Cigna Corporation (NYSE:CI) Q3 2023 Earnings Call Transcript

Cigna Corporation (NYSE:CI) Q3 2023 Earnings Call Transcript November 2, 2023

Cigna Corporation beats earnings expectations. Reported EPS is $6.77, expectations were $6.66.

Operator: Ladies and gentlemen, thank you for standing by for the Cigna Group’s Third Quarter 2023 Results Review. [Operator Instructions]. We’ll begin by turning the conference over to Ralph Giacobbe. Please go ahead.

Ralph Giacobbe: Great. Thanks. Good morning, everyone. Thank you for joining today’s call. I’m Ralph Giacobbe, Senior Vice President of Investor Relations. With me on the line this morning are David Cordani, the Cigna Group’s Chairman and Chief Executive Officer; Brian Evanko, Chief Financial Officer; and Eric Palmer, President and Chief Executive Officer of Evernorth Health Services. . In our remarks today, David and Brian will cover a number of topics, including our third quarter financial results and our updated financial outlook for 2023. Following their prepared remarks, David, Brian and Eric will be available for Q&A. As noted in our earnings release, when describing our financial results, we use certain financial measures, including adjusted income from operations and adjusted revenues, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP.

A reconciliation of these measures to the most directly comparable GAAP measures, shareholders net income and total revenues, respectively, is contained in today’s earnings release, which is posted in the Investor Relations section of the cignagroup.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2023 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today’s earnings release and in our most recent reports filed with the SEC.

Before turning over the call, I will cover a few items pertaining to our financial results. In the third quarter, we recorded an after-tax special item charge of $171 million or $0.58 per share for charges primarily associated with our Medicare litigation settlement. We also recorded an after-tax special item charge of $19 million or $0.06 per share associated with the sale of our international life accidental and supplemental business to Chubb and an after-tax special item charge of $9 million or $0.03 per share for integration and transaction-related costs. As described in today’s release, special items are excluded from adjusted income from operations and adjusted revenues in our discussion of financial results. Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2023 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2023 dividends.

With that, I’ll turn the call over to David.

David Cordani: Thanks, Ralph. Good morning, everyone, and thank you for joining today’s call. We had another quarter of strong performance, and we remain on pace for a year of sustained momentum in 2023. With the strength of capabilities across our health services and benefits platforms, we are continuing to deliver on our mission for those we serve as we continue to grow our company. Today, I’ll highlight key drivers supporting our performance during the quarter our priorities and opportunities for expanding our impact and continue to advance our growth and our view of 2024, including some of the expected tailwinds and headwinds. Brian will share additional perspective about our third quarter performance as well as our outlook for the rest of the year.

So with that, let’s get started. In the third quarter, we delivered $49 billion in total revenue, adjusted earnings per share of $6.77, continued strong cash flow generation across our franchise, all while continuing to reinvest back in our business to fund growth, expansion and ongoing innovation. These results are strong, and they show how we’re continuing our track record of strong, sustained performance. With our Evernorth Health Services and Cigna Healthcare Benefits platform, we are executing well in a dynamic period and fueling customer growth with our deep clinical expertise, innovative solutions and breadth of market-leading capabilities. Our results during the quarter demonstrate how we’re continuing to deliver on our commitments for our customers and patients our clients as well as our shareholders.

We are raising our full year 2023 outlook for EPS, customer and revenue growth, as well as cash flow from operations. With our continued affordability initiatives, we are also now guiding to an improved medical care ratio for 2023. Our businesses are performing well, and we now expect to deliver adjusted earnings per share of at least $24.75 for full year 2023. Now I’ll turn to how we are working to sustain our growth and impact. With our durable strategic growth framework, we harness complementary capabilities from across the Cigna Group. We have scale to mature businesses that drive foundational growth, and businesses in faster-growing market segments that contribute accelerated growth. We fuel additional growth through cross enterprise leverage as we bring together the power of our talent, client relationships, differentiated capabilities and innovation from across our company.

Next, I’ll share how we have deliberately shaped our portfolio of businesses that are well positioned for today’s market needs. Additionally, I’ll highlight some of the ways we continue to drive our sustained success as we look to the future. Evernorth Health Services continues to demonstrate a proven ability to create value with differentiated pharmacy care and benefits capabilities. We had a strong pharmacy benefit selling season for 2024, and our teams are already actively engaged in the 2025 season. We are continuing to innovate and provide our clients with expanded choice as well as market-leading value. Many of the clients we serve leverage Evernorth’s unique suite of solutions to support the needs of their customers. Centene is one new relationship we discussed before, and our teams have been collaborating effectively on implementation work, which is going very well as we prepare to serve approximately 20 million Centene customers beginning in January.

We have a leadership position in addressing a substantial market opportunity with the expanded wave of pharmacological innovation that is reshaping the health care landscape. Many of the treatments that are coming to market are pressuring affordability with high list prices from drug manufacturers. At Evernorth, we are driving better experience, clinical outcome and affordability for patients and clients, given our deep clinical expertise, strong relationships with pharmaceutical manufacturers, as well as with physicians. The surge of demand for the GLP-1 drug class for weight management offers a good example of how we provide value. Our InCircle Rx program is an innovative solution that addresses the complexity and costs associated with obesity, diabetes and cardiovascular disease, a prevalent combination of conditions that’s also known as cardio diabesity.

Growing at Evernorth’s clinical expertise, breadth and depth of data and analytical insights, InCircle Rx guides patients to the most effective care and helps improve affordability for clients. Beyond the GLP-1 drug class, we expect to see many different manufacturers bringing forth a growing number of new drugs, including gene therapies, additional treatments for cancer as well as others for Alzheimer’s and other conditions. We are uniquely well positioned to make medicine more accessible, affordable and clinically coordinated for those we serve as well as to continue to drive growth for our company. Now in our international health business, another foundational business within a portfolio. We are supporting continued growth in target markets and expanding our portfolio of solutions.

During the quarter, for example, we introduced a new affordable health plan, customized specifically for the globally mobile seniors population. Additionally, in the foundational portfolio, our U.S. commercial business continues to harness cross-enterprise leverage capabilities for the benefit of their clients. As we look forward to 2024, we know that additional — in addition to affordability, one of the top priorities for many employers is expanding access, coordination and overall effectiveness of behavioral health programs and solutions. The benefit of our commercial clients to customers, we are leveraging innovations and capabilities that exist in our accelerated businesses. For example, stress, anxiety, [indiscernible], other mental health conditions create challenges for employers who need a healthy, engaged workforce, and we continue to expand the behavioral health solutions we offer through Evernorth Care businesses.

One of the newer solutions is Confide behavioral health navigator. It’s resonating well with clients, helping us both retain and win new business. Confide is guided by a proven model of a more proactive, high-touch service level, effective monitoring and targeted follow-up engagement. We will launch additional enhancements next year to provide digital tools that are personalized to the needs of individual patients that improve matching them with the right therapists and also offer greater convenience and accelerated scheduling opportunities. Additionally, as we continue to advance our focus on vitality, including our latest research addressing the capacity of individuals across multiple dimensions, it reinforces that mental health, for example, is one of the most significant drivers.

We know that adults without significant mental health challenges are 10x more likely to have high vitality. Now if you’re an employer, this means higher engagement, higher productivity, lower turnover as well as lower medical costs. In addition to addressing growing behavior health needs in Evernorth Care, we are also acting as a positive disruptor in care delivery and care management to improve experience, outcomes and access from a patient’s perspective. We’re developing innovative care models and clinical programs with continued investments, for example, to expand our digital and virtually-led capabilities, while making sure they are coordinated and connected with physical sites of care. For example, we continue to innovate and build on leading virtual care platform and plan to further accelerate new capabilities in 2024.

Turning to another accelerated growth business. I’ll touch on specialty pharmacy. Last quarter, we talked with you about Accredo’s extensive clinical expertise in the assets that provide us with a competitive advantage in this fast-growing specialty pharmacy market, which continues to be an important source of growth for our company. We also have additional capabilities contributing to our leadership and growth opportunities in this space. Accredo focuses predominantly on supporting patients who receive specialty drugs in their home. Sometimes, these complex medications also need to be administered in physician’s offices or hospital outpatient settings. Today, we support providers and health systems with our CuraScript specialty distribution capability and we continue to see meaningful growth in this aspect of our specialty pharmacy services.

Finally, an additional accelerated business is our U.S. government portfolio services. We are pleased with our recent Medicare stars quality rating showing that we again have over 2/3 of our members in 4-star or higher plans. This is recognition of the value we provide to seniors in supporting access as well as high-quality care. With open enrollment now underway for both Medicare Advantage and the individual exchange business, we are balancing competitive benefit offerings, targeted market expansion and pricing discipline activity. So to summarize, we are performing well across our diverse enterprise. And these highlights reinforce how our strategic framework guides us in accelerating innovation, expanding client relationships and continuing to broaden our reach.

Now as we look to 2024, we expect another strong year of performance for the Cigna Group as we build on momentum with EPS, revenue and cash flow growth. We’ll share more detailed guidance with you on our fourth quarter earnings call as we always do. The tailwinds and headwinds we expect in the year ahead remain largely consistent with our prior conversation, and we continue to be confident in our ability to deliver adjusted EPS of at least $28 per share in 2024. Notable tailwinds include growth-related contributions, including the full launch of Centene, which starts on January 1, a growing positive impact of biosimilar contributions, and an improved margin profile in our individual exchange business. In terms of headwinds, we will continue to make strategic investments across our portfolio of businesses to drive sustained innovation as well as position ourselves for long-term growth.

Now I’ll just briefly summarize our performance for the quarter. We had another strong quarter, and it builds on good momentum throughout the course of the year. We delivered adjusted EPS of $6.77, as well as strong customer, revenue and cash flow growth. Our company continues to deliver for the benefit of those we serve, and we have been able to increase our outlook for adjusted EPS to at least $24.75 for full year 2023, and we expect to deliver adjusted EPS of at least $28 in 2024, which is consistent with our past discussions. We are well positioned with a clear durable strategic framework that leverages the power of our differentiated services within our benefits portfolio and services portfolio. And now Brian will share additional perspective about our performance in the quarter and our outlook for the rest of the year.

Brian?

Brian Evanko: Thank you, David. Good morning, everyone. Today, I’ll review the Cigna Group’s third quarter 2023 results and discuss our updated outlook for the full year. We are proud to deliver another strong quarterly performance, including all of our most critical metrics running in line or favorable to expectations. With this performance, we are increasing our full year adjusted 2023 earnings outlook to at least $24.75 per share. Now looking at the quarter specifically, some key consolidated financial highlights include revenue growth of 8% to $49 billion, after-tax adjusted earnings growth of 8% to $2 billion, adjusted earnings per share growth of 12% to $6.77, and cash flow from operations of $2.8 billion. Our 2 growth platforms continue to perform well, with Evernorth posting a bottom line growth rate that improved sequentially as expected, and Cigna Healthcare delivering results ahead of expectations.

Regarding our growth platforms, I’ll first comment on Evernorth. Evernorth continues to deliver strong results, with third quarter 2023 revenues growing 8% to $38.6 billion, and pretax adjusted earnings growing 6% to $1.7 billion in line with expectations. Evernorth’s results in the quarter were driven by strong performance in our Specialty Pharmacy business, which continues to see double-digit year-over-year revenue growth. We continue to provide a variety of differentiated services and solutions that drive affordability and value for our customers and our clients, while also enhancing cross enterprise leverage across our Evernorth and Cigna Healthcare growth platforms. In addition, we continue to make strategic investments to support onboarding of new clients and expansion of existing client relationships, all while advancing our digital and care solutions capabilities to enhance customer experiences and provide clients with greater options to achieve their critical goals of access, quality outcomes and affordability.

Overall, Evernorth delivered strong third quarter results, consistent with expectations, and we remain well positioned as we look to the remainder of the year. Turning to Cigna Healthcare. Third quarter 2023 adjusted revenues grew 14% to $12.8 billion. Pretax adjusted earnings grew 16% to $1.2 billion, and the medical care ratio was 80.5%. Our medical care ratio was better than expectations, driven by our U.S. commercial business. More specifically, our favorable MCR performance was a reflection of ongoing disciplined pricing and continued affordability initiatives, ensuring patients get quality care in appropriate settings. An example of this is Pathwell Specialty, our site of care program that aligns patients who have high-cost specialty conditions with high quality, yet cost-effective care settings.

Moving to Cigna Healthcare Medical customers. We ended the quarter with 19.6 million total medical customers, which represents growth of approximately 1.6 million customers year-to-date. On a sequential basis, we delivered medical customer growth across all businesses within Cigna Healthcare, ahead of expectations. Overall, Cigna Healthcare continues to provide differentiated value and drive affordability for our customers and clients, and the results in the quarter demonstrate our strong underlying fundamentals. Now turning to our outlook for full year 2023. We have increased our expectations for full year 2023 consolidated adjusted revenues to at least $192 billion, driven by strong growth across our businesses. And we are increasing our full year 2023 adjusted earnings outlook to at least $24.75 per share.

In Evernorth, we continue to expect full year 2023 adjusted earnings of at least $6.4 billion. This implies mid- to high single-digit growth in the fourth quarter, consistent with our prior commentary. In Cigna Healthcare, we are raising our medical customer growth expectation to at least 1.6 million customers. This updated outlook represents the third consecutive quarter we have increased our customer growth despite the dynamic economic backdrop. We now expect our medical care ratio to be within a range of 81.5% to 82%, an improvement of 30 basis points from the high end of the prior range. And we continue to expect full year 2023 adjusted earnings of at least $4.425 billion. This outlook reflects our continued focus and execution across our Cigna Healthcare businesses.

Additionally, our full year 2023 enterprise adjusted SG&A ratio is now expected to be approximately 7.4%, an increase compared to our prior guidance as we further accelerate investments across both our Evernorth and Cigna Healthcare platforms. And finally, our full year 2023 adjusted tax rate is now expected to be in the range of 20.5% to 21%. Turning to our 2023 capital management position and outlook. Year-to-date through November 1, 2023, we have repurchased approximately 7.7 million shares of our common stock for approximately $2.2 billion. The continued strength of our cash generation gives us the confidence to increase our full year 2023 expected cash flow from operations by $1 billion to at least $10.5 billion for full year 2023. And our updated guidance assumes full year 2023 weighted average shares outstanding to now be in the range of 296 million to 298 million shares.

Our healthy balance sheet and cash flow outlook benefit from our efficient service-based model that drives strategic flexibility, strong margins and attractive returns on capital. Now to recap. Third quarter results were strong, reflecting execution across our diverse portfolio of businesses, giving us confidence to deliver on our increased 2023 adjusted EPS guidance of at least $24.75. While we will provide formal 2024 guidance on our fourth quarter call, we continue to expect 2024 adjusted EPS of at least $28. That said, I’d like to expand upon the tailwinds and headwinds David spoke to earlier. Our tailwinds include revenue growth, inclusive of the full launch of our Centene relationship starting January 1, and continued momentum of the biosimilar opportunity to drive more savings to benefit our patients and clients.

We also anticipate improvement in our individual exchange margins next year driven by our pricing actions taken in targeted geographies. Given these actions, we are likely to have fewer customers in the individual exchange business relative to where we are in 2023. These tailwinds will be partially offset by continued strategic investments across our portfolio of businesses to drive sustained innovation and long-term growth. We look forward to providing detailed guidance on our fourth quarter call. And with that, I’ll turn it over to the operator for the Q&A portion of the call.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Lisa Gill with JPMorgan.

Lisa Gill: I just really wanted to focus on a couple of things. One would be potential PBM legislation as we think about potentially an end of year bill. What are your thoughts on what could be included on the PBM side? And then secondly, David, you talked about InCircle Rx and talked about GLP-1. I think this is a real benefit, especially when I think about your PBM business for the self-insured market. Can you maybe just talk about the opportunities that you see there? And how you see that going forward? Are we seeing more people sign up for this in ’24, et cetera?

David Cordani: It’s David. I’ll take the legislative question, a little tee up relative to the GLP-1 question in the broader marketplace, and I’ll ask Eric to expand on the InCircle Rx program. Specific to legislation, as you know, we haven’t continued to expect to operate in a very active regulatory and legislative environment. As a result, we remain active and constructively engaged in the ongoing dialogue. And by way of framing, before I get the specific, potential legislative activities, we positioned our company with a breadth of capabilities, both modular configured and otherwise, and value creation and value capture capabilities that we believe will be able to thrive and grow under a variety of environments. I’d highlight an area where we have a lot of passion, and that is to ensure that and amplify the fact that any legislative regulatory activity should not remove choice, especially from the commercial market for employers as well as health plans given that they are large sophisticated organizations and fund the vast majority of the comprehensive benefit costs.

Having said that, there is intensified activity around transparency, and we are highly supportive of transparency so long it is targeted and constructive, meaning it could drive requisite level of actions on a go-forward basis. As it relates to the innovation that’s taking place, as I noted in my prepared remarks, we believe we are exceptionally well positioned. We took very deliberate actions 5 years ago by acquiring Express Scripts, 3 years ago by launching Evernorth, our continued ongoing investment in our specialty capabilities, et cetera, are all oriented around positioning toward both today’s class of drugs that we’re seeing like the GLP-1s, but future innovations, be they for Alzheimer’s, additional cancer therapies, gene therapies, et cetera.

And we believe we’re well positioned to support both commercial clients as well as health plans. InCircle Rx is a wonderful new innovation. It’s the first of its kind in the marketplace and highly supportive of clients. Eric, can I ask you to expand on that?

Eric Palmer: Sure, David. Lisa, It’s Eric. As you can imagine, there is significant interest and need from our clients on the InCircle Rx program and helping them with GLP-1s more broadly. They’re looking for our help with managing the affordability and ensuring that they get good outcomes from the spending on these treatments. As David teed up, I’m really excited about, and I think the InCircle Rx program is a great example of the power of the collective capabilities that we have within Evernorth. It’s the first of its kind, comprehensive solution that brings together our supply chain and procurement expertise, along with our clinical capabilities to target the right patient population, the relevant clinical markers, it targets the pharmacy network management, working to eliminate any waste or use in the system, and it works to engage patients with additional support that they need to help make changes that makes the impact last year.

And we wrap this all with a guarantee of clinical outcomes and such for our clients as well. So we’re — in short, we’re really optimistic and excited about the opportunity for this product brings to self-funded markets and would expect additional growth as we look into 2024 and beyond.

Operator: And this question comes from Justin Lake with Wolfe Research.

Justin Lake: I wanted to focus on the individual market for a second. Membership was up pretty significantly there, almost 100,000 members. Curious if that’s what’s driving your 200,000 member guidance increase? You’re expecting another big slug of those members in the fourth quarter. . And then can you remind us where you are on margins relative to target this year, and where you kind of — you talked about improving that? Do you expect to get into target margins next year? That would be helpful.

Brian Evanko: Justin, it’s Brian. Just to clarify, your second question was specifically on the individual exchanges, correct, in terms of the margin profile?

Justin Lake: Exactly.

Brian Evanko: Yes. Yes. So first off, as it relates to the Cigna Healthcare customer guide increasing by 200,000 customers, I’d start by saying we’re really pleased with the strong momentum across the health care book with our year-to-date customers running ahead of expectations. And that builds off a really strong year we had in 2022, where we added nearly 1 million customers in the Cigna Healthcare business, primarily in our U.S. commercial business. To your point, we have continued to show sequential growth in our U.S. government businesses in the third quarter, particularly individual exchanges. But we’ve also seen favorability in our U.S. commercial membership, as we have not seen the disenrollment levels we had incorporated into our prior outlook.

You may recall that we had been anticipating some economic weakness late in 2023, but this has not yet materialized in any notable impact on our customer volumes. So all in, we’re really pleased with 9% projected full year customer growth in Cigna Healthcare, a portion of which is related to the individual exchanges, but a portion of which is related to the strength in our U.S. commercial business. As it relates to the individual exchange margin profile, just for a little bit of context, you can think of this as being approximately a $5 billion block of business for us in 2023. And as we shared in our second quarter call, we anticipate the individual exchange book to run below our target margins in 2023, and our long-term target for this business is 4% to 6%.

A primary driver of this is the increased risk adjustment payable that we expect to owe, with the majority of that impact driven by our 2 largest states, notably Texas and Georgia. Now for 2024, we’ve taken sizable price increases in both of these 2 large states, and we would expect some degree of margin expansion in the individual book overall. The exact amount of the margin improvement will be a function of our geographic mix and our duration mix in 2024, and we’re likely to have fewer customers in the individual exchange products in 2024 compared to where we are in 2023. But hopefully, that helps a bit, as you think about how to model the ’24 Cigna Healthcare outlook.

Operator: Our next question comes from Kevin Fischbeck with Bank of America.

Kevin Fischbeck: Great. In the tailwind side of things. You talked about revenue growth, including the Centene launch. You’ve talked so far about the exchanges as well as kind of other kind of one-time items. Does that mean that we should generally think about the rest of the businesses growing more or less in line with those long-term growth targets? Or is there any other business where you would highlight a specific headwind or tailwind to the revenue growth outlook for next year?

David Cordani: Kevin, it’s David. I’d ask you to step back and first look at the consistency of our performance over the years relative to the portfolio. And if you look at the — our EPS CAGR, even over the past several years, with a slight downtick this year because of the investments we’ve made to onboard Centene and our outlook for 2024, we remain consistently within our growth algorithm of 10% to 13% on average EPS CAGR as we’ve delivered that over the last 3 years, 5 years and 10-year time horizon. We called out a few of the headwinds and tailwinds to try to amplify some of the components. I would suggest that the first component, the outsized growth, and specifically the Centene contribution, given the offset in 2023, you can view that one as more directionally additive.