The Cigna Group: 2023 First-Quarter 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 and Other Operations. Evernorth provides pharmacy benefit, specialty pharmacy, distribution, care delivery and related services. Cigna Healthcare provides commercial, government and international medical, pharmacy, behavioral, dental and related products. The filing covers the three months ended March 31, 2023, compared with the same period in 2022. Prior-period amounts were retrospectively adjusted for adoption of long-duration insurance contract accounting guidance.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $46.5 billion | $44.0 billion | 6% |
| Income from operations | $2.0 billion | $2.2 billion | (8%) |
| Shareholders’ net income | $1.267 billion | $1.197 billion | 6% |
| Diluted EPS | $4.24 | $3.73 | 14% |
| Adjusted income from operations | $1.618 billion | $1.948 billion | (17%) |
| Adjusted diluted EPS | $5.41 | $6.06 | (11%) |
| Operating cash flow | $5.028 billion | $2.030 billion | 148% |
| Effective tax rate | 18.4% | 22.7% | Down 430 bps |
Revenue growth reflected higher pharmacy revenue, premiums and fees. Pharmacy revenue increased 5% to $32.1 billion, premiums increased 6% to $11.0 billion and fees and other revenues increased 21% to $3.1 billion. Net investment income declined 33% to $277 million. Net realized investment losses improved to $56 million from $322 million, primarily because of lower mark-to-market losses on strategic healthcare equity investments.
Total benefits and expenses increased 6% to $44.5 billion. Medical costs and other benefit expenses rose 9%, while selling, general and administrative expenses rose 8%. GAAP income from operations represented approximately 4.3% of revenue, compared with approximately 5.0% in the prior-year quarter. Shareholders’ net income margin was approximately 2.7% in both periods.
Segment performance
- Evernorth Health Services: Adjusted revenue increased 8% to $36.2 billion. Pre-tax adjusted income from operations increased 1% to $1.320 billion, while the adjusted margin declined to 3.6% from 3.9%. Growth in specialty pharmacy, care delivery and contract affordability services was partly offset by strategic investments.
- Cigna Healthcare: Adjusted revenue increased 12% to $12.7 billion. Pre-tax adjusted income declined 14% to $1.115 billion, and the adjusted margin fell to 8.8% from 11.4%. The medical care ratio improved slightly to 81.3% from 81.5%, but the adjusted expense ratio increased to 21.4% from 20.5%.
- Other Operations: Adjusted revenue declined 84% to $157 million and pre-tax adjusted income declined 93% to $15 million, primarily because businesses sold in the 2022 Chubb transaction were no longer included.
- Medical customers: Total medical customers increased 10% to 19.5 million, driven mainly by fee-based customers and growth in Individual and Medicare Advantage products.
Liquidity, capital and debt
Cash, cash equivalents and restricted cash were $8.0 billion at March 31, 2023, compared with $5.1 billion at March 31, 2022. Cash and cash equivalents on the balance sheet were $7.9 billion, compared with $5.9 billion at December 31, 2022. Operating cash flow benefited from early receipt of April Medicare premiums, a higher Medicare Part D annual settlement, higher insurance liabilities and timing of pharmacy service-payable balances.
Investing cash flow was $(3.0) billion, including a $2.5 billion investment in VillageMD. Financing cash flow was $(37) million and included $962 million of share repurchases, $368 million of dividends paid and $1.5 billion of net proceeds from long-term debt issuance.
Total debt was approximately $32.5 billion at March 31, 2023, consisting of $3.4 billion of short-term debt and $29.1 billion of long-term debt. The debt-to-capitalization ratio was 42.2%, compared with 41.0% at December 31, 2022. The company was in compliance with its debt covenants and had no outstanding borrowings under its revolving credit facilities or commercial paper program.
As of March 31, 2023, the company reported $5.0 billion of undrawn revolving credit capacity, $5.0 billion of remaining commercial paper capacity and $8.1 billion of cash and short-term investments. In April 2023, it replaced its revolving facilities with a $4.0 billion facility maturing in 2028 and a $1.0 billion 364-day facility maturing in 2024.
Material changes, outlook and unusual items
- The company adopted LDTI accounting on January 1, 2023. Management stated that the impact on first-quarter 2023 results was immaterial; prior periods were restated. The cumulative adoption effect included a $139 million decrease to shareholders’ equity as of January 1, 2021.
- The company issued $1.5 billion of senior notes in March 2023, including $700 million due in 2026 and $800 million due in 2033.
- The company invested $2.5 billion in VillageMD in January 2023 and invested an additional $200 million in April 2023, bringing the total investment to $2.7 billion.
- Management expects approximately $1.4 billion of 2023 capital expenditures, primarily for technology. Required pension contributions for 2023 are expected to be immaterial.
- Management did not expect the 2024 Medicare Advantage final rates to have a material impact on consolidated 2024 results.
- The first-quarter dividend was $1.23 per share, compared with $1.12 in the prior-year quarter. The board declared a second-quarter dividend of $1.23 per share.
- The company repurchased 3.2 million shares for approximately $1.0 billion during the quarter. Repurchase authority was $2.5 billion as of May 4, 2023.
- Management reported no material operating or cash-flow impact from inflation, labor-market conditions or recent banking failures during the quarter, but continues to monitor these issues.
Risks, contingencies and legal matters
- Key risks include medical-cost trend, drug pricing and manufacturer relationships, pharmacy-network changes, inflation, interest rates, cybersecurity and privacy incidents, regulatory changes, government-sponsored programs, competition, capital-market volatility, debt levels and reinsurer credit risk.
- The company faces ongoing litigation and regulatory matters, including Elevance claims against Express Scripts and a Department of Justice Medicare Advantage risk-adjustment investigation and related False Claims Act litigation. The company stated that accruals for the described matters were not material, but an adverse outcome could materially affect results, financial condition or liquidity in a particular period.
- The Elevance matter’s remaining prior-authorization claims were scheduled for trial beginning December 4, 2023. The company stated that the potential aggregate loss range could not currently be estimated.
- Reinsurance recoverables totaled approximately $5.5 billion, creating exposure to reinsurer performance. The Berkshire reinsurance arrangement covering the variable-annuity business had approximately $3.1 billion of remaining capacity at March 31, 2023.
- Debt obligations, including scheduled interest and maturities, totaled approximately $48.5 billion through March 2051, including an expected $3.9 billion of payments during the remainder of 2023.
Investor verification checklist
- Reconcile GAAP shareholders’ net income and EPS with adjusted income from operations and adjusted EPS, particularly the effects of investment results, amortization and special items.
- Assess whether Evernorth’s revenue growth and specialty-pharmacy performance offset its declining adjusted margin and higher strategic investment spending.
- Monitor Cigna Healthcare’s medical care ratio, expense ratio, premium growth and Medicare Advantage enrollment.
- Evaluate liquidity after the VillageMD investment, debt issuance, share repurchases, dividends and upcoming debt maturities.
- Track medical-cost trends, pharmacy pricing and rebate economics, investment portfolio marks, interest rates and credit conditions.
- Review developments in the Elevance litigation, Medicare Advantage investigations and other regulatory matters.
- Confirm the effects of LDTI adoption and future actuarial assumption changes on insurance liabilities, accumulated other comprehensive income and earnings.