The Cigna Group — 2023 Third-Quarter Form 10-Q Summary
Business context and reporting period
The Cigna Group is a global health company operating primarily through Evernorth Health Services and Cigna Healthcare. Evernorth provides pharmacy benefit management, specialty and home-delivery pharmacy, distribution, care delivery and management solutions. Cigna Healthcare provides commercial, government and international medical, pharmacy, behavioral, dental and related products and services. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Prior periods were retrospectively adjusted for the January 1, 2023 adoption of long-duration contract accounting guidance.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenues | $49.0 billion | $45.3 billion | $144.2 billion | $134.8 billion |
| Shareholders’ net income | $1.4 billion | $2.8 billion | $4.1 billion | $5.5 billion |
| Diluted EPS | $4.74 | $8.97 | $13.89 | $17.46 |
| Adjusted income from operations | $2.0 billion | $1.9 billion | $5.4 billion | $5.8 billion |
| Adjusted diluted EPS | $6.77 | $6.05 | $18.31 | $18.31 |
| Operating income | $2.2 billion | $2.1 billion | $6.5 billion | $6.7 billion |
| Net cash from operating activities | Not separately provided | Not separately provided | $10.3 billion | $6.6 billion |
Revenue increased 8% in the quarter and 7% year to date. Pharmacy revenue rose 5% in both periods, premiums increased 15% in the quarter and 9% year to date, and fees and other revenues increased 17% and 19%, respectively. Net investment income increased 57% in the quarter because of higher yields and improved partnership returns, but declined 7% year to date because of the 2022 divestiture and lower partnership returns.
GAAP shareholders’ net income fell 49% in the quarter and 25% year to date, primarily because 2022 included a $1.7 billion pretax gain from the sale of international businesses. Adjusted income from operations increased 8% in the quarter but decreased 6% year to date. Q3 GAAP net margin was approximately 2.9%; nine-month net margin was approximately 2.9%. Operating income margin was approximately 4.6% in both periods.
Evernorth Health Services adjusted revenue increased 8% in both periods, while pretax adjusted income increased 6% in Q3 and 3% year to date. Its pretax adjusted margin was 4.4% in Q3 and 4.0% year to date, compared with 4.6% and 4.2%. Cigna Healthcare adjusted revenue increased 14% in Q3 and 13% year to date; pretax adjusted income increased 16% in Q3 but declined 2% year to date. Its medical care ratio was 80.5% in Q3 and 81.0% year to date.
At September 30, 2023, cash and cash equivalents were $8.5 billion, total investments were $20.0 billion, and total assets were $149.6 billion. Short-term debt was $3.0 billion and long-term debt was $28.1 billion. The company reported a 40.5% debt-to-capitalization ratio, $5.0 billion of undrawn revolving credit capacity, $3.5 billion of remaining commercial paper capacity and approximately $8.7 billion of cash and short-term investments.
Material changes versus the prior comparable period
- Medical customers increased 9% to 19.6 million, driven primarily by fee-based customers and Individual and Medicare Advantage growth.
- Cigna Healthcare premiums benefited from customer growth and higher premium rates, while medical costs increased 15% in Q3 and 12% year to date.
- Corporate adjusted losses increased to $435 million in Q3 and $1.3 billion year to date, primarily because of higher interest rates and pension costs.
- The company repaid approximately $2.9 billion of senior notes at maturity in July 2023 and issued $1.5 billion of senior notes in March 2023.
- Share repurchases were $1.8 billion for the first nine months of 2023, compared with $5.8 billion in 2022. Dividends declared increased to $1.23 per share per quarter from $1.12.
- The company invested $2.7 billion in VillageMD preferred equity and acquired a minority interest in CarepathRx Health Systems Solutions.
- Capital expenditures increased to $1.2 billion from $1.0 billion, reflecting continued technology investment.
Guidance, outlook, commentary, risks and unusual items
Management stated that the 2024 Medicare Advantage and Part D final payment rates are not expected to have a material impact on consolidated 2024 results. Based on announced Star Ratings and current customer mix, management estimated that 67% of plans would be in four-star-or-higher plans eligible for bonus payments in 2024 and 2025.
Third-quarter special items included $201 million pretax of litigation-related charges, $21 million related to the loss on sale of businesses and $13 million of integration and transaction-related costs. The company settled Medicare Advantage litigation for $37 million plus interest and fees and settled a related Department of Justice investigation for approximately $135 million plus interest. It also entered into a five-year Corporate Integrity Agreement with the HHS Office of Inspector General.
Material risks include medical claims exceeding estimates, medical cost trend and inflation, drug pricing and manufacturer relationships, competition, government regulation and Medicare program changes, litigation and regulatory investigations, cybersecurity and privacy incidents, integration and transaction execution, reinsurer credit risk, investment and interest-rate volatility, capital-market access, and significant indebtedness. The company noted that debt securities had $1.1 billion of unrealized depreciation at September 30, 2023, primarily attributable to higher interest rates. A 10% decline in equity securities would have resulted in an estimated realized loss of approximately $340 million.
The company stated that liquidity was adequate, debt covenants were satisfied, and no material changes occurred in disclosure controls. It also noted that interim results are affected by estimates and seasonality and should not necessarily be extrapolated to the full year.
Most important facts for investors to verify
- Whether Evernorth’s growth and margin performance can offset higher strategic investment and operating expenses.
- Whether Cigna Healthcare’s medical care ratio, Medicare Advantage mix, Star Ratings and government reimbursement rates develop as expected.
- The effect of litigation settlements, the Corporate Integrity Agreement and any remaining Elevance-related appeals or claims.
- Cash generation, regulatory restrictions on subsidiary dividends, debt maturities, commercial paper usage and future capital deployment.
- Valuation and concentration risk associated with the $2.7 billion VillageMD investment and other private-market and healthcare equity investments.
- Potential changes in medical cost trends, pharmacy pricing, interest rates, investment valuations, reinsurance recoverables and credit losses.
- The effect of LDTI adoption and retrospective restatement on comparability, insurance liabilities, accumulated other comprehensive income and future earnings patterns.