The Cigna Group (CI) Earnings Call Transcript & Summary

Hi, everyone, and welcome to this next session at day 4 of Morgan Stanley's Global Healthcare Conference. I'm Ricky Goldwasser, and I am Morgan Stanley's health care services analyst. I'm really pleased to have here with us today, David Cordani, CEO of Cigna; and Alexis Jones, Head of IR. Before we get started, just wanted to highlight an initiative that's really close and dear to our hearts here at Morgan Stanley, and that's the Morgan Stanley Alliance for Children's Mental Health. It uses the resources of the Morgan Stanley Foundation in collaboration with the expertise of our key nonprofit member organizations in the mental health space to help address children's mental health, specifically the far-reaching challenges of stress, anxiety and depression. And now, more than ever, we need urgent coordinated efforts to prevent the existing global crisis in children's mental health from escalating. And all of us can play a role in this effort. So we really encourage everyone to learn more about the issue that children are facing around their mental health and become advocates for change, and you can learn more by visiting our website. We have a dedicated area, Mental Health Alliance. And with that, I'll just make a quick sort of disclosure here. The webcast is only for Morgan Stanley's clients. It's not for members in the press. And for any important disclosures, you can go to our website at the Research Disclosures section. And with that, David, great to have you here, and I'd like to turn it over to you for just some introductory remarks to help frame our conversation.

Sure, Ricky. Thanks for having us here today, and I look forward to our conversation. Just a few comments to frame our dialogue here today. First and foremost, I'm proud of the way Cigna has been able to show up and perform and deliver for our clients, our customers, our partners, our patients around the globe during these interesting environment of the COVID pandemic and the prolonged COVID pandemic, as well as the way our colleagues are stepping up each and every day in support of those we serve and obviously, Cigna supporting our colleagues. We recognize the environment remains fluid from that standpoint, but we're also proud of the fact that our growth strategy, which is guided by our mission, continues to guide us, which has us focusing in 3 areas: one, ensuring that we deliver differentiated value for our clients and customers each and every day, that helps to lead our growth strategy relative to outstanding retention and expansion of relationships as well as new business adds; second, relentlessly partnering and innovating. This environment requires a relentless path toward innovation, and we augment that with an open orientation relative to proof of partnerships; and then third, expanding our addressable markets. We've positioned our business portfolio to have significant opportunities. Now in 2021, we saw varied performance in the second quarter. Although -- while our MLR was up in our U.S. medical portfolio of business, our broad portfolio strength enabled us to deliver on the aggregate results we committed to The Street as well as reaffirm our full year outlook of at least $20.20 from an EPS standpoint. Additionally, off of that backdrop, to provide a visibility to 2022 that we expect to have at least 10% EPS growth, which remains in our growth algorithm of the 10% to 13% off of that at least $20.20. That is really underscoring the power and potential of our broad portfolio. It's led by Evernorth, which continues to perform extremely well within our portfolio, sustained strong growth in our U.S. medical portfolio and then stable consistent growth in our international portfolio. And then lastly and very importantly, we've positioned our business portfolio to be a high service-oriented density portfolio, which enables us to convert a meaningful portion of our earnings to operating cash flow and, ultimately, deployable cash flow. We're going to generate $50 billion of operating cash flow between 2021 and 2025. And in this fiscal year alone, in fiscal year 2021, we're giving back about $7 billion to shareholders just in this year alone through dividends and share repurchase, including our recent $2 billion ASR. So all in, proud of the portfolio, proud of what we're able to deliver in the marketplace and we recognize an opportunity for further growth exist within the portfolio, even as we step into 2022 in this environment. And finally, that cash generation piece of the equation is a very deliberate strategic positioning and the deployment we've yielded in 2021 in excess of $7 billion is quite attractive. With that, Ricky, I'll hand it back to you.

Great. Thank you, David. So wanted to start with kind of like just addressing sort of the near-term issues that we're seeing in the industry. So stability, predictability, really been the core tenets of sifting the portfolio and the investment story. Last quarter were somewhat of a deviation that were impacted by the uncertainties in the market. You have pointed to higher costs across your book of business. Can you just help us understand what surprised you in the quarter in that ASO business? And what evolved according to plan?

Sure. So let's look at it in aggregate first and click down into your question. In aggregate, the breadth of the portfolio and the strong positioning of the portfolio delivered on our results in the second quarter and puts us in position to deliver on our commitment for the full year. So as the variability comes into play that you articulate, that I'll come back to in a moment, the breadth of our service portfolio augmented against our U.S. medical portfolio enabled us to deliver on the full year commitment. Within the quarter, to be very specific to your question, we expected fiscal year 2021 to start with a more elevated medical care ratio. So we expected to step up because of COVID versus historic rates of the medical care ratio growing throughout the course of the year. Second, in the second quarter, we expected a deceleration of COVID costs and a slower acceleration of the non-COVID experience. While COVID costs decelerated in the second quarter, it decelerated at a slower rate. And while non-COVID costs return back to a more normalized level, they return to a more normalized level at a little faster rate. That's it in a nutshell in the second quarter. So that put some MLR pressure in the second quarter, but again, the aggregate performance of the franchise and the strength of the franchise enabled us to deliver on our commitments.

So since you reported the quarter, we've seen a meaningful step-up in COVID cases. So how has COVID utilization trended August and September to date? And what are you seeing on the non-COVID side relative to baseline?

Sure. So I'm going to just frame it in an aggregate statement. In advance of this conversation, we reaffirmed our full year earnings outlook. So headline, when you shake it all through, we remain committed to our -- at least $20.20 of EPS for 2021. So I think that's the most important headline, Ricky, the national data is quite clear. In the third quarter, COVID rates and COVID utilization rates continue to move up. In the early part of the quarter, we see that national data sets, the same national data set you say. The non-COVID utilization, we expect it to be more akin to baseline activities in the third quarter. And then we're observing the same thing the national data set is indicating where we're seeing some national data points that are pointing toward a deceleration in non-COVID utilization, largely from a capacity standpoint. Those are all national data points, not segment-specific data points, but the overall environment, I think, is informed by that picture. But back to the headline, we're able to reaffirm our full year outlook of at least $20.20.

Let's talk a little bit about 2022. Last week, you reiterated the 2022 sort of early guide of at least 10% above 2021 baseline. How should we think about the tailwinds versus the headwinds next year? And what do you need to see to feel just more comfortable about 2022? Because this is an early guide.

Yes, it's quite an early guide. We sought to be helpful to investors to provide some early insights relative to what we see for 2022. We would typically provide headwinds and tailwinds at the end of the third quarter, and we would typically provide detailed guidance relative to a fiscal year at the end of the fourth quarter. So given the fluidity of the environment, we sought to be helpful to provide the at least 10% off of our at least $20.20. And that underscores the strength of the portfolio and having the balance of the service portfolio, the U.S. medical portfolio and an international portfolio that sits in front of us. So we're not going to reconcile puts and takes in terms of headwinds and tailwinds. But in the bigger picture, the portfolio will grow as we step into 2022. Again, we'll see margin expansion opportunity relative to the underlying risk business in the portfolio and we'll see productivity gains additionally within our portfolio. That's the bigger picture when you shake it all through, there'll be risk adjusters, there'll be whole variety of items, but that will be the bigger picture. And I think putting 2022 in context of our historic performance, we have over a decade track record of delivering, on average, between 10% and 13% EPS growth for the franchise. And we have over a decade track record of having congruity between the organic earnings contribution and an effective capital deployment in 2022 will be another year where there'll be attractive organic earnings performance and very attractive capital deployment.

In 2 areas of that 2022 outlook that we get questions from investors on our ASR and the commercial business or the capital deployment, so you announced an ASR recently. You reiterated the guidance with that ASR. How should we think about the ASR? Was it included in your thinking when you provided preliminary results on 2022? And also what's the capacity that you have for additional buybacks beyond that?

Yes. So on the ASR, the ASR was a very specific action to reinforce the fact that we believe our equity was undervalued at a given point in time. When we step forward with the $2 billion ASR, the $2 billion was within the scope of what we anticipated deploying across fiscal year 2021. So to step back, I indicated we returned somewhat in excess of $7 billion to shareholders in 2021, that's through share repurchase and dividends. As you look forward to 2022, we've made it quite clear in terms of the capital deployment opportunity is an attractive contributor to the EPS growth and that we would, as we set guidance, provide insights in terms of how much of the EPS growth is organic from the underlying operations, which would be consistent and attractive as well as for capital deployment. So my point is capital deployment in an accretive fashion, whether it be share repurchase or accretive M&A, remains a meaningful part of the equation. As it relates to capacity, the capacity is fluid relative to approvals. Big picture, post executing the ASR, there's -- my recollection is a bit less than $2 billion of capacity on the shelf, somewhere between $1.5 billion to $2 billion of capacity system shelf, post executing that ASR.

Okay. And then on the commercial side, on your second quarter call, you sort of you mentioned that your customers are talking about just some pickup in attrition. And since then, we've heard it across industries, we've heard it in our conference over the last [ 4 ] days. So one, what are you hearing from our customers? What are the implications for the commercial book of business next year? And how do you balance growing the business and margin?

Yes. So when you think about the commercial space, we have a track record in the commercial space of growing essentially every year over the last decade. And it's in an environment where the commercial space in aggregate is pretty stable. It's a pretty stable aggregate environment. So we've been able to grow in a relatively stable environment by micro segmenting the buyer community and bringing differentiated value largely through our ASO or ASO stop loss or ASO stop loss with the diverse well-performing specialty capabilities and delivering very strong clinical quality, service quality and total medical cost results. That's key to our proposition. And if you look back over the last decade, Ricky, we've essentially grown low single-digit medical customers and high single-digit revenue and earnings. And the difference there is largely expanding the relationships, expanding it over an ever positively performing and broadening specialty portfolio, which grows even further with the Evernorth capabilities. I think the attrition comment you're making reference to that we noted in the second quarter is, while we noted attrition at a pretty meaningful level because of COVID, we believe it's not proper to project that that's going to come back in the next year. So we can hold that into the baseline. So point is we're not betting on a reversal of the attrition that happened in COVID to make our growth numbers. We're thinking that, that attrition, if it comes back, it's going to come back over a prolonged period of time and it will come back over fundamental organic execution from that same standpoint. So that was a subtle piece we were trying to tease out in the second quarter. We're not betting on a reversion of that attrition within our revenue outlook or growth algorithm from that standpoint. And then finally, we see plenty of employers that are growing. We absolutely do. It depends on what sectors you're operating in from that standpoint. We also see what you see every day in the headlines. We see employers challenged to find enough employees from that standpoint. Hence, our ability to help our employers have healthy, productive, present coworkers is more important than ever. And that's core of what our value proposition is, so it continues to resonate well in the market.

So David, I want to go back to the comment you made about the fact that over the last decade, you've expanded the relationships by really expanding the service offering. So if you think about it, you really have meaningfully diversified the enterprise, right, building these additional revenue streams that leverage in the commercial market and developing partnership with players that, either in the health care ecosystem, U.S. competitors or disruptors. So first of all, how do you view your positioning and future health plan business mix developing over the next 5 years?

And you said in future health plan business mix?

Yes. So when you think about that...

So the U.S. med...

So go ahead.

Within the U.S. medical portfolio or broadly within the enterprise?

Broadly within the enterprise.

Yes, thank you, and thank you for the framing. So we viewed ourselves for quite some period of time as a global health service company. And we view that those we have the privilege of serving, ultimately in individual, we largely get access to individuals either through corporate employers, health plan partners, governmental agencies or increasingly, in some cases, risk-bearing or performance-oriented provider -- integrated provider systems. So to deliver value, you need to have a broad suite of capabilities, not just financing capabilities or network access capabilities or supply chain capabilities, you need to have clinical capabilities. Care management, navigation support, behavioral health capabilities, alternative site of care capabilities, be they virtual or in the home capabilities from that standpoint. And as we've discussed previously, we also see and believe that the evolution of innovation within health care will be heavily oriented and informed by pharmacological advancements. So specialty pharmaceuticals, biosimilars, et cetera, through that lens. So we seek to continue to broaden our suite of solutions we can bring to corporate buyers, health plans, governmental agencies and health care professionals. And as you noted, also very open to partnering with others to create value. So to answer your question, we see the services portfolio growing meaningfully. We see serving others through health plan relationships, through governmental agency relationships, et cetera, being very attractive growth opportunities because we want to be in service of the end consumer through the breadth of our capabilities. And then back in the U.S. health plan business, we continue to see attractive growth in the Medicare Advantage proposition, where we're growing faster than the marketplace within the individual exchange marketplace, where we could expand our geographies as well as deepen our relationships as well as in the commercial population. So it's an and orientation. But it's prefaced with serving the individual and delivering that differentiated value through the breadth of services and then converting them through different buyer groups, be they corporate employers, health plans, governmental agencies or increasingly risk-bearing or performance-oriented health care professionals. Ricky, is that picture helpful?

It is. It's very helpful. And you touched on the Medicare Advantage book of business as an important growth driver. We've got a couple of questions from investors around that. So let me try to incorporate both. So one question is really as you think about the government sector, both Medicare Advantage and in Medicaid, how do you think about growing in that business and M&A versus just continuing to do what you're doing, right, and growing the business organically?

Sure. So a couple of data points. First, relative to MA. Historically, we've only participated in the MA marketplace through the individual, not group, and through the HMO, not PPO chassis and in the limited number of markets for MSAs. We were very clear that we're going to seek to grow 10% to 15% covered lives over a 5-year horizon from '20 to end of '24. And that was going to be in-market growth, expanding the portfolio to adding an individual PPO offering, and then expanding geographies, takes us from about addressing 18% of the market to addressing 50% of the market place organically, largely organically over that time horizon. That's an MA statement. In the individual exchange market that we deem to be also part of the government marketplace, we see a similar phenomenon, a double-double phenomenon, the ability to double our portfolio of business and double the geographies we're participating in because we have more opportunity with our high-performing value-based providers to expand the capabilities. And then before I talk about inorganic, in the Evernorth portfolio, the vast majority of health plans we have the privilege to serve today have commercial offerings, Medicare offerings and, in many cases, Medicaid offerings. So we're expanding our services relationship, serving governmental portfolios through those health plan relationships as well as, over time, the ability with direct to governmental agencies. So that's the organic picture I would paint for you. And then it's 1 of our 4 inorganic priorities. Our 4 inorganic priorities that we have are further our government capabilities in the United States, further our international profile, further our care delivery and alternative site of care capability and further our technology and informatics insights. And our historic portfolio would have said we are guided by our stated priorities, and we'll execute when we see strategic and financially attractive opportunities that's in front of us.

So a follow-up question we got here from the audience. When you think about these 4 areas of expansion: government, international, care delivery, technology, when you think about your target capital structure, how are you thinking about how big can you go in terms of strategic M&A?

Yes. So when we positioned our corporation and positioned the corporation first, as I noted earlier, we're an organic-first growth framework. We need to grow each and every day in the marketplace through retention, deepening and adding new relationships. That's a fundamental part of the growth story for our portfolio, our capabilities, et cetera. Then you add to that having the organization positioned with strategic flexibility and financial flexibility. Because if you have strategic flexibility and the financial flexibility, you really don't have strategic flexibility. If you have financial flexibility, but no strategic flexibility, you have a different problem. We have the benefit of both with positioning our corporation, have the benefit of both. As it relates to size, we don't have an arbitrary line drawing that says not above X or not below Y. It comes back to being informed by strategic value creation and financial value creation. What I would add to that is if it is a large transaction, meaningful scale transaction, it not only has to be strategically attractive, it has to be financially attractive, which for us means accretive within the first full year of operations, so there's a pretty clear hurdle, as well as understanding what type of returns on capital we seek to have. So organic first, well positioned, strategic and capital flexibility and then disciplined if we choose to act from an inorganic standpoint.

So it seems, from what I'm hearing in my hand is you are not opposed to doing a big acquisition. It's really just about the return and about the accretion.

Correct. You never say never, you never say always, right? And then back to having the flexibility, but the preface, your restatement, it's off an organic-first growth framework and it's off of a very disciplined capital deployment framework as we've demonstrated this past year.

So let's talk about one of the acquisitions that you made this year in the care delivery area, the telehealth acquisition. How is it going? How is it resonating with your customers?

Sure. So relative to the acquisition of MDLIVE, we're delighted with the acquisition, with the team, with the capabilities, et cetera. And it's informed by a view of where we think the health care proposition is going. We talked a little bit about it before. The opportunity to bring care closer to the individual on a real-time basis and the ability to have coordinated care closer to the individual, not just triage or transactional care, but longitudinal, virtual primary and behavioral care. And then the ability to expand that with a virtual chronic, virtual polychronic capability, that's an exciting opportunity within our portfolio, and we're well positioned strategically to be able to deliver it, a, with the capabilities; b, with our broad clinical capabilities; and c, with avoiding channel conflict within our portfolio. Meaning, we purposely positioned ourselves to be a virtual-first offering as opposed to a physical-first offering. So we're quite pleased with it. It's resonating well within the organization. It's resonating well within our portfolio, and we're innovating additional services off that chassis.

So within the mindset of virtual first and also partnership, you are partnering with parts of both the health care system in the tech world that others in the health care ecosystem stay away from. So starting with Amazon, it's been almost a year into your relationship. How is it progressing? Where do you see opportunities to build on that existing relationship?

Sure. So I'm going to speak more to the broad intention. I'm not going to get down into individual relationships, as you might expect. But I respect and I appreciate your question. Philosophically, we orient around seeking to be the undisputed partner of choice, right? It's a stated strategic tenet of the corporation. And while we're proud of who we are and where we are, we believe that the rate and pace of change demands or presents the opportunity for exploring open-minded partnerships to create scaled or step function change. That happens through formal partnerships, like you articulate. It happens through our Cigna Ventures portfolio, where we take targeted investments in smaller specialist entities and co-development and co-collaborate with those entities from that standpoint. So we're open-minded on purpose to drive accelerated innovation and change in value creation for those we serve. And then we dynamically manage that, right? Because the partnership, it's interesting if it works for Party A and Part B. Obviously, that's necessary. The important part is, does it work for the customer? Does it create differentiated value for the customer? Because all 3 propositions need to work. My proposition to a partner, the partner's proposition to me, and then that begs the third question, which does it create a step function in value for the consumer? And if all 3 hunt, they're sustainable. If all 3 of those dimensions don't hunt, it's not sustainable. So we have to be open-minded and start with that consumer orientation to work our way back in. So the last piece I'd say is, relative to the relationship you referenced, it's dynamically being managed, and we're collaborating back and forth with an eye toward can we continue to create step function value for customers, subsegments of customers, et cetera.

So let me expand it a little bit. In one of an earlier conversation we had this year, we talked about health plans over time, also meaning to work more collaboratively together and cross-selling more solutions. Because you might not have sort of kind of like the one plan, the one entity that has all the solutions. What's the catalyst to get us there?

Well, I think there's -- there are 2 catalysts. One is in the marketplace, if you believe the rate and pace of change is and will continue to accelerate, right, so in terms of tenant, then your question whether or not as a sovereign entity, can you be towards the higher end of excellence on all the areas that are continuing to accelerate. If the answer is no, and most companies can't be, most companies can't be excellent in everything, right, business 101 tells you that, then you have to have an open mind in this, relative to where and how you collaborate with others. So that's point one. One is the attitudinal orientation. And then two is, we call it the technological pipes, data flows and tools to create step-function value in different operating models or otherwise. Now I'll bring that back to ourselves. Our Evernorth portfolio is expressly designed to serve other health plans. Not in a combination, as an express target market to co-collaborate, co-develop and serve other health plans, with an objective of having a positive impact on more customers' lives. And in fact, as you inspect our Evernorth revenue, our Evernorth revenue is disproportionally non-Cigna health plan revenue. That's on the design, and it will continue to grow. So a, it's attitudinal in one's perspective of business strategy and the environment and the model; and then b, is you build a business model that is in service of that. And we believe a is accelerating and b, our business model is configured to accelerate the services in collaboration to other health plans, even if it is creating channel conflict with the Cigna medical proposition. That can be -- that could co-habitate. It could co-habitate each and every day. So the dedicated business, the dedicated resources, the dedicated R&D that exists there is built out of a view in terms of what the market needs and wants.

And David, we have time for one more question. So as we conclude our conversation, I think this was a year where investor is really focused on the challenges and the risks. So when you sort of look ahead, what is the one challenge, I'd say, that you are most focused on? And then as you think about kind of like the next 12 months, what do you think investors -- will be more evident for investors as we exit sort of COVID and look ahead for maybe second half of 2022?

Sure. So to me, the larger challenge remains from a societal standpoint. If we have a U.S. conversation, if we're having a global conversation, the larger challenge remains affordability. There is an affordability challenge when you break this down to every stakeholder in the equation. And to address the affordability, to create more value, we have to have the services to keep people healthy in the first place or actively help those that are at risk to avoid major health events, and then optimize quality for someone with a chronic or acute health event. So bigger picture to me, that challenge remains, and COVID has actually amplified it if we want to inspect it. It amplifies the impact of chronic disease on an individual. It amplifies the effect of physical delivery system impediments in some cases. It amplifies the effect of public-private partnership in terms of accelerating new pharmacological innovations. It amplifies the ability to connect directly with the individual to drive an outcome. So to me, that challenge just continues to be amplified. And the parties that can improve affordability, improve consumer engagement, improve clinical quality have the ability to not just withstand but continue to grow and thrive from that standpoint. For us, putting the mirror back up as we step into 2022, it's demonstrating that 2022 will be another year of attractive growth, attractive growth in terms of our earnings growth in the organization as we continue to make targeted investments within our portfolio organically, as part of the way we invest in our portfolio, as we continue to grow our diverse portfolio of assets within our chassis and as we continue to convert a significant amount of that operating cash flow. And demonstrating that the businesses that we are in are growth businesses and those growth businesses present the opportunity for additional growth, both within as well as adjacencies that exist around that. So that's the picture I think we could front both as a society and then from a Cigna standpoint.

David, thank you very much for the time. And for everybody watching us over the webcast, thank you for tuning in.

Ricky, thanks so much for your time today.