CI

Business Context and Reporting Period

Cigna Corporation, the registrant identified in the filing, reported unaudited results for the three months ended March 31, 2019. The company operates health services, pharmacy benefit management, medical, government, international, disability, life and related businesses. The filing reflects the December 20, 2018 acquisition of Express Scripts; 2018 segment information was restated, but the prior-year consolidated period did not include Express Scripts’ results.

Key Financial Metrics

Pharmacy revenue was $25.179 billion versus $717 million, primarily because Express Scripts was included for the first time. Premiums increased 11% to $9.971 billion, and fees and other revenues increased 79% to $2.450 billion. Amortization of acquired intangible assets rose to $743 million from $27 million, while interest expense and other increased to $452 million from $57 million.

Q1 2019 adjusted revenues were $33.429 billion, including $22.460 billion from Health Services, $9.195 billion from Integrated Medical, $1.394 billion from International Markets and $1.296 billion from Group Disability and Other. Consolidated pre-tax adjusted income from operations was $1.964 billion, with a 4.4% Health Services margin and a 12.7% Integrated Medical margin.

Balance Sheet, Debt and Liquidity

• Total assets were $154.348 billion, compared with $153.226 billion at December 31, 2018.
• Total liabilities were $111.897 billion, compared with $112.154 billion at year-end; shareholders’ equity was $42.408 billion versus $41.028 billion.
• Short-term debt was $2.915 billion and long-term debt was $37.571 billion at March 31, 2019. The debt-to-capitalization ratio was 48.8%, down from 50.9% at year-end.
• Cigna repaid $1.0 billion of term-loan principal during the quarter. The remaining term-loan principal was $2.0 billion.
• The company had a $3.25 billion revolving credit facility, with $22 million of letters of credit outstanding, and approximately $560 million of commercial paper outstanding.
• Management expected approximately $6.2 billion of capital available for deployment in 2019, including $2.1 billion of regulated-insurance-company dividends available without prior regulatory approval. Expected parent-company cash obligations for the remainder of 2019 were approximately $2.6 billion, excluding commercial-paper maturities expected to be reissued.

Cash Flow and Capital Deployment

• Operating cash flow increased primarily from higher net income, depreciation and amortization, pharmacy and service-cost payables, and lower inventories. The comparison was partly affected by an approximately $730 million early CMS payment received in Q1 2018.
• Investing activities provided $475 million, compared with $1.700 billion used in Q1 2018, mainly because of higher investment-sale proceeds and lower investment purchases.
• Financing activities used $2.534 billion, including $1.0 billion of long-term debt repayment, $1.048 billion of net short-term debt reduction and $462 million of share repurchases.
• Cigna repurchased 2.5 million shares for approximately $460 million during the quarter. The remaining repurchase authority was $390 million as of May 1, 2019.

Material Changes Versus the Prior Comparable Period

• The Express Scripts acquisition transformed the revenue and expense mix, adding substantial pharmacy revenues, pharmacy service costs, amortization and acquisition-related debt.
• Shareholders’ net income increased 50%, but diluted EPS declined because 137.6 million shares were issued to Express Scripts shareholders and interest expense increased.
• Adjusted income from operations increased 48%, principally from Express Scripts and improved Integrated Medical performance.
• Integrated Medical adjusted revenue increased 13% and pre-tax adjusted income increased 16%. Its medical care ratio worsened to 78.9% from 77.5%, while its expense ratio improved to 22.2% from 24.1%.
• International Markets adjusted income declined 5%, and Group Disability and Other declined 28%, reflecting higher operating or loss ratios, unfavorable foreign exchange effects and unfavorable disability claims experience.
• Integration and transaction-related costs increased to $136 million pre-tax from $60 million. The 2019 effective tax rate declined to 23.3% from 24.7%, primarily because the health insurance industry tax was suspended for 2019.

Outlook, Commentary, Risks and Unusual Items

• Management expected to reduce debt to the upper-30% debt-to-capitalization range within 18 to 24 months after closing the Express Scripts acquisition, using operating cash flow.
• Anthem terminated its pharmacy benefit management agreement effective March 1, 2019, with a 12-month transition period. Anthem and Coventry results are excluded from Cigna’s adjusted revenue and adjusted income measures as “transitioning clients.”
• Approximately 73% of Medicare Advantage customers were in plans eligible for 2019 quality bonuses; management expected this percentage to rise to 77% for 2020 bonuses.
• The federal health insurance industry tax was suspended for 2019 and is expected under current legislation to return in 2020. Cigna stated that final 2020 Medicare Advantage rates were not expected to materially affect consolidated 2020 results.
• Key risks include medical and pharmacy cost trends, drug pricing and rebate regulation, government-program participation, regulatory changes, integration and synergy execution, elevated acquisition-related debt, foreign exchange movements, investment-market volatility and cybersecurity or systems risks.
• The Department of Justice was investigating Medicare Advantage risk-adjustment practices, including medical chart reviews and health exams. Cigna was responding to civil investigative demands.
• Significant litigation remained pending with Anthem regarding the terminated merger and with Anthem regarding Express Scripts’ pharmacy benefit management contract. Cigna stated that potential losses could not be estimated for certain matters and that adverse outcomes could materially affect a particular period.
• The Amara pension litigation resulted in a one-time $142 million pension expense and increased the unfunded pension liability by approximately $140 million. Plaintiffs challenged aspects of the benefit methodology in April 2019.
• The company adopted new lease accounting guidance on January 1, 2019, with no material effect on net assets, retained earnings, income or cash flows.

Important Facts for Investors to Verify

• Assess the comparability of Q1 2019 and Q1 2018, particularly the inclusion of Express Scripts only in 2019 and the restatement of segment information.
• Reconcile GAAP income and EPS to adjusted income and EPS, including transitioning-client results, amortization, realized investment gains and integration costs.
• Monitor debt paydown, refinancing needs, covenant compliance and progress toward management’s upper-30% debt-to-capitalization objective.
• Evaluate the financial impact and timing of Anthem’s customer transition, including potential revenue and margin effects after March 1, 2020.
• Review the DOJ Medicare risk-adjustment investigation, Anthem litigation, Express Scripts contract litigation and disability claims regulatory review for changes in potential exposure.
• Track Medicare Advantage quality ratings, risk-adjustment settlements, the possible 2020 return of the health insurance industry tax and proposed pharmacy rebate regulations.
• Verify medical care ratios, pharmacy margins, generic utilization, specialty-pharmacy performance and the sustainability of Integrated Medical earnings improvement.