Cigna Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. The filing covers Cigna Corporation, a global health services organization operating primarily through Evernorth and Cigna Healthcare. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
- Evernorth provides pharmacy benefit, specialty pharmacy, care and related health services.
- Cigna Healthcare provides U.S. Commercial, U.S. Government and International Health products and services.
- On July 1, 2022, Cigna completed the sale of its life, accident and supplemental benefits businesses in six countries to Chubb for approximately $5.4 billion in cash.
- Prior-year segment information was restated to conform to the revised reporting structure.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|
| Total revenues | $45.280 billion | $44.288 billion | $134.765 billion | $128.390 billion |
| Income from operations | $2.141 billion | $2.294 billion | $6.689 billion | $6.398 billion |
| Shareholders’ net income | $2.757 billion | $1.621 billion | $5.499 billion | $4.249 billion |
| Diluted EPS | $8.97 | $4.80 | $17.42 | $12.32 |
| Adjusted income from operations | $1.858 billion | $1.936 billion | $5.770 billion | $5.408 billion |
| Adjusted diluted EPS | $6.04 | $5.73 | $18.28 | $15.69 |
| Operating cash flow | Not separately provided | Not separately provided | $6.557 billion | $2.916 billion |
- Q3 total revenue increased 2%; nine-month revenue increased 5%.
- Q3 shareholders’ net income increased 70%, primarily because of the $1.735 billion pretax gain on the Chubb sale. Nine-month net income increased 29%.
- Adjusted income from operations decreased 4% in Q3 but increased 7% for the first nine months.
- Q3 and nine-month effective tax rates were 20.4% and 21.0%, respectively, compared with 20.6% and 21.7% in the prior-year periods.
- Q3 operating margin, based on income from operations divided by total revenue, was approximately 4.7%; the nine-month margin was approximately 5.0%. These are calculated GAAP measures and are not management’s adjusted margins.
Segment Performance and Margins
| Segment | Q3 2022 adjusted revenue | Q3 pretax adjusted income | Q3 margin | 9M 2022 adjusted revenue | 9M pretax adjusted income | 9M margin |
|---|
| Evernorth | $35.698 billion | $1.625 billion | 4.6% | $104.147 billion | $4.402 billion | 4.2% |
| Cigna Healthcare | $11.176 billion | $1.053 billion | 9.4% | $33.905 billion | $3.572 billion | 10.5% |
| Other Operations | $153 million | $17 million | 11.1% | $2.080 billion | $476 million | 22.9% |
- Evernorth revenue rose 6% in Q3 and 8% year to date, driven by specialty claims volume, branded drug price inflation and growth in affordability services. Pretax adjusted income rose 5% in both periods.
- Cigna Healthcare revenue was essentially flat in Q3 and increased 1% year to date. Pretax adjusted income increased 1% in Q3 and 14% year to date.
- Cigna Healthcare’s medical care ratio improved to 80.8% in Q3 and 81.0% year to date, compared with 83.5% and 83.0%, respectively, in 2021. Lower COVID-19 testing, treatment and vaccine costs were significant contributors.
- Medical customers increased 6% to 17.954 million at September 30, 2022, reflecting growth in fee-based products and International Health, partly offset by the Medicaid disposition.
Cash Flow, Debt and Liquidity
- For the first nine months, operating activities provided $6.557 billion, investing activities provided $3.714 billion and financing activities used $8.604 billion.
- Investing cash flow benefited from $4.838 billion of net divestiture proceeds, principally related to the Chubb transaction.
- Financing cash outflows included $5.874 billion of share repurchases, $1.050 billion of dividends and a $2.051 billion reduction in short-term debt.
- Cash and cash equivalents were $7.079 billion at September 30, 2022, compared with $5.081 billion at December 31, 2021. Cash, cash equivalents and restricted cash totaled $7.117 billion.
- Total debt was approximately $31.578 billion, consisting of $3.488 billion of short-term debt and $28.090 billion of long-term debt, compared with approximately $33.670 billion at year-end 2021.
- The debt-to-capitalization ratio was 41.2%, compared with 41.7% at December 31, 2021. Cigna reported compliance with its debt covenants.
- Cigna had $5.0 billion of undrawn revolving credit capacity, $5.0 billion of remaining commercial paper capacity and approximately $7.2 billion of cash and short-term investments. The filing states that approximately $0.8 billion was held by the parent company or certain non-regulated subsidiaries.
Material Changes, Outlook and Unusual Items
- The Chubb transaction generated a $1.735 billion pretax gain and approximately $1.4 billion after tax. Net after-tax proceeds were approximately $5.1 billion, used primarily for share repurchases.
- Cigna entered into $3.5 billion of accelerated share repurchase agreements in July 2022, initially receiving 10.4 million shares. The company expected total repurchases under the agreements of approximately 12.3 million shares after final settlement.
- The company repurchased 20.1 million shares for approximately $5.8 billion during the first nine months, compared with 26.5 million shares for approximately $6.3 billion in the prior-year period.
- Cigna expects annualized after-tax savings of approximately $184 million from its organizational efficiency plan, with a substantial amount expected in 2022. The remaining related liability was $60 million at September 30, 2022, and most payments are expected by the end of 2023.
- Management stated that inflation had not materially affected results through September 30, 2022, but it continues to monitor workforce, vendor, provider and drug-pricing pressures.
- Management did not expect the 2023 Medicare Advantage capitation rates to have a material impact on consolidated 2023 results. Medicare Advantage plans with at least four stars represented approximately 89% of customers eligible for 2022 bonus payments, 84% expected for 2023, and an estimated 67% based on ratings announced for 2024.
- Cigna will adopt the long-duration targeted improvements accounting standard on January 1, 2023, using the modified retrospective method. Management did not expect a material impact on shareholders’ equity but continued to assess possible effects on earnings patterns and market sensitivity.
- Net realized investment losses were $81 million in Q3 and $495 million for the first nine months, primarily reflecting mark-to-market losses on a strategic health care equity investment. The investment portfolio also experienced significant unrealized losses from higher interest rates.
Risks, Contingencies and Other Matters
- Cigna faces risks from medical cost trends, inflation, drug pricing, competition, government regulation, Medicare program changes, cybersecurity and privacy incidents, economic conditions, interest rates, foreign currency movements and reinsurer credit exposure.
- The Department of Justice intervened in a qui tam Medicare Advantage risk-adjustment action. The DOJ filed its complaint-in-intervention on October 14, 2022; Cigna’s response was due December 16, 2022.
- An Elevance litigation matter had claims totaling $14.8 billion relating to pricing and service issues. In March 2022, the court granted summary judgment for Express Scripts on all pricing claims and most service claims; certain prior-authorization claims remained pending.
- Cigna stated that accruals for disclosed litigation and regulatory matters were not material, but an adverse outcome in one or more matters could materially affect results, financial condition or liquidity for a particular period. No aggregate loss range could be estimated.
- Cigna’s $5.005 billion of reinsurance recoverables were subject to reinsurer credit risk, including approximately $4.721 billion related to acquisition, disposition or run-off activities.
Investor Verification Priorities
- Separate recurring operating performance from the $1.735 billion Chubb divestiture gain and other special items.
- Monitor Evernorth specialty pharmacy growth, pricing, script volumes and contract affordability margins.
- Assess sustainability of Cigna Healthcare’s improved medical care ratio as COVID-related utilization effects normalize.
- Verify final settlement of the $3.5 billion accelerated share repurchase agreements and the resulting share count.
- Review 2023 implementation impacts from the long-duration contract accounting standard.
- Track Medicare Advantage Star Ratings, risk-adjustment litigation and the DOJ investigation.
- Evaluate investment portfolio exposure to higher interest rates, credit deterioration, private markets and unrealized losses.
- Confirm liquidity and debt-management plans given upcoming short-term maturities and continued capital returns.
