Cigna Corporation Form 10-Q Summary
Business context and reporting period
Cigna Corporation is a global health services organization offering pharmacy, medical, dental, behavioral health, insurance and related services. The filing covers the unaudited three months ended March 31, 2021, compared with the same period in 2020. Reportable segments were Evernorth, U.S. Medical, International Markets, Other Operations and Corporate.
The U.S. Group Disability and Life business was sold to New York Life on December 31, 2020, for $6.2 billion. Segment names and reporting were also updated following the launch of Evernorth.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $40.971 billion | $38.469 billion | +7% |
| Pharmacy revenues | $28.025 billion | $25.098 billion | +12% |
| Premiums | $10.214 billion | $10.840 billion | -6% |
| Income from operations | $1.957 billion | $2.061 billion | -5% |
| Shareholders’ net income | $1.161 billion | $1.181 billion | -2% |
| Diluted EPS | $3.30 | $3.15 | +5% |
| Adjusted income from operations | $1.664 billion | $1.758 billion | -5% |
| Adjusted diluted EPS | $4.73 | $4.69 | +1% |
| Operating cash flow | $1.093 billion | $1.887 billion | -42% |
The GAAP operating margin was approximately 4.8% in Q1 2021, compared with approximately 5.4% in Q1 2020. Consolidated pre-tax adjusted income from operations was $2.142 billion, with an adjusted margin of approximately 5.2% based on adjusted revenues of $40.985 billion.
- Evernorth: Adjusted revenues increased 13% to $30.620 billion and pre-tax adjusted income increased 13% to $1.223 billion. Adjusted pharmacy scripts increased 9% to 393 million, while the overall generic fill rate declined to 87.2% from 87.9%.
- U.S. Medical: Adjusted revenues increased 5% to $10.362 billion, but pre-tax adjusted income declined 18% to $987 million. The pre-tax adjusted margin fell to 9.5% from 12.2%; the medical care ratio increased to 81.8% from 78.3%.
- International Markets: Adjusted revenues increased 7% to $1.572 billion, while pre-tax adjusted income declined 7% to $262 million. The adjusted margin declined to 16.7% from 19.2%.
- Other Operations: Adjusted revenues declined 90% to $139 million and pre-tax adjusted income declined 69% to $24 million, primarily because of the Group Disability and Life divestiture.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $6.505 billion at March 31, 2021, down from $10.182 billion at December 31, 2020. Cash, cash equivalents and restricted cash totaled $6.544 billion.
- Total assets were $152.081 billion and total liabilities were $103.867 billion at March 31, 2021.
- Short-term debt declined to $404 million from $3.374 billion, while long-term debt increased to $31.568 billion from $29.545 billion.
- The debt-to-capitalization ratio was 39.9%, compared with 39.5% at December 31, 2020. The company reported compliance with its debt covenants.
- Cigna issued $4.3 billion of senior notes in March 2021 and redeemed approximately $4.2 billion of existing debt, recording $131 million of pre-tax debt extinguishment costs.
- Operating cash flow was $1.093 billion. Investing activities used $717 million and financing activities used $4.051 billion, including $2.794 billion of share repurchases, $345 million of dividends and net debt repayments.
- Management reported $4.25 billion of undrawn revolving credit capacity, $4.25 billion of remaining commercial paper capacity and $7.0 billion of cash and short-term investments as of March 31, 2021.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Evernorth pharmacy and health services growth, while premiums declined largely because the Group Disability and Life business was sold.
- Adjusted earnings declined because of lower U.S. Medical results, COVID-19 effects and the divestiture, partly offset by Evernorth growth and lower corporate interest expense.
- Shareholders’ net income was broadly stable because lower operating earnings were substantially offset by improved investment results and lower special-item charges. The effective tax rate increased to 22.6% from 14.9%, primarily because favorable tax items recorded in 2020 did not recur.
- Per-share results benefited from the share repurchase program. Cigna repurchased 12.7 million shares for approximately $2.8 billion during the quarter.
- Operating cash flow decreased primarily because of higher accounts receivable and the timing of payable and accrued-liability payments.
Guidance, outlook, risks and unusual items
The filing does not provide a specific full-year earnings guidance figure. Management stated that liquidity and projected operating cash flows are sufficient to support operations and obligations, but cautioned that interim results may not be indicative of full-year performance because of seasonality, estimates and COVID-19 effects.
- COVID-19 had a net unfavorable effect on U.S. Medical results, including testing, treatment and vaccine costs, lower Medicare Advantage risk-adjustment revenue, specialty-product pressure and pandemic-related disenrollment. These effects were partly offset by deferred care.
- Future results may be affected by vaccination progress, renewed medical utilization, additional COVID-19 costs, unemployment-related customer losses, Medicare risk documentation and financial-market volatility.
- Investment income from partnership investments is expected to remain volatile. The company identified continued risks in aviation, hospitality and energy exposures, although management did not expect investment losses to materially impair liquidity or financial condition.
- In April 2021, Cigna completed its acquisition of MDLIVE, funded with cash on hand and commercial paper borrowings. The purchase price allocation was not complete at the filing date.
- In April 2021, Cigna replaced its revolving facilities with new agreements providing $4.0 billion of five-year and three-year capacity plus a $1.0 billion 364-day facility.
- Material legal and regulatory matters include the DOJ’s Medicare Advantage risk-adjustment investigation and related qui tam litigation, the Express Scripts litigation with Anthem, and Cigna’s former claims against Anthem. The filing states that accruals were not material, but potential aggregate losses could not be estimated.
- Special items included $131 million of debt extinguishment costs, $29 million of integration and transaction-related costs and a $27 million litigation benefit, for a net pre-tax impact of $133 million.
Investor verification checklist
- Verify the sustainability of Evernorth’s revenue and earnings growth, including the effects of Prime Therapeutics collaboration, specialty pharmacy performance and generic utilization.
- Monitor U.S. Medical medical-cost trends, COVID-19 utilization, Medicare Advantage risk adjustment and the medical care ratio.
- Reconcile post-divestiture comparisons and assess the effect of the Group Disability and Life sale on premiums, earnings and cash flows.
- Review debt maturities, refinancing activity, leverage and the April 2021 revolving-credit agreements.
- Assess cash conversion, working-capital movements and the scale of ongoing share repurchases and dividends.
- Track the MDLIVE integration, acquisition accounting and expected strategic or financial benefits.
- Follow the DOJ Medicare risk-adjustment inquiry, Anthem-related litigation and other regulatory developments.
- Evaluate investment-portfolio credit quality, unrealized losses, partnership-income volatility and exposure to economically sensitive sectors.