The Cigna Group (CI) Earnings Call Transcript & Summary

All right. I think we're ready for our next presentation. Welcome, everyone. I'm A.J. Rice, the health care service analyst at Credit Suisse. And we're very pleased to have with us today the management team of Cigna; Eric Palmer, Executive Vice President and Chief Financial Officer; and Alexis Jones, Director of Investor Relations. I want to turn it over to Eric to make a few comments, maybe just give us some perspective coming out of the recently reported third quarter.

Thanks, A.J., and a pleasure to be here virtually with everyone. Maybe just a couple of remarks to get us started here. As I'm sure you know, we just reported our third quarter results last Thursday, and it's another strong quarter for Cigna. I would highlight our strategy, accelerated by our recent launch of Evernorth positions us to continue to deliver in a really rapidly changing dynamic environment. We delivered strong financial results in the quarter, and we continue to take actions to support our customers, our clients, our colleagues and coworkers, health care professionals overall. And we've got, again, a really nice track record of supporting all of those in the environment around us. We've got confidence in our 2020 outlook. We updated our 2020 outlook, increased the revenue line, tightened our range from an earnings per share and moved it up at the midpoint. And we're on track to achieve our long-standing target of $20 to $21 of earnings per share for 2021. And overall, I would just note, we continue to have really strong financial strength and flexibility with robust cash from operations in both 2020 and 2021 and are positioned well there as well. So it's again, a number of positive elements of momentum as we continue to navigate through this disruptive time. But I'll stop by my comments there and happy to go where you'd like, A.J.

All right. Well, I appreciate those comments. And we live in a world of, what have you done for me lately? So people are obviously focused on your 2021 comments as well, which you've reaffirmed, your $20 to $21. You talk about a couple of puts and takes, I think, on that. Maybe I'll just have you review as you stand here today and think about next year, what are some of the tailwinds and headwinds that you're facing. And what would put you toward the higher end of that range that might break to the positive? Or what would be challenging that might put you toward the lower end of that?

Yes. I mean -- so I appreciate that, A.J. So stepping back, we provided our 2021 guidance already back in the spring of 2018 when we announced the combination with Express Scripts and have been pleased to be on track for that for some time. We'll have a lot more color and more detail to share as we get into our fourth quarter earnings and our normal timing of providing an update in the course of closing out the full year. But in the meantime, we'd just note that headwinds and tailwinds dimensions that we'd think about would be really more centered around the rate and pace of any changes from an economic perspective around us. And the other dimension would be just around the -- just the normal items in terms of utilization or things along those lines. But again, more to come as we get to the end of the year.

Right. And your -- you have committed, sort of a long-term earnings growth target that you have out there. What is that? And sort of what are the building blocks to that in its normal year, would you say?

Yes. Sure. So from a normal long-term perspective, we've provided some targets as part of our Investor Day back in the summer of 2019 already. And there, we outlined both the margins, the growth rates, et cetera, for our businesses, and then the expectation for what we would do for capital deployment on top of that. So in total, A.J., we expect to grow our enterprise on an average annual basis in the 6% to 8% range in terms of the core earnings growth of the enterprise. And on top of that then, put capital to work to get us to another 4% to 5% of earnings per share growth. So our long-term guidance is for 10% to 13% EPS growth on an annual basis, on average. Again, any given year could be put or take from that, but that's our long-term expectation.

And 2 things that we're floating around is incremental tailwinds for next year were, one, playing out the fourth -- the I guess, ultimate synergies out of the Express Scripts deal. I think at one point, you'd characterize that as about a $477 million synergy opportunity with -- if I remember the original number, it's sort of $90 million step-up from $20 million to $21 million or that would be the equivalent of a $0.20 boost to EPS. And then there was this discussion for a long time about stranded overhead that was going to go away and that, that was about $0.40 in headwind at the worst. What's the thinking on that? Are you on track or ahead or behind on the Express synergies? And how should we think about those discussions, previous discussions, around the overhead -- stranded overhead from some of the businesses?

Yes, sure. So from a synergies perspective, I would characterize this as on track. So no change in terms of the numbers that we put out as part of our initial expectations. We've continued to work through those other synergies for -- since announcing the combination and the likes since, again, I would say we're on track for those and tracking well from execution on achieving those synergies. In terms of the notion around stranded overhead or things along those lines, stepping back on that, we announced almost 2 years ago now, we provided a bit of an estimate related to the effect of overhead associated with the Anthem transition out happening a little bit sooner than we had previously contemplated. But I think of that notion as kind of in the past at this point. A lot's changed over the course of the last couple of years. We've effectively transitioned that book of business out. That's been done and behind us for some time now. We've effectively transitioned the Cigna volumes in. We've launched and built quite a successful collaboration with Prime and such. So again, we think of that as more in the past than anything else at this point, A.J. So again, like I say, we'll provide more detail on our 2021 guidance as we get to our year-end results. But I think of that notion as being kind of behind us at this point.

Okay. And a big part of the company's story is around operating cash flow, which, I guess, once you've completed the divestiture, you're looking at about -- of the Group Life and Disability business, you're looking at about $8 billion of operating cash flow in '21. You've had strong cash flow this year. A little bit has been diverted toward paying down a debt. It sounds like once you exit this year, you'll be at a capital structure, debt-to-cap and lease that you're comfortable with maintaining. So talk a little bit about your availability for capital deployment and some of the priorities there.

Yes. Sure. So I really appreciate that. I think this is a key point of strength of our business model and how we expect to operate going forward in terms of the cash that we expect to generate. So as you know, we've been committed to achieving debt-to-capitalization ratio of less than 40% within 2 years of the close of the Express Scripts combination and we're coming up on that. And we are on track to achieve the debt-to-cap ratio of less than 40% once we cross through that milestone and cross to the completion of our group insurance divestiture. So looking ahead then, we do expect to have meaningful amount of capital available for deployment. Now our priorities, from a capital deployment perspective, really remain consistent with the framework we've talked about historically in terms of ensuring that we continue to invest in ourselves, that we continue to invest in our capabilities and the like. I know we make sure that our subsidiaries are well capitalized. That's a key priority. We will look for opportunities for additional accretive combinations or M&A activity, things that could add into the portfolio. We've outlined some of those categories in terms of areas that we would be interested in. And then we look to return capital to shareholders beyond that. So again, that will be the framework we'll think about. And we'll look forward to providing more detail on how that evolves as we get into 2021 as well.

And I guess pre-Express Scripts, the company had not really looked seriously, it didn't seem like, at a dividend. We've been asked recently as we come out of the pandemic as you've got Express generating a lot of cash flow on that side of the business, what's the company's thinking about whether they would consider a dividend or not?

Yes. I think at the highest order, we think about what's the best use of our capital overall and look at this question and how we deploy our capital regularly. I think we've got a good track record here, and this will be something that we'll take up as we get past our current priorities and get into 2021. So again, think of that as something that we evaluate and we'll take up with -- and reevaluate it as we go forward.

There's not a philosophical reason that you wouldn't pay a dividend per se? It's just -- obviously, the company has been through a lot of -- with integrating a major acquisition in the last 2 years. So but there's not -- some companies have a predisposition. We'd rather do buybacks and dividends or whatever. Would you put Cigna in that class?

I would just say, as we look to the future, the company has a really strong position overall. And so again, I wouldn't put any sort of philosophical markers down. We've obviously been active in share repurchase even throughout the course of 2020. As we've seen, that is a really compelling use of the shareholder capital. But again, we'll -- there's no philosophical objections, kind of, one way or the other. We'll look at what the best approach is as we are in 2021.

Okay. Maybe just looking at the individual business lines a little bit. On the commercial side, it seems like there's 2 major questions, sort of, coming out of a year like this year. How do you develop an expectation around cost trend? And what is your confidence given we could have deferred procedures. We could have people still scared of going in. We could have -- we may well have a vaccine, it looks like, today. And we -- testing and all of that stuff. I think your book's a little more insulated from that issue, but I'll let you walk through it in the way you want to. But any thoughts on that? And then I'm going to come back and ask you on enrollment as well.

You bet. So yes, stepping back, I appreciate you talking about the book being a bit more insulated. If you step back in our commercial book of business, fully 85% of our customer relationships are in self-funded arrangements where we are working with employers to effectively manage their dollars. And that set of programs has worked well for us and has worked well for our clients. On top of that, then, out of that 15% or so that are insured or a meaningful portion of those are insured, what I'd call a participating arrangement where our clients benefit from favorability on experience and the like. And then even in the portion where it's guaranteed cost, so we would build up the rates based off of our customers' experience and our expectation for their experience in the future. So it's, again, very different than an entity that's got a lot more fully insured and kind of rating different things and big blocks or things along those lines. Now having said that, our orientation is to work through and to identify the costs for the particular group and work -- base those costs off of the characteristics of that group. We've seen differences in terms of costs and expectations around the impact of COVID that vary by geography. They vary by demographics. They vary by whether or not the workforce is able to work in a remote or isolated way, or whether they're out and engaged with others. So all of those types of things go into our approach. And just like we do, I mean, I'll say, "normal times", we'll work consultatively with our clients to find ways and to identify what we think the right premiums, the right cost and such will be for them -- with them going forward. So our philosophical approach, as you say, is to ensure that we are aligning the cost of our services up with our expected costs and approaching it that way. So it's again, very bespoke kind of client-by-client approach to estimating that. Now as you say, there are some variables in play. Certainly, the expectation for how and when there is changes in terms of treatment, how folks are accessing the health care system, what the -- at the book of business level is, the macro expectations for changes in employment and the like are all things that we have to take into consideration. And we'll look forward to providing even more specificity as we get into 2021. But at a macro level, our orientation is that the employment levels and the like will return to normal relatively slowly throughout the course of next year. Our orientation is that there will continue to be meaningful costs in place for -- for COVID in terms of cost of treatment and things along those lines in place as we get into in 2021. And those things are all factored into our thinking for the balance of this year as well as for 2021's kind of earnings range that we reaffirmed.

And when you think about the membership numbers on the commercial side, any comment or update or thoughts about the selling season, how that played out this year? We sort of generally hear that people decided to stay with the incumbent more often than not because of all the craziness of the pandemic, but maybe that changed as the selling season progressed. But whether we're talking about your self-funded business or what you're seeing in the select. And then obviously, you've got the issue of what the economy does. And I don't know whether ASO-type business tends to have less impact on the margin than more -- maybe small group and some of those areas do in an economy. But any thoughts on any of that?

Yes. Maybe a couple of things I'd pick up out of your comments there. So first of all, I would say that there's a bit of a dimension of a high degree of retention in our book of business and such. But to be clear, the selling season is active and the like. So while initially in the pandemic, I'd say kind of shopping was shut down. I think, things folks have figured out how to work through the dynamics and such. So again, I think there's probably a bit of -- an initial bit in the pandemic where there wasn't as much market activity. I think a lot of market activity has now resumed on that front. Now with respect to the kind of dynamics around the kind of makeup of the book of business or things along those lines. I think first of all, Cigna is not really a significant player in the under-50 market or the small group market, where I think there's been more disruption. So that's kind of one dimension. And two, I think there is a bit of a dimension where just the positioning of the industries of who our clients and such are made up of is a bit favorable relative to average. We have a very low number of our clients are in travel tours, restaurants and the like, some of the industries that have been most significantly impacted. So that's been a bit of a positive positioning factor for us as well.

Okay. All right. When you think about the Evernorth business, I mean, I think, we naturally think, oh, that's the PBM by another name. But I think long term, you've got other aspirations for that. It will morph into something more broad service orientation. Maybe, first of all, just take a minute and tell us what the thinking was in setting that up. And does that affect where capital is going to go, to build that out further? And how should we think about that?

Yes. Sure. So we announced Evernorth back in September in terms of being the next step forward for our services business. And I guess, a couple of things to step back. I would one, would just say, I think of Evernorth as the logical evolution of our health services strategy and was kind of in the -- in mind as we even approach the combination with Express Scripts. So we see there being a real opportunity to bring to market additional services that are helpful, whether they're marketed to other health plans to large employers, to health care professionals, to government agencies. We think there's a real opportunity to bring services across the board to those different constituencies. And obviously, we've got a world class-leading capability in a number of dimensions of pharmacy through the capabilities brought to us and that we've continued to build on within Express Scripts and Accredo and such in that domain. But there's opportunity for additional services as well, as we think about the opportunities and the continued build-out of eviCore and the solutions that they bring to market. That will be -- that will be and is part of the Evernorth's kind of portfolio. So again, we think that, that portfolio of services and solutions has the potential to continue to grow. And not only be a growth engine in terms of supporting and working with other -- again, other health plans, large clients, et cetera, but also being a collection of capabilities that help to power and drive the sustained results that we've had within our U.S. medical business as well.

Some of the other -- of your peers have branched into some provider assets. They've gone into data analytics and other IT services solutions, certainly home health and physicians. What -- are any of those off the drawing board? Or how would we think about things that move you away from the pharmacy services into some of these other areas? Are they on the table?