Cigna Corporation — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report rather than a standalone quarterly filing; fourth-quarter 2019 data is presented in the unaudited quarterly financial table. Cigna is a global health services organization operating through Health Services, Integrated Medical, International Markets, and Group Disability and Other.
Business Context and Reporting Period
- 2019 was the first full year reflecting the December 20, 2018 acquisition of Express Scripts, compared with only 12 days of Express Scripts results in 2018.
- Health Services includes pharmacy benefit management, specialty pharmacy, home delivery, clinical solutions, and health benefit management services.
- Integrated Medical includes commercial, Medicare, Medicaid, individual, dental, behavioral health, and related specialty products.
- Cigna agreed in December 2019 to sell its Group Disability and Life business to New York Life for $6.3 billion, subject to regulatory approvals and other closing conditions.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|
| Total revenues | $153.566 billion | $48.650 billion | 216% |
| Shareholders’ net income | $5.104 billion | $2.637 billion | 94% |
| Net income | $5.120 billion | $2.646 billion | 93% |
| Diluted EPS | $13.44 | $10.54 | 28% |
| Adjusted income from operations | $6.476 billion | $3.557 billion | 82% |
| Adjusted diluted EPS | $17.05 | $14.22 | 20% |
| Income from operations | $8.077 billion | $4.160 billion | 94% |
| Effective tax rate | 22.1% | 26.1% | Down 400 bps |
| Operating cash flow | $9.485 billion | $3.770 billion | 151% |
Revenue growth was principally attributable to the full-year contribution from Express Scripts. Pharmacy revenues were $103.099 billion, premiums were $39.714 billion, fees and other revenues were $9.363 billion, and net investment income was $1.390 billion.
Segment Results
| Segment | 2019 Adjusted Revenue | 2019 Pre-tax Adjusted Income | 2018 Income | 2019 Margin |
|---|
| Health Services | $96.447 billion | $5.092 billion | $380 million | 5.3% |
| Integrated Medical | $36.519 billion | $3.831 billion | $3.502 billion | 10.5% |
| International Markets | $5.615 billion | $762 million | $735 million | 13.6% |
| Group Disability and Other | $5.182 billion | $501 million | $529 million | 9.7% |
- Integrated Medical customers increased 1% to 15.548 million; total medical customers increased 1% to 17.145 million.
- Integrated Medical’s medical care ratio increased to 80.8% from 78.9%, while its expense ratio improved to 22.9% from 24.7%.
- Health Services reported 1.224 billion adjusted scripts excluding transitioning clients, with an overall generic fill rate of 86.8%.
- South Korea represented 37% of International Markets adjusted revenue and 63% of that segment’s pre-tax adjusted income, creating geographic concentration.
Balance Sheet, Debt and Liquidity
| Metric | December 31, 2019 | December 31, 2018 |
|---|
| Cash and cash equivalents | $4.619 billion | $3.855 billion |
| Cash and investments | $27.098 billion | $32.829 billion |
| Total assets | $155.774 billion | $153.226 billion |
| Short-term debt | $5.514 billion | $2.955 billion |
| Long-term debt | $31.893 billion | $39.523 billion |
| Total liabilities | $110.395 billion | $112.154 billion |
| Shareholders’ equity | $45.338 billion | $41.028 billion |
| Debt-to-capitalization ratio | 45.2% | 50.9% |
- Cigna repaid approximately $5.2 billion of debt during 2019, including the $3.0 billion term loan used to finance the Express Scripts acquisition.
- Management targeted further deleveraging into the upper 30% range by the end of 2020 using operating cash flow.
- The company had approximately $5 billion of cash and short-term investments at year-end, including approximately $1.1 billion held by the parent or nonregulated subsidiaries.
- The Group Disability and Life sale was expected to generate approximately $5.3 billion of net after-tax proceeds, intended for debt repayment and share repurchases.
- Cigna repurchased 11.8 million shares for approximately $2.0 billion in 2019 and had $3.5 billion of repurchase authority as of February 26, 2020.
Material Changes Versus the Prior Comparable Period
- Express Scripts materially changed the scale and composition of Cigna’s results, driving most of the increase in revenue, pharmacy costs, amortization, and operating income.
- Interest expense increased to $1.682 billion from $498 million due to acquisition-related debt and assumed Express Scripts debt.
- Amortization of acquired intangible assets increased to $2.949 billion from $235 million, primarily due to the Express Scripts acquisition.
- Adjusted Health Services income increased to $5.092 billion, but the segment’s adjusted margin declined to 5.3% from 5.8% because 2019 included a full year of Express Scripts results.
- Integrated Medical adjusted income increased 9% to $3.831 billion, supported by commercial growth and specialty products, but the medical care ratio worsened.
- Group Disability and Other income declined 5% due primarily to unfavorable disability claims experience.
- Operating cash flow increased substantially, while investing cash outflows fell sharply because the Express Scripts acquisition was completed in 2018.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $180 million of annualized after-tax savings from the organizational efficiency plan, with a substantial portion expected in 2020. The plan generated a $207 million pre-tax, $162 million after-tax charge in the fourth quarter of 2019.
- The federal health insurance industry tax was suspended for 2019, reducing the effective tax rate. Cigna expected approximately $460 million of such tax in 2020; the tax was repealed effective 2021.
- Approximately 73% of Medicare Advantage customers were in plans qualifying for 2019 quality bonus payments. Cigna expected this proportion to rise to 77% for 2020 payments and 87% for 2021 payments.
- Anthem terminated its pharmacy benefit management agreement effective March 1, 2019. The transition was substantially complete by December 31, 2019, and related results were excluded from certain non-GAAP measures in 2019.
- CMS and the Office of Inspector General had ongoing risk-adjustment data validation audits, and the Department of Justice was investigating industry risk-adjustment data submission practices involving Cigna and other Medicare Advantage organizations.
- Cigna carried an allowance for $109 million of ACA risk-corridor receivables. The outcome of related litigation remained uncertain.
- Pending litigation included disputes with Anthem involving the terminated merger and Express Scripts’ former pharmacy benefit management agreement. The filing states that aggregate potential losses could not be estimated.
- Key operating risks include medical and pharmacy cost volatility, pricing pressure, government regulation, Medicare funding and Star Ratings, pharmacy manufacturer and network concentration, cybersecurity and privacy incidents, foreign currency and South Korea exposure, reinsurance credit risk, and integration of Express Scripts.
- Goodwill and other intangible assets totaled approximately $81 billion, or 52% of consolidated assets. Future impairment charges could materially affect earnings and equity if acquired businesses underperform.
- The filing identifies no material goodwill or intangible impairment in 2019 and states that internal controls over financial reporting were effective.
Investor Verification Checklist
- Verify the extent to which 2019 and subsequent results are comparable after the Express Scripts acquisition and the treatment of transitioning Anthem and Coventry business.
- Reconcile GAAP results with adjusted income from operations, adjusted revenue, segment margins, and all excluded special items.
- Monitor debt repayment, refinancing needs, interest expense, leverage targets, and the timing and regulatory approval of the Group Disability and Life divestiture.
- Assess whether the expected $180 million efficiency savings are realized and whether restructuring costs remain within expectations.
- Review medical cost trends, medical care ratios, pharmacy gross margins, generic utilization, and claims reserve development.
- Track Medicare Advantage Star Ratings, CMS reimbursement, RADV audits, DOJ investigations, and ACA-related litigation.
- Evaluate concentration risk in South Korea, major pharmacy networks, government programs, pharmaceutical manufacturers, and large clients.
- Review the carrying value and impairment sensitivity of goodwill and acquired intangible assets, as well as long-term disability reserve assumptions.
- Confirm cash availability at the parent level after considering regulatory restrictions on subsidiary dividends, debt maturities, pension obligations, and contractual commitments.
