The Cigna Group Q4 FY2024 earnings call

Management Statement and Operational Highlights

• 2024 Results: Delivered full-year revenue growth of 27% to approximately $247 billion, with adjusted earnings per share of $27.33. Returned $8.6 billion to shareholders through dividends and share repurchase. The Board declared an 8% increase to the quarterly dividend and increased share repurchase authority to $10.3 billion.
• Stop Loss Actions: Identified higher than expected medical costs in the stop loss product within Cigna Healthcare and is taking corrective actions to recapture margin over the next two years.
• Evernorth Performance: Evernorth continued to drive strong results, particularly in specialty and care services. Biosimilar use for eligible Humira scripts reached nearly 50% by year-end 2024, and initiatives like EnCircle Rx solution grew to approximately 8 million lives enrolled.
• Transparency and Access Initiatives: Accelerating investments to improve transparency, expand support, and drive accountability. Express Scripts announced actions to lower patient out-of-pocket costs and enhance predictability, while Cigna Healthcare plans to improve prior authorizations and expand access to advocates.

Segment Performance

• Cigna Healthcare: Fourth quarter 2024 revenues were $13.3 billion, pre-tax adjusted earnings were $511 million, and the medical care ratio was 87.9%. Full-year 2024 revenue was approximately $247 billion, with adjusted earnings per share of $27.33. The stop loss product within Cigna Healthcare had higher than expected medical costs in the fourth quarter, but other products were in line with expectations. Over the next two years, Cigna Healthcare expects to recapture approximately 100 basis points of margin.
• Evernorth Health Services: Fourth quarter 2024 adjusted revenues grew 33% to $53.7 billion, and pre-tax adjusted earnings grew 14% to $2.1 billion. Specialty and care services adjusted revenue grew 18% to $23.5 billion, with adjusted earnings growing 27% to $948 million. Evernorth's strong performance was driven by specialty and care services, including biosimilar initiatives like Humira and Stelara biosimilars.

Guidance

• 2025 Outlook: Expected full-year consolidated adjusted revenues of at least $252 billion and adjusted income from operations of at least $7.9 billion or $29.50 per share. Evernorth expected full-year adjusted earnings of at least $7.2 billion, and Cigna Healthcare expected at least $4.1 billion. The divestiture of the Cigna Healthcare Medicare business to HCSC is on track to close in the first quarter, with proceeds planned for share repurchase. Expectations for share repurchase and dividends outlined, with guidance assuming full-year weighted average shares outstanding in the range of 266 million to 270 million shares.
• Investments: Up to $150 million in costs for initiatives to improve patient and provider experience, split between Evernorth and Cigna Healthcare.

Risks

• Stop Loss Variability: Higher than expected medical costs in the stop loss product in Q4 2024 impacted margins, with variability in this product at times. The company expects some challenges in recapturing margin fully in the near term.
• Dynamic Healthcare Environment: Regulatory, market, and cost trend uncertainties could impact profitability. Unforeseen cost trends, especially in specialty pharmaceuticals and high-acuity surgical activity, could affect future performance.

Question and Answer

Q: Justin Lake asked about the split between aggregate versus specific stop loss premiums and margin pressure in the fourth quarter.

A: Brian Evanko responded that the stop loss product is part of an integrated employer offering, with a mix of individual and aggregate stop loss. The 2024 stop loss MCR ran in the low 90s, and the company expects to recapture margin through pricing, affordability initiatives, and operating efficiency.

Q: Stephen Baxter inquired about retention and membership impact from stop loss cycles.

A: Brian Evanko noted that stop loss is part of an integrated offering, and client relationships are profitable, with over 50% of employer clients being with Cigna Healthcare for five years or more.

Q: Charles Rhyee asked about specialty NEDs related to GLP-1s and Evernorth guidance.

A: Brian Evanko explained that stop loss pressure was from high-cost specialty injectables and high-acuity surgical activity, not GLP-1s. Evernorth's guidance reflects long-term growth within 5%-8% range, adjusting for factors like VillageMD and stranded overhead.

Q: Lisa Gill asked about rebate retention and uptake of new programs.

A: David Cordani and Eric Palmer responded that rebates are mostly passed through, and new initiatives are designed to lower patient out-of-pocket costs with enhanced reporting, expected to be the default for employers.

Q: AJ Rice inquired about Medicare sale impact and Evernorth margin.

A: Brian Evanko stated the Medicare divestiture is on track, removing ~$12 billion in revenue, and Evernorth's guidance reflects normalized growth within long-term ranges, adjusting for specific 2025 factors.

Q: Scott Fidel asked about stop loss repricing and client renewal cycles.

A: Brian Evanko explained that stop loss is part of an integrated offering, with 20% of client costs being stop loss, and renewal cycles tilted toward the first quarter, with confidence in recapturing margin through strategic actions.

Q: Erin Wright asked about acquisition standpoint and capital deployment.

A: David Cordani responded that capital priorities include share repurchase, dividends, and evaluating strategic bolt-on acquisitions to advance the portfolio.

Q: Andrew Mok asked about stop loss pressure vs fully insured business.

A: Brian Evanko and David Cordani explained that stop loss pressure was due to mix shifts in high-cost claimants, while fully insured products ran broadly in line with expectations, with examples like inpatient events being higher dollar.

Q: Josh Raskin asked about Medicare sale purchase price and membership.

A: Brian Evanko stated the sale is on track, with typical financial adjustments, and 2025 membership showed attractive growth in targeted geographies and products.

Q: Adam Ron asked about Evernorth guidance and underperformance.

A: Eric Palmer and Brian Evanko responded that Evernorth's long-term growth trends remain intact, with 2025 guidance adjusting for VillageMD, stranded overhead, and $150 million in investments.

Q: Ann Hynes asked about 2025 MLR.

A: Brian Evanko explained that stop loss MCR is expected to be higher in 2025 due to timing of pricing cycles, with adjustments for prior year development and investments.

Q: Sarah James asked about 2025 outlook bridging from 3Q.

A: Brian Evanko responded that 3Q was directional, with stop loss pressure greater than anticipated, and $150 million investments factored in, with strong growth across the enterprise.

Q: Ben Hendrix asked about 2025 earnings seasonality.

A: Brian Evanko stated that 2024 seasonality was not typical due to stop loss, and 2025 is expected to be more normal, with stop loss MCRs having a level cadence and Evernorth factors weighted to the first half.

Q: George Hill asked about stop loss margin recovery levers and high acuity surgical activity.

A: Brian Evanko responded that margin recovery includes client relationship conversations and adjusting pooling points, with high acuity surgical activity being inpatient, cancer and cardiac driven, not elective.