The Cigna Group (CI) Earnings Call Transcript & Summary

Hi, everyone. Good morning, and thank you for joining us today at day 3 of Morgan Stanley's Global Healthcare Conference. I'm Ricky Goldwasser, Morgan Stanley's healthcare services analyst. And before we get started, please note that this is a webcast for Morgan Stanley's clients and appropriate Morgan Stanley employees only. Webcast is not for members of the press. And if you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com. And if you have any questions, please reach out to your Morgan Stanley's sales representative. And with that out of the way, I'm very pleased to have Cigna CEO, David Cordani, here with us today. 2020, David has demonstrated really the company's strong ability to execute and work with clients despite a very challenging year on the COVID front for clients and patients. So I wanted to -- David, to turn it over to you to spend a few minutes talking about year-to-date, about strategies, some introductory remark before we go to Q&A. And for everybody on the webcast, if you have any question for David, please type it into the browser and I will be happy to relay it. David, on to you.

Good morning, Ricky. Thank you for hosting this, and hello, everyone. Thanks for spending time today. I'll make my remarks relatively brief because I know there's a lot of Q&A ahead of us. But I do want to frame that Q&A. First and foremost, Cigna Corporation has been and continues to be guided by our mission. Our mission is to improve the health, well-being and peace of mind of those we serve. And to that end, we strive to be champions for affordable, predictable and simple solutions for all that we serve around the globe today, having approximately 180 million customer relationships around the globe. In this very disruptive environment, both the COVID pandemic as well as the racial tensions that we confront, both in the United States and also outside of the United States, I'm quite proud of the way Cigna has stepped forward in a whole variety of ways proactively, in many cases, leading, putting our customers, our client, our partners and our communities front and center in terms of what we do, how we do it, et cetera, on behalf of our clients, our customers and our communities from that standpoint. Now as we think about our business portfolio, today is a really exciting day. Our announcement of Evernorth represents an exciting next chapter for our corporation. Evernorth represents codification of our commitment as well as the breadth of what we have in our current portfolio around health services. The successful integration of Cigna with Express Scripts, now almost 2 years since we closed that combination, puts us in position to take the next step on our strategic journey. And Evernorth is a brand codification of what that is in terms of bringing together capabilities around pharmacy services, care management services, benefit management services and data analytics services, both in existing capabilities, new innovations we're standing up and will be further fueled by additional innovations, partnerships, which is core to who we are as well as potentially some acquisitions. That portfolio of services will be oriented toward the needs of health plan clients, core clients, of course, as well as governmental entities, and increasingly, over time, physicians and delivery systems that are taking performance-based risks and challenges. Now that complements our existing growth platforms of our U.S. commercial platform, our U.S. government platform and our international platform and our third -- our fourth platform, our health services portfolio. Taken as a whole, that portfolio of services continues to put us in position to deliver our long-term goals and objectives, which is 6% to 8% revenue growth and 10% to 13% EPS growth. Now I would note that we have a track record of not just putting the objectives on the page but delivering. For example, over the last decade, we have delivered that 10% to 13% EPS growth objective. Now punching it down to specifics. We reiterated our 2020 EPS outlook of $18 to $18.60 in this disruptive environment, all while we deliver significant value back to our clients and customers. For example, our ASO clients have benefited by $2 billion of lower spend in the first half of the year. And as we noted in our second quarter call, we returned an additional almost $300 million back in support of our clients in this unique environment that we operate in from that standpoint. Additionally, we remain focused on our 2021 EPS objective of $20 to $21 per share, and we remain on track to achieve our deleveraging objective by the end of this calendar year, so fourth quarter 2020, a short 24 months post-closing or combination. My final comment is that puts us in position to have our balance sheet where we seek to have our balance sheet and we're in position to generate well in excess of $8 billion of operating cash flow in 2021, which represents a significant shareholder value creation opportunity. So taken as a whole, we are quite excited about our performance this year in a very challenging environment and what we're doing for our customers, our clients, our partners and our communities. Two, Evernorth is an exciting step forward for our franchise and is on strategy as we broaden our health service portfolio. That business will be led by Tim Wentworth as its CEO, and it leverages a broad portfolio of existing services and will be expanded through new innovations, partnerships as well as acquisitions that fit in the pharmacy service space, the care management space, the benefit management space and the data analytics space. With that, Ricky, I'll turn it over to you. And I look forward to exploring what's on your mind and the investors' minds.

So David, I would like to start a few with Evernorth. I'd say that innovation and partnership have really been kind of the key themes in conference -- in the first couple of days of the conference. And Evernorth, I think, fits right into that theme. So why create Evernorth? And why now?

Yes. So I'm going to go to the why now first, and then the why, we're working back. So as I indicated, almost 2 years ago, we closed the combination with Express Scripts. We were very clear of what we were seeking to accomplish relative to that combination. But first and foremost, in 2019, it was heads down focused on execution because we had 2 very large growing health service platforms that we needed to ensure that we delivered phenomenal results for our clients, our customers, our patients and our partners. And I'm proud to say we did it in 2019, led by our colleagues around the globe from that standpoint. Our client retention levels and our customer retention levels and our market-leading medical cost trend and pharmacy trend and service results reinforced that in 2019. That put us in a position to have another attractive growth year in 2020, which put us in a position to get ready to unveil our strategy. We've worked with our leadership team because alignment of a corporation in our breadth is quite important throughout the second quarter of this year. And this marks the right time to roll out Evernorth off the health and successful integration of our 2 companies and complementary leverage. It also is reinforced by the health service needs, as you articulated. Those we serve, health plan clients, corporations, governmental entities, individual consumers and health care providers, are seeking more coordinated and leveraged services to create more value for them. Example. Almost every pharmacy event is a behavioral event, yet traditional pharmacy management services tend not to leverage the best of behavior health services on behalf of the patient or customer. We have leading pharmacy services and leading behavioral services. Evernorth will bring the best of those 2 capabilities together for the benefit of a patient and therefore, ultimately, for the benefit of either health plan and corporate client or government intermediary who is financing some of those solutions. So it's an evolution of our strategy. It's the right time. The market need is there, and our core capabilities are there. Ricky, last comment I would make. We seek to be the undisputed partner of choice. It is a clear, declarative statement that we have made for years, and we have many examples of the way in which we partner to create shared value. Evernorth is an example of how we seek to continue to partner to create value. But that means with those we serve, be it a health plan or a corporate client and who we seek to work with to create that value. And you'll note, you'll probably peel it back, we have a significant number of partnerships with entities of all sizes, where we seek to create shared value for the marketplace. And as long as we create differentiated shared value, we get to capture a reasonable amount for the benefit of our shareholders.

So David, we're already getting interest from investors in Evernorth and a few questions that have come through. So first of all, is Evernorth initially focused on servicing Cigna fully-insured customers? Or would it also be targeting self-insured?

So let's separate for a moment. Think about 2 large leading brands or market positions for our corporation. Cigna from a health benefit standpoint, largely going after the integrated market for commercial and the government business; and then Evernorth, a service portfolio with pharmacy services, care management services, benefit management services and data and analytics services. Evernorth's primary customer base is serving non-Cigna customers and clients. Cigna could contract to consume those services like any other client outside, be it a health plan, a corporation, a governmental entity, an integrated delivery system. So don't think about it as servicing guaranteed cost or ASO or otherwise. Think about Evernorth as a separate business portfolio of capabilities that is focused on the non-Cigna marketplace, if you want to use Cigna as guarantee cost to make it really rigid, and create value for those buyers, health plan, corporation, governmental entity, risk-bearing health care provider. And then think about the fact that Cigna, in the traditional sense of the way the question was asked, can contract with or seek to buy services from Evernorth, based upon what Cigna needs from that standpoint.

David, it sounds like an agnostic platform that allows you to expand your market reach. So the follow-up questions that we got, and I think you answered some of it but I'll still pose it, is when you think about competitors in the marketplace, what kind of effect is the -- how are you differentiating with Evernorth versus what's available in the marketplace today? And I think you talked about fertility service, for example. How is it different from what you do today?

Yes. So to your prior comment, you used the word agnostic. I appreciate that. I think that's directionally correct. We talked about open architected. So we've talked about open architected since the day we put the 2 companies together because we believe that the addressable market is much broader than the traditional view of what people might do in insurance orientation because it's more of a health services orientation. Now back to -- I think the core of your question is how does it differentiate itself in the marketplace. I'll give you 3 major buckets. One, it's a customer or client-centric orientation to all solutions. So Evernorth will not be pushing product. It will not be going to market with a portfolio of products and trying to identify buyers. Evernorth goes to market through a need set and working in a client-centric or customer-centric way of saying how do we put a set of solutions together that best meet your need. So it's a client-oriented, solution-oriented organization and configuration, which is very different than a product push organization. Two, there's a relentless orientation to data-driven innovation. The fertility benefit services, we'll come back to in a moment, is a data-driven innovation from that standpoint. And then third, a relentless orientation to open framework and partnering. Most of who we compete with seems to manufacture their own and turn it into product and sell product. We'll manufacture some of it ourselves. We'll innovate it ourselves. Look, we will have an open architected framework of partnering because that creates accelerated share leverage from that standpoint. So customer-centric solution, data-driven innovation, relentless open architected partnership orientation comes to bear relative to it. And in the case of the fertility services, orientation on partnership is going back to the pharmaceutical manufacturer and seeking to better align the value-based outcomes; working with the clinical delivery system, where now it's an aggregate enterprise to have expanded services around the fertility interventions; and then coordinating the -- both care management and the behavioral management services around that, that is patient-centric or client-centric. That's an example of what is on the shelf today within Evernorth, but the product portfolio will continue to grow over time.

Very helpful. Next on investors' minds is that 2020 enrollment in utilization trends. So can you talk about what you're seeing in terms of commercial enrollment now that we are more than 2/3 of the way done with the third quarter? How have things trended relative to the expectations that you laid out on the second quarter where -- and how is the utilization to date is kind of like shaping your view of the rest of the year?

Sure. So just to put it in context, one, at a franchise level, we are delighted with our aggregate revenue performance for 2020. And I would note that we entered the year with strong outlook, and we strengthened that outlook throughout the course of the year. So growth for the franchise is quite strong. Two, within the context of enrolling growth, I'll come to commercial in a second, we're really pleased to see the step function we made relative to Medicare Advantage growth, where we set forth the 5-year objective of growing Medicare Advantage organically by 10% to 15% customer growth per year. In 2020, we're at or above that threshold from that performance. As it relates to commercial performance in the medical portfolio, we expected this to be a very challenging year given the pandemic. The first half of the year, as we talked about in the second quarter, the results of, if you will, disenrollment were less acute than I think many people anticipated, and in part, less acute than we anticipated. Now part of our less acute performance or less disenrollment was driven by where we play. We have less concentration in the sectors that were initially most disrupted through COVID: travel, leisure, et cetera, from that standpoint. Now as it relates to the second half of the year, you recall from our second quarter call, we said we expect to see further pressure on disenrollment. And that was fully factored into our outlook for the full year, when we reiterated our revenue guidance as well as our earnings guidance from that standpoint. But we said we expected to see further pressure on disenrollment as furloughed employees either -- some made their way back to full employment, but some went beyond furlough to full unemployment from that standpoint. An early look at that were through July and August. The rate of erosion is a little slower than we even anticipated on that. And I'll come back to 2 headlines that I think are quite important: One, the durability of the U.S. economy, the U.S. economy and the strength of corporations in terms of seeking to innovate their way through this pandemic. And secondly, I think something that gets a little less attention than it should get, employers are working in extraordinary ways to help their employees in a variety of ways, either avoiding layoffs, extending furloughs, having continuity benefits, et cetera. And I think one of the messages around that is it underpins the strength of the U.S. employer market and the philosophical approach of employers at large relative to their employees, whether it's an obligation they feel in or an expectation that they could be returning majority of the employees back to the workforce as their volumes ramp up. So as a headline, we expected it to erode throughout the course of the year. That pressure exists. Thus far, through the third quarter, the rate of erosion is slower than we anticipated or better.

So David, that actually brings an interesting question because it really talked about the strength of the U.S. employer and the philosophical approach in -- when there is a public health crisis to provide those benefits. How do you think this is going to evolve into next year?

And I want to pinpoint that when you say this is going to evolve, what part of this?

That approach. The employers have been very open to extending benefits and really thinking about the member and the employee and the need to provide health care benefits.