Cigna Corporation (NYSE:CI) Q4 2022 Earnings Call Transcript

Cigna Corporation (NYSE:CI) Q4 2022 Earnings Call Transcript February 3, 2023

Operator: Ladies and gentlemen, thank you for standing by for Cigna’s Fourth Quarter 2022 Results Review. As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. We’ll begin by turning the call over to Ralph Giacobbe. Please go ahead.

Ralph Giacobbe: Great. Thanks. Good morning, everyone, and 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, Cigna’s Chairman and Chief Executive Officer; and Brian Evanko, Cigna’s Chief Financial Officer. In our remarks today, David and Brian will cover a number of topics, including Cigna’s fourth quarter and full year 2022 financial results as well as our financial outlook for 2023. As noted in our earnings release, when describing our financial results, Cigna uses certain financial measures, 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 cigna.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 our cautionary note in today’s earnings release and in our most recent reports filed with the SEC.

Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Regarding our results, in the fourth quarter, we recorded after-tax special item charges of $17 million or $0.06 per share for integration and transaction-related costs. We also recorded an after-tax special item charge of $56 million or $0.18 per share for costs associated with the sale of businesses. As described in today’s earnings 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: Thank you, Ralph. Good morning, everyone, and thanks for joining today’s call. 2022 was a pivotal year of performance and growth for our company. Evernorth further expanded its health service reach and impact, and Cigna Healthcare demonstrated tremendous resilience in the dynamic market. Together, the breadth and complementary nature of our portfolio enabled us to exceed our revenue and earnings outlook and return meaningful capital to our shareholders. This provides us with momentum as we begin 2023 and we expect another year of customer and earnings growth as we innovate and expand our broad portfolio of services and capabilities. Today, I’ll provide perspective about our key drivers for our 2022 performance and how we’re positioned for sustained growth going forward.

Then Brian will walk through additional details about our 2022 financial results and discuss our ’23 outlook. Then we’ll take your questions. So let’s jump in. As we reflect on our performance for 2022, I’m proud of what the company and Cigna team delivered overall. We grew full year revenues to approximately $181 billion. We delivered full year adjusted earnings per share of $23.27 reflecting a 14% rate of growth. We returned $9 billion to shareholders through a combination of share repurchase and dividends, and we sharpened the health service focus of our international business through the divestiture of our life accident and supplemental benefits businesses across seven markets. This performance demonstrates how well our Evernorth and Cigna Healthcare platforms are strategically positioned for sustained attractive growth.

In 2022, Evernorth delivered strong top and bottom line growth and also won, renewed and expanded several large multiyear client relationships for 2023 and beyond. The depth of Evernorth’s capabilities and expertise is highly valued by our clients and partners and enables us to deepen existing relationships across our entire portfolio of businesses. Cigna Healthcare, our health benefits platform also had a strong year, delivering customer growth along with differentiated medical cost performance for the benefit of our customers and clients. Our U.S. Commercial business had a standout performance achieving outsized customer growth while maintaining pricing discipline and driving margin improvement. This reflects our ability of our Commercial team to work consultatively to help employers of all sizes manage affordability, all while we support healthy, highly engaged employees for the benefit of their businesses.

Overall, we’re pleased with the strength of our 2022 performance across our enterprise. As we look to 2023, we continue to deliver and capture meaningful value in multiple ways. First, we expect sustained growth through our foundational businesses, Pharmacy Benefit Services, U.S. Commercial and International Health. These are mature scaled businesses that have established core relationships with corporate clients, health plans and governmental agencies. The value proposition for these businesses continues to resonate very well in the marketplace. In Pharmacy Benefit Services, we expect continued contributions in 2023 through the strength of our unique solutions and partnership orientation. With the strong selling season across our employer, health plan and governmental agency portfolio, we will continue delivering greater affordability to more customers and patients.

Additionally, we are investing meaningfully to put in place the teams and resources to make prescriptions more accessible and affordable for approximately 20 million Centene customers starting in 2024. In the U.S. Commercial business, we also had a strong 2023 selling season across all our market segments and across all funding types, self-funded risk and shared return arrangements. As a result, we anticipate driving another year of earnings, customer and revenue growth. And in International Health, we expect continued revenue and earnings contributions through our leadership in meeting the health and wellbeing needs in attractive growth markets and for the globally mobile. Second, we expect outsized growth from our accelerated businesses, Accredo Specialty Pharmacy, Evernorth Care Services and U.S. government.

These businesses have differentiated capabilities and platforms addressing accelerated secular growth trends. With Accredo, we were able to lower cost for patients and plans while preserving choice and flexibility for those who could benefit from new drugs. This includes our work to increase the availability of biosimilars. We’ve seen a handful of these lower-cost alternatives for biologic drugs launched in the past few years and understand the exceptional value they deliver for the benefit of clients and customers. 2023 will mark the start of a growing market opportunity for biosimilars, a trend that we expect to continue ramping up in 2024 and beyond. This includes HUMIRA, a treatment for a range of inflammatory conditions and one of the top-selling drugs globally over the past decade.

Now there’s a biosimilar alternative that we’ve co-preferred on a national preferred formulary creating significant savings opportunities for clients and customers. We will continue our leadership in advocating for greater availability of biosimilars, which over time, we expect to drive even more savings and benefit for patients and clients. In Evernorth Care Services, we are continuing to enhance and expand our portfolio of capabilities in care management and care delivery. Last year, MDLIVE virtual patient visits grew meaningfully, including a substantial increase in primary care visits. Demand and satisfaction with virtual care is rising and we will continue expanding our MDLIVE platform to provide even more of these options for the benefit of our customers.

Evernorth Care Services is also accelerating our value-based care capabilities through our recently announced partnership with VillageMD. Our wrapping Evernorth health service capabilities with VillageMD’s network of physicians, we will help guide more patients to high-quality care experiences at lower overall total costs. We expect this partnership to begin rolling out over the course of this year. In the U.S. government, another accelerated business, we expect strong growth in 2023 as we expand services and our geographic presence across a large and growing addressable market. This includes Medicare Advantage, where we will introduce enhanced services and benefits, and we nearly doubled the size of our provider network over the last two years as we expand into new geographies.

Additionally, as we have demonstrated continued consistent commitment to participating in the ACA exchange marketplace, in a dynamic environment, our Individual & Family Plan business, we will see outsized customer growth in 2023. The third growth driver for us in 2023 and beyond is enterprise leverage. This is where our businesses work together to create or capture more value than anyone could achieve on their own. Here, think about our ability to look across our enterprise and client relationships to broaden and deepen them by leveraging our entire suite of capabilities. A great example is a new large service-based relationship for Cigna Healthcare where we were able to expand our support for a long-served Evernorth client. Additionally, the depth of clinical expertise success in advancing innovation and breadth of solutions within Evernorth, all combined to help further improve Cigna Healthcare’s value proposition.

For example, in 2022, by harnessing Evernorth’s capabilities and programs, Cigna Healthcare delivered exceptional affordability, a key reason it continues to be competitively attractive option for employers of all sizes. This ability to deliver meaningful value is what makes Evernorth a partner of choice to a wide range of health plans, large employers and other clients. Another way we generate enterprise leverage is with our longitudinal portfolio data, which enables us to accelerate innovation and create new solutions for our clients and customers. This is specifically how we developed our Pathwell programs where we’re able to integrate Cigna Healthcare’s high-performing provider networks and benefits management with Evernorth’s analytical and clinical expertise as well as personalized digital support.

This equips Pathwell to lower cost while connecting patients with the right care, anticipating their future needs and helping them recover more quickly. Pathwell’s focus in 2023 includes musculoskeletal conditions and patients who take injectable or infusible biologic drugs. Early feedback here has been very positive, and we expect to support millions of patients throughout these programs with better experience, clinical quality, costs, resulting in improved overall value. These examples illustrate just some of the impact we’ve already achieved with our cross-enterprise leverage, and we’ll continue acting on additional opportunities in the years ahead to expand relationships, accelerate innovation for the benefit of our customers, patients and clients.

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Now I’ll briefly summarize. 2022 was a strong year of performance and growth for our company. With our Evernorth and Cigna Healthcare platforms, and our durable growth framework, we are well positioned to meet the needs of our customers, clients and partners as we look to the future. We are delivering on our commitments to our shareholders with our 2022 adjusted EPS of $23.27 and returning $9 billion in share repurchase and dividends. And we are also responding to evolving needs of those we serve in the coming years in the Healthcare environment of accelerated change. We have a differentiated innovation pipeline that will allow us to build on our momentum and create value, continue to advance our growth strategy. We are confident 2023 will be another year of strong performance for our company as we expect to deliver customer and earnings growth.

Our EPS outlook of at least $24.60 and the 10% increase of our quarterly dividend reinforced our commitment to sustained impact and growth for the benefit of all of our stakeholders. And with that, I’ll turn the call over to Brian.

Brian Evanko: Thanks, David. Good morning, everyone. Today, I’ll review key aspects of Cigna’s fourth quarter and full year 2022 results, and I’ll provide our outlook for 2023. We’re very pleased with our strong performance in 2022, reflecting focused execution and growth across both Evernorth and Cigna Healthcare, with each segment achieving pre-tax adjusted earnings growth in line or above our long-term targets. This positions us well for continued growth in 2023. Looking at full year 2022 specifically, key consolidated financial highlights include total revenues of approximately $181 billion, and adjusted earnings of $7.3 billion after tax or $23.27 per share, reflecting 14% growth from 2021. This is above the high end of our 10% to 13% long-term average adjusted EPS growth target.

Regarding our segments, I’ll first comment on Evernorth. 2022 marked another year of sustained growth and profitability in Evernorth, as our innovation, market-leading clinical capabilities and proven track record of delivering for clients and customers continue to resonate in the market. Turning specifically to fourth quarter results for Evernorth, revenues grew to $36.2 billion, while pre-tax adjusted earnings grew 6% over fourth quarter 2021 to $1.7 billion. Similar to the first three quarters of 2022, Evernorth’s strong results in the fourth quarter were driven by continued expansion of our accelerated growth businesses, led by our specialty pharmacy as well as our focus on affordability and delivering lowest net cost solutions for our clients and customers.

We also continued to make meaningful strategic investments, which serve to strengthen our client relationships, expand our services portfolio and advance our digital capabilities. Overall, Evernorth delivered another strong year, focusing on driving value for clients and customers and expanding our partnerships and relationships, all while achieving strong revenue and pre-tax adjusted earnings growth in line with our long-term growth targets. Our recently announced collaboration with Centene that begins in 2024 as well as other large multiyear contracts we renewed for 2023 further demonstrate the strength of our value proposition and proven partnership orientation in the market, providing long-term opportunities to grow while driving lower costs for our clients.

Turning to Cigna Healthcare. As we entered 2022, we shared with all of you our goals of both growing our customer base and expanding margins. I’m pleased to report we ended the year accomplishing both of these goals, as we grew our medical customer base by 5% or 923,000 lives to 18 million total customers, while improving full year pre-tax adjusted margins to 9%, a year-over-year improvement of 90 basis points. Fourth quarter 2022 performance contributed to full year results with adjusted revenues of $11.1 billion, pre-tax adjusted earnings of $500 million and a medical care ratio of 84%. Despite an elevated flu and RSV season, our medical care ratio was slightly better than our expectations, particularly within our stop-loss products. Our medical care ratio for full year 2022 of 81.7% improved 230 basis points compared to the prior year.

Both full year and fourth quarter results benefited from pricing discipline and affordability initiatives, including our clinical programs. Overall, Cigna Healthcare delivered for our customers, clients and partners, all while driving a strong year of customer growth and margin expansion with full year pre-tax adjusted earnings growth of 13%, which is above the high end of our long-term target range of 8% to 10%. Turning to Corporate and Other Operations. The fourth quarter 2022 pre-tax adjusted loss was $382 million. As a reminder, this segment previously included earnings contributions from the international life, accident and supplemental benefits businesses that we divested to Chubb on July 1, 2022. Overall, Cigna’s 2022 results were strong, reflecting focused execution for the benefit of our clients and customers.

As we turn to 2023, we continue to expect underlying growth in both Evernorth and Cigna Healthcare, while continuing to make strategic investments to drive future growth. For the full year 2023 outlook, we expect consolidated adjusted revenues of at least $187 billion. We expect full year consolidated adjusted income from operations to be at least $7.33 billion or at least $24.60 per share, consistent with our prior EPS commentary on our third quarter earnings call. I’d like to remind you this outlook includes a headwind from costs we will incur in 2023 to prepare for serving Centene’s customers. This contract starts on January 1, 2024, and we look forward to many years of partnership and collaboration as we drive affordability for their customers.

Additionally, with regards to earnings seasonality, we would expect a different cadence this year when compared to historical patterns, with earnings more back half weighted, in first quarter representing slightly above 20% of the full year EPS. For full year 2023, we project an adjusted SG&A expense ratio of approximately 7.3%. And we expect a consolidated adjusted tax rate in the range of 21% to 21.5%. I’ll now discuss our 2023 outlook for our segments. For Evernorth, we expect full year 2023 adjusted earnings of at least $6.4 billion. Tailwinds and headwinds are largely consistent with the points we highlighted on our third quarter earnings call. These include tailwinds from a strong selling season and value creation from the increased availability of biosimilars, building in the second half of 2023 and ramping in 2024 and beyond.

These are partly offset by headwinds from additional costs to support future growth, including implementation costs associated with onboarding Centene prior to receiving revenue, strategic investments in our accelerated growth businesses and the expansion of our relationships with the Department of Defense and Prime Therapeutics. In consideration of these tailwinds and headwinds, we expect adjusted earnings within Evernorth to be weighted more towards the back half of the year, with low single-digit year-over-year earnings growth in the first half, followed by mid-to-high single-digit year-over-year earnings growth in the second half. For Cigna Healthcare, we expect full year 2023 adjusted earnings of at least $4.4 billion, representing growth of at least 8% year-over-year.

We expect 2023 Cigna Healthcare earnings to be split closer to 50-50 between the first half and second half of the year. This outlook reflects the strength of our value proposition and focused execution in our business driven by organic customer growth and disciplined pricing. Key assumptions reflected in our Cigna Healthcare earnings outlook for 2023 include the following: regarding total medical customers, we expect 2023 growth of at least 1.2 million customers, with growth across each of our U.S. Commercial, Medicare Advantage and individual businesses. Within U.S. Commercial, we expect organic customer growth across each of our national, middle market and select market segments. And similar to 2022, the growth will primarily reflect fee-based customers.

We expect Medicare Advantage customer growth of at least high single digits, and we expect growth in our U.S. individual business of at least 300,000 customers, driven by geographic expansion, strong industry growth and the exit of competitors from certain geographies. We expect the 2023 medical care ratio to be in the range of 81.5% to 82.5% in part reflecting an increased mix of government business, which tends to have a higher medical care ratio compared to U.S. Commercial and International Health. Additionally, we would expect the first quarter 2023 medical care ratio to be within the full year guidance range. As it relates to Corporate and Other Operations, this segment has evolved given the divestiture of a portion of our international business last year that had been a positive earnings contributor in the first half of 2022.

As a result, we expect the full year 2023 pre-tax adjusted loss to more closely reflect annualized fourth quarter 2022 results. Now moving to our capital management position and outlook. In 2022, we finished the year strong and delivered $8.7 billion of cash flow from operations. We returned $9 billion to shareholders via share repurchases and dividends in 2022. Specific to share buyback, we repurchased 27.4 million shares for $7.6 billion. Additionally, our debt-to-cap ratio finished the year at 40.9%, an improvement of 80 basis points from year-end 2021. Now, framing our capital outlook for 2023. We expect at least $9 billion of cash flow from operations, reflecting the strong capital efficiency of our enterprise. This positions us well to continue creating value through accretive capital deployment in line with our strategy and priorities.

We expect to deploy approximately $1.4 billion to capital expenditures. These investments will include substantial commitments to our accelerated growth platforms of specialty pharmacy, Evernorth Care, and U.S. government. We expect to deploy approximately $1.45 billion to shareholder dividends, reflecting our increased quarterly dividend of $1.23 per share, up 10% from 2022 on a per share basis. Year-to-date, as of February 2, 2023, we have repurchased 1.6 million shares for $510 million. And our guidance assumes full year 2023 weighted average shares to be in the range of 296 million to 300 million shares. Our balance sheet and cash flow outlook remains strong, benefiting from our asset-light framework that drives strategic flexibility, strong margins and attractive returns on capital.

And now to recap. Our full year 2022 consolidated results reflect strong contributions and execution from both Evernorth and Cigna Healthcare. Our 2023 outlook reflects continued momentum across our segments as we invest to support long-term attractive growth. We are confident in our ability to deliver our 2023 full year adjusted earnings of at least $24.60 per share. And we continue to expect to deliver 2024 adjusted EPS of at least $28, consistent with our prior EPS commentary. With that, we’ll turn it over to the operator for the Q&A portion of the call.

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Q&A Session

Operator: Our first question comes from Mr. A.J. Rice with Credit Suisse.

A.J. Rice : I might ask a little bit more about where you’re at in the rollout of the VillageMD value-based contracting arrangements. I know when the deal was signed, contracts had to be signed in the various markets with the VillageMD folks. Have you largely been able to do that? Maybe give us anything you can about how you see that business ramping up in terms of contribution to Evernorth revenue and operating income over time. I assume it will be not particularly material this year, but as you look out over the next few years.

David Cordani : Good morning, A.J., it’s David. So first and foremost, stepping back, we’re pleased with the relationship and the ability to partner with a proven organization that has a nice growth track record. Two, you think about the work taking place collaboratively in phases, with the first phase of well underway working through and successfully securing approvals and contracts with building momentum, whereby we will put in place with Village, capabilities such that we could enable more targeted access to preferred or higher-performing specialists within the Cigna Healthcare Life portfolio and the direct serve portfolio of our relationships as Phase 1 and expand some of the capabilities to coordinate care, whether it’s expansion of virtual capabilities, expansion of behavioral capabilities or otherwise.

There’s a second phase of work, so the innovation will continue, whereby we work with Village to codify and build some new products that have exclusivity relative to their proven physician leadership and physician-directed programs that have even a more targeted value proposition not just for the benefit of Cigna Healthcare on the benefit side, but offered for the benefit of health plans we serve in a broader sense and for Village. One of the wonderful parts of the way the relationship is built through leveraging the Evernorth capabilities, we’ll be building a lot of the shared savings together with Village. And as such, be able to benefit from those shared savings through our Evernorth program. So to recap, good momentum already, good collaboration already, good progress already.

You’re right, we don’t market as a significant revenue or earnings driver in 2023 for us, but we will see progress in 2023, especially through the second half of the year and a building contributor in 2024, and we look forward to providing you more of an update as we look to 2024.

Operator: Our next question comes from Mr. Gary Taylor with Cowen.

Gary Taylor : I also wanted to ask about VillageMD. So David, we’ll keep you on that track just a little bit longer. My question — I guess I have a couple of questions about it. One is, I know historically, your inclination was Cigna didn’t need to own delivery assets even though your peers are increasingly moving in that direction, and this investment does obviously give you some ownership of a delivery asset. So just wanting to understand how much your thinking has evolved along those lines? And then secondly, I just kind of want to understand a little better long term. Village obviously has this large growth national expansion plan, how do you — but payer agnostic. So does it really just become a important partner and a part of a preferred primary care network? Or how do we think about the next several years, like what that relationship means to the Cigna Healthcare and to Evernorth?