.8 billion of remaining commercial paper capacity and $9.7 billion of cash and short-term investments. It was in compliance with debt covenants.
- In July 2023, the company repaid $2.9 billion of senior notes due in July 2023.
- The quarterly dividend was $1.23 per share, up from $1.12 in the prior-year period. Share repurchase authority was approximately $2.5 billion as of August 2, 2023.
Material changes versus the prior comparable period
- Revenue growth was offset by lower adjusted profitability, primarily due to the absence of earnings from the international life, accident and supplemental benefits businesses sold in the 2022 Chubb transaction, lower net investment income, higher medical costs and increased technology investment.
- Net realized investment results improved materially: the company recorded a $26 million gain in the quarter versus an $89 million loss in the prior-year quarter, and a $30 million loss year to date versus a $411 million loss.
- Net investment income declined 14% in the quarter and 25% year to date, mainly because of lower partnership investment returns and the impact of divestitures.
- Interest expense and other increased 21% in the quarter and 20% year to date, reflecting higher interest rates and increased pension costs.
- The effective tax rate declined to 19.9% for the quarter and 19.2% year to date, from 20.7% and 21.6%, respectively, due largely to foreign operating results and favorable tax audit developments.
- The company adopted LDTI effective January 1, 2023. The cumulative adoption effects were described as immaterial, although prior periods were restated and future earnings patterns may change as assumptions and discount rates are updated.
- Equity securities increased to $3.4 billion from $622 million at year-end 2022, primarily due to the $2.7 billion VillageMD preferred-equity investment.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear new full-year earnings or revenue guidance figure.
- Management stated that the 2024 Medicare Advantage and Part D final rates are not expected to materially affect consolidated 2024 results.
- Management expects adequate liquidity and anticipates funding capital expenditures primarily from operating cash flow. Required 2023 pension contributions are expected to be immaterial.
- Key risks include medical claims exceeding estimates, medical cost trend, pharmacy pricing and manufacturer relationships, competitive and regulatory pressures, Medicare program changes, inflation, interest rates, recession risk, cyber and privacy incidents, operational disruption, reinsurer credit risk, debt obligations and litigation or regulatory investigations.
- The company remains involved in Elevance litigation concerning Express Scripts contractual matters. The court previously dismissed claims seeking $14.8 billion in pricing damages; remaining prior-authorization claims were scheduled for trial beginning December 4, 2023.
- A Department of Justice Medicare Advantage risk-adjustment matter remains pending, including a False Claims Act complaint and related regulatory inquiries. The company states that aggregate potential losses cannot currently be estimated and that adverse outcomes could be material for a particular period.
- Debt securities had $937 million of unrealized depreciation at June 30, 2023, primarily associated with higher interest rates. Management stated that it does not expect investment losses to have a material adverse effect on liquidity or financial condition.
- A 10% decline in equity security prices would have resulted in an estimated loss of approximately $340 million as of June 30, 2023.
- In July 2023, Evernorth invested $437 million for a minority interest in CarepathRx Health Systems Solutions, an event occurring after the reporting date.
Investor verification priorities
- Verify the sustainability of Evernorth growth and whether technology investments and pharmacy pricing pressures continue to compress margins.
- Monitor Cigna Healthcare’s medical care ratio, Individual risk-adjustment exposure and Medicare Advantage membership and profitability.
- Reconcile GAAP results with adjusted income and EPS, particularly amortization, realized investment results and special items.
- Assess liquidity after the July debt repayment, VillageMD and CarepathRx investments, planned capital expenditures, dividends and future buybacks.
- Review the effect of LDTI assumption updates, discount-rate changes and other comprehensive income volatility on equity and earnings.
- Track the Elevance litigation, Medicare Advantage risk-adjustment investigation and any related accruals or disclosures.
- Evaluate the concentration and valuation risk in strategic healthcare equity investments, private partnerships and commercial real estate assets.