Cigna Corporation Form 10-Q Summary
Business context and reporting period
Cigna Corporation is a global health services organization providing pharmacy, medical, dental, behavioral health, insurance and related services. Its principal segments are Evernorth, U.S. Medical, International Markets, Other Operations and Corporate. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the same periods in 2020, and the balance sheet as of September 30, 2021, compared with December 31, 2020.
The results reflect the December 31, 2020 sale of the U.S. Group Disability and Life business, the April 2021 acquisition of MDLIVE, continued COVID-19 effects and the operating transition of the business toward health services and pharmacy solutions.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $44.3 billion, up 8% | $128.4 billion, up 8% |
| Shareholders’ net income | $1.621 billion, up 17% | $4.249 billion, down 2% |
| Diluted EPS | $4.80, up 27% | $12.32, up 6% |
| Adjusted income from operations | $1.936 billion, up 20% | $5.408 billion, down 2% |
| Adjusted diluted EPS | $5.73, up 30% | $15.69, up 5% |
| Operating cash flow | Not separately reported for the quarter | $2.916 billion, versus $6.056 billion |
- Pharmacy revenue increased 12% in both the quarter and first nine months, driven by branded-drug inflation, higher claim volume and the Prime Therapeutics collaboration.
- Premiums declined 4% for the quarter and 3% year to date, primarily because the sold Group Disability and Life business was no longer included.
- Fees and other revenues increased 16% for the quarter and 14% year to date, primarily from Evernorth pharmacy services.
- Net investment income rose 58% for the quarter to $468 million and 34% year to date to $1.169 billion, supported by strong limited-partnership investment results.
- Income from operations was $2.294 billion for the quarter and $6.398 billion year to date. GAAP operating margin was approximately 5.2% for the quarter and 5.0% year to date.
- Adjusted income from operations margin was approximately 4.4% for the quarter and 4.2% year to date, compared with approximately 4.0% and 4.7%, respectively, in the prior-year periods.
- U.S. Medical adjusted revenue increased 9% in both periods. Pre-tax adjusted income from operations increased 31% in the quarter but declined 14% year to date. The medical care ratio was 84.4% for the quarter and 83.9% year to date.
- Evernorth adjusted revenue increased 13% in both periods, while pre-tax adjusted income from operations increased 7% for the quarter and 11% year to date. Adjusted pre-tax margin was 4.6% for the quarter and 4.3% year to date.
- International Markets adjusted revenue increased 10% for the quarter and 9% year to date; pre-tax adjusted income increased 20% for the quarter but declined 8% year to date.
- Total assets were $154.3 billion and total liabilities were $106.8 billion at September 30, 2021. Shareholders’ equity was $47.4 billion.
- Cash and cash equivalents were $3.483 billion, down from $10.182 billion at December 31, 2020. Total investments were $25.1 billion, including $17.9 billion of debt securities.
- Short-term debt was $2.703 billion and long-term debt was $31.609 billion. The debt-to-capitalization ratio was 42.0%, compared with 39.5% at year-end 2020.
- Cigna reported $5.0 billion of undrawn revolving credit capacity, $2.3 billion of remaining commercial paper capacity and $3.9 billion of cash and short-term investments as of September 30, 2021.
Material changes versus the prior comparable period
- Quarterly shareholders’ net income and adjusted operating income improved, primarily due to growth in Evernorth, higher investment income and stronger U.S. Medical results.
- Nine-month shareholders’ net income and adjusted operating income declined modestly because of lower U.S. Medical earnings, COVID-19 impacts and the absence of earnings from the sold Group Disability and Life business.
- Per-share results increased despite lower nine-month net income because share repurchases reduced the weighted-average share count.
- Operating cash flow declined by $3.140 billion year to date, partly because of higher accounts receivable, timing of payables and approximately $800 million of tax payments related to the Group Disability and Life sale.
- Investing cash outflows increased to $3.734 billion, principally because of the $2.0 billion MDLIVE acquisition and investment activity. Financing cash outflows increased to $5.841 billion, driven primarily by $6.321 billion of share repurchases and $1.017 billion of dividends paid.
- Cigna repurchased approximately 26.5 million shares for $6.3 billion during the first nine months, including a $2.0 billion accelerated share repurchase transaction. Final settlement of that transaction was expected in the fourth quarter of 2021.
- The effective tax rate was 21.7% year to date, compared with 20.8% in 2020, reflecting the absence of certain prior-year tax benefits, partially offset by repeal of the nondeductible health insurance industry tax.
Guidance, outlook, commentary and risks
- The filing does not provide a clear numerical full-year earnings guidance figure.
- In October 2021, Cigna agreed to sell its life, accident and supplemental benefits businesses in seven countries to Chubb for $5.75 billion in cash. Closing was expected in 2022, subject to regulatory approvals and customary conditions. Cigna estimated approximately $5.4 billion of net after-tax proceeds and expected to use them primarily for share repurchases.
- Management reported that COVID-19 created net unfavorable effects in U.S. Medical, including testing, treatment and vaccine costs, lower Medicare Advantage risk-adjustment revenue, deferred-care normalization and pandemic-related disenrollment. The extent and timing of future effects remained uncertain.
- Medicare Advantage exposure remains significant. Approximately 87% of MA customers were in plans eligible for 2021 quality bonus payments, approximately 88% for 2022 payments and an expected 89% for 2023 payments.
- Key risks include medical-cost estimates and utilization, COVID-19 developments, competitive and pricing pressure, pharmaceutical manufacturer and network relationships, government regulation, Medicare risk-adjustment audits, litigation, cyber and privacy incidents, investment-market volatility, reinsurer credit risk and substantial indebtedness.
- The DOJ was conducting industry-wide investigations of Medicare Advantage risk-adjustment practices, and Cigna was responding to civil investigative demands. A related qui tam action remained pending; the DOJ had not intervened as of the filing.
- Cigna’s claim for more than $195 million of cost-sharing-reduction payments from the federal government remained pending. The separate $120 million risk-corridors claim had been resolved through payment in September 2020.
- Anthem litigation against Express Scripts alleges potential damages of up to $14.95 billion, based on the claims described in the filing. Express Scripts had filed a motion for summary judgment; the filing states that no tentative trial date had been set. Cigna reported that accruals for the disclosed litigation and regulatory matters were not material, but an aggregate loss range could not be estimated.
- Management stated that annual goodwill and intangible-asset impairment evaluations completed in the third quarter found reporting-unit fair values significantly above carrying values.
- Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the final settlement, share count and cash or share obligation under the $2.0 billion accelerated share repurchase agreements.
- Track completion of the proposed $5.75 billion Chubb transaction, regulatory approvals, net proceeds and subsequent capital deployment.
- Monitor U.S. Medical medical-cost trends, COVID-19 claims, Medicare risk-adjustment revenue and the medical care ratio.
- Reconcile GAAP results with adjusted operating income and adjusted EPS, particularly amortization, investment gains, debt extinguishment costs and other special items.
- Review the impact of MDLIVE integration, Evernorth growth and Prime Therapeutics-related volume on pharmacy revenue and margins.
- Assess liquidity after share repurchases, dividends, MDLIVE funding and commercial paper borrowings, including the April 2022 maturity of the $1.0 billion 364-day revolving facility.
- Follow the DOJ risk-adjustment investigation, the related qui tam action, the CSR reimbursement litigation and the Anthem-Express Scripts dispute.
- Evaluate investment portfolio sensitivity to interest rates, credit deterioration, private-market valuations, foreign currency movements and COVID-19-related economic conditions.