Cigna Group Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Justin Lake - Wolfe Research - Analyst : I wanted to ask a couple of things on the stop loss business. First, on the $7 billion of premium. I was hoping you can give us some split between the aggregate versus specific stop loss premiums and then maybe tell us if there was any more margin pressure in one segment versus the other in the fourth quarter. And then I wanted to just make sure I'm understanding the magnitude of the miss correctly here. You talked about the fourth quarter miss being all stop loss. So I'm getting to like 1,500 basis points in the fourth quarter. Is that in the ballpark? And then I think you said your margins overall are 100 basis points higher because of this or lower that you'll recapture which would seem to indicate stop loss is off by about 5% given the percentage of revenue. Just making sure I understand all of that correctly. Any help, appreciate it. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare It's Brian, a number of components to your question so I'll do my best to capture as much of that as possible. Let me just start with a little bit of context on the stop loss business. I'll try to get to your very specific questions there, on my way through here. So obviously, we're disappointed by the shortfall that we reported in the fourth quarter. As I mentioned in my prepared comments earlier, the vast majority of the shortfall was driven by our stop loss products within Cigna Healthcare and the rest of the Company performed broadly as we expected. Now it's important to keep in mind that our stop loss product performance in the quarter is really more representative of the full-year impact. It's an accumulation product reflecting 12 months of health care activity for a given individual or an employer. And we continue to feel very good about the long-term fundamentals of our US Employer portfolio and the stop loss products specifically. And the shortfall that we're currently experiencing represents an embedded earnings opportunity for the future. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 1:30PM, CI.N - Q4 2024 Cigna Group Earnings Call As we look back to 2024, the aggregate health care costs within the Cigna Healthcare portfolio were broadly in line with our expectations, reflecting the persistently elevated cost trend environment that I referenced. But the mix of those costs shifted more toward high-cost claimants than we had expected, which has a disproportionate impact on the stop loss products. And given when we identified the magnitude of the 2024 stop loss pressure, we were not able to fully recognize this in our January 2025 renewal pricing as much of that pricing work was completed in the fall. Now some of the later 2025 renewals will reflect the updated estimates, with the majority of the 2025 stop loss pricing will not capture that elevated cost structure. So when you put all those pieces together, we would expect to see 100 basis points of margin improvement across the Cigna Healthcare portfolio by 2027 with the majority of that to be captured in 2026. Now more specifically to your questions. When you think about the $6.7 billion of premium in our stop loss book of business, there's a mix of individual and aggregate stop loss in there. And there are a variety of attachment points and different client choices embedded in there. You can think of it as more tilted toward the individual versus the aggregate, but we have a wide range of stop loss offerings that are out there. And for full-year 2024, the overall stop loss MCR ran in the low 90s in terms of the percentage, which you can think of as being a mid-single-digit percentage amount worse than our expectations had been in 2024. So again, that $6.7 billion of premium multiplied by a mid-single-digit percentage miss gets you about the earnings impact that we're seeking to recover over time on the stop loss portion of the portfolio. But importantly, the balance of the Cigna Healthcare portfolio ran broadly in line with expectations. Thanks for the question.

Question: Stephen Baxter - Wells Fargo - Analyst : I'll ask another one on stop loss. I guess, when you've gone through these cycles in the past, can you talk a little bit about how it's impacted retention and membership for the impacted accounts that have seen these kind of larger above-trend increases for stop loss? And I can definitely appreciate why it takes until at least 2026 to get meaningful improvement. But when you're talking about some of this improvement leaking out into 2027 potentially, could you just help us understand a little bit why it could become even that far extended? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Stephen, it's Brian again. So one thing that's critical to keep in mind as it relates to our stop loss portfolio is that we don't write standalone stop loss coverage. So our entire book of business reflects an integrated employer offering where we're providing the first dollar coverage alongside. So as a result, our overall relationship with the employer is multifaceted in nature and involves many products and solutions, which ends up creating numerous opportunities for value creation and the associated value capture. And even with the stop loss claims pressure that we experienced in our 2024 results, our overall client level relationships are profitable for those employers who choose our stop loss offerings. When we look back historically over many years, decades, in fact, we've been able to overcome the short-term ups and downs of our stop loss portfolio and generate attractive long-term returns. And our clients value these long-term relationships and the associated budget certainty that our offerings can provide to them, which really is evidenced by the fact that well over 50% of our employer clients who choose our stop loss products have been clients of Cigna Healthcare for five years or more. So the shortfall in our 2024 results offers a substantial embedded earnings opportunity for the company, and we're confident in our ability to execute against this, balancing the timing of margin recovery with client persistency. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 1:30PM, CI.N - Q4 2024 Cigna Group Earnings Call

Question: Charles Rhyee - TD Cowen - Analyst : Just related to sort of the stop loss again a little bit. You called out specialty meds at the start contributing to that. Is that related to GLP-1s at all? And related to that, as we think about the Evernorth guide going forward, you're starting at a 3% operating income growth starting point. But you finished '24 up 9%, which, if I remember correctly, right, including onboarding costs related to Centene in the first half of the year. Anything to call out relative to '25 because otherwise, it seems this part of the guidance seems pretty conservative, particularly given the growth you saw in specialty in the back half of '24. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Charles, it's Brian. So as it relates to the stop loss specific drivers, I think was the core of your first question, you can think of this as being a situation where we had a greater frequency of high-dollar claimants than we have been expecting, particularly driven by high cost specialty pharmaceuticals and by high acuity surgical activity. Now within the specialty drugs, I would not point to GLP-1s as a driver of this. Think of it as more specialty injectables, so when you look at the nature of that particularly for the stop loss books, it's drugs like KEYTRUDA or OCREVUS, those sorts of specialty injectables that drove some of the upward pressure. And then on the high acuity surgical side, think of that as more tilted to inpatient procedures, for example, oncology and cardiac-oriented procedure. So that was really the core of the upward pressure on the stop loss products. Now as it relates to Evernorth's 2025 income outlook, just again, I'd start by saying how pleased we are with the overall performance of that portion of the company. We delivered a strong result in '24, as you noted in your question. As it relates to 2025, specifically, our outlook for the income growth is within our long-term growth rate range of 5% to 8% when a few adjustments are made. So specifically, the absence of VillageMD net investment income, which was recorded in 2024 as well as the Evernorth share of stranded overhead from the Medicare divestiture. And then as I noted in my prepared comments, we have earmarked up to $150 million across the company for incremental 2025 investments in patient and provider facing initiatives, and our guidance reflects a portion of that spending in the Evernorth segment. So adjusting for these factors, we look forward to Evernorth delivering income growth within our long-term average annual growth rate range. So overall, Evernorth performing well. We're positioned for another good year.

Question: Lisa Gill - JPMorgan - Analyst : David, I wanted to go back to the comments that you made around Express Scripts and some of the offerings that you now have, lowering the price at the counter, et cetera, and really tie that back to comments you've made in the past around roughly 20% of total profits coming from rebate retention. Can you talk about two things? One, are clients shifting more where they want more of the rebate retention? And if so, how do we think about that impact to profitability over time? And then secondly, the programs that you talked about, are those more of an opt in, so you're selling those into the marketplace. And I'm just curious around what you're seeing on the uptake side. So really two questions here, how I think about the future. And if we have changes, what that could do to the profit of the model. And then secondly, the uptake around this. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 1:30PM, CI.N - Q4 2024 Cigna Group Earnings Call

Question: A.J. Rice - UBS - Analyst : Hi, everybody. Just to maybe get a little bit of clarification on a couple of points with respect to the 2025 guidance. And when you gave some preliminary comments on third quarter, I don't think you had incorporated this, but now you're incorporating the sale of the MA book by the end of the first quarter in the outlook as well as presumably some redeployment of that capital. I'm trying to figure out what is the underlying assumption around what that does to the earnings outlook of the company when you start to factor that in. Also, I think the other aspect of the '25 outlook was -- there was some pressure on the Evernorth margin in '24 related to the big new contract wins that you are absorbing and that there was presumably going to be some favorable step-up in '25 as that contract -- that one big contract, in fact, matured a little bit. Are you assuming some level of step-up on that? Or are you now sort of assuming it's sort of steady-state margin? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare A.J., it's Brian. So let me do my best with your questions here. The former in terms of the Medicare divestiture, as I mentioned earlier, on track to close in the first quarter. We've reflected that in the revenue and the income guide as well as the capital deployment expectations here for the year. And you can think of it as about $12 billion of revenue from 2024 that will be obviously removed with the divestiture. We'll recognize a stub here with one month of January revenue and then whenever the closing date happens to be in February or March. As it relates to capital deployment, as I mentioned earlier, we expect to use the majority of the proceeds for share repurchase. That's reflected in our share count guide. And then relative to the other contributions when you think about the Cigna Healthcare income guide, the removal of Medicare is reflected in that. So maybe just to put a finer point on that. If you look at our segment income guide for Cigna Healthcare this year and you compare it to 2024, if you look at 2024 as actual income and remove the contribution from the Medicare financials, remove the stranded overhead from the divestiture and remove the favorable prior year development that we saw in 2024, the normalized Cigna Healthcare earnings would have been slightly below $4 billion in 2024. So that just gives you a basis to compare our 2025 outlook, reflecting the removal of Medicare and the removal of the prior year development. We do not forecast future prior year development. As it relates to the client contribution in Evernorth and the guide that I walked through to the earlier question that Charles asked me, the implied normalized growth rate that I referenced being within our 5% to 8% long-term growth rate range reflects the continued maturation of our large client contracts. So it's in there. The relationship continues to be very strong across the teams, and we're pleased with the overall financial contribution of that relationship.

Question: Scott Fidel - Stephens - Analyst : Just wanted to sort of put the stop loss repricing efforts into some context. First, just curious around the fact that we know that the stop loss pressures were not unique to Cigna. We did see data points during the quarter from other large stop loss carriers also discussing very similar effects. So the first piece would be, as you reprice the business in '25 and into '26, do you think that the persistency of the clients may benefit from the fact that others in the market will also be needing to take similar pricing actions? And then when we think about the renewal cycle of the clients that typically takes stop loss for Cigna, which has always been a bit more weighted towards select and middle market, there's a different renewal cycle for those clients. They're not as entirely weighted to sort of Jan 1, for example. So basically, also, if you could remind us for '25 basically, walk us through how much of the business you still have an opportunity to reprice on where you see these higher stop loss costs. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 1:30PM, CI.N - Q4 2024 Cigna Group Earnings Call Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Scott, it's Brian. So as it relates to your first question in terms of the client relationships, the timing to recover, et cetera, and putting that into context. As I mentioned to the earlier question, I think Stephen had asked me, important to keep in mind, these are all integrated client relationships where we have both the first dollar and the stop loss coverage. And if you look across the totality of the relationships, on average, about 20% of a given client's cost is stop loss oriented. In terms of the clients that choose to work with us on stop loss, about -- on average, 20% of it is stop loss. Some are higher, some are lower depending on how much risk appetite they have, how much risk they seek to transfer. So the point being a point of overall claim cost is only 20% of that on the stop loss. So there's a little bit more of a buffer here as it relates to repricing in terms of the overall client persistency, which in our estimation gives us an advantage being an integrated stop loss carrier compared to the standalone stop loss carriers who might be competing up against us. Now your question on the renewal cycles. The way that our stop loss products happen to work, it's actually a little bit more tilted toward the beginning of the year. So we have about two-thirds of our stop loss premium that renews in the first quarter, given that we also have large clients who purchased stop loss from us. So it's not quite as uniformly distributed throughout the calendar year as our select segment happens to be. And as a result of that, that's one of the primary reasons why we're not able to recapture more in 2025. But again, we have the confidence that we'll capture a majority of that 100 basis points of Cigna Healthcare margin expansion in 2026 with any residual in 2027.

Question: Erin Wright - Morgan Stanley - Analyst : Great. So you spoke to the buyback authorization increase, but how are you thinking about, I guess, capital deployment from an acquisition standpoint? And just any sort of change in your thought process around the regulatory environment on that front? Or just your broader framework and thought process around acquisitions, I guess. Has anything changed there?

Question: Andrew Mok - Barclays - Analyst : I understand the different mechanics of the stop loss business. But if you're seeing pressure in that part of the business related to higher specialty cost trends, I'm a little confused why you're not seeing that pressure on the fully insured part of the business. Maybe help clarify that. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Andrew, it's Brian. So as it relates to your question on the different pockets of the Cigna Healthcare portfolio, maybe I'll expand a little bit on the MCR performance for the different components. But again, I'd come back to something I said earlier, where the all-in cost structure that we saw in 2024 was comparable to what we expected it to be, an elevated cost structure, but comparable to what we had planned and priced for in totality, but the mix of those costs shifted more toward high-cost claimants than what we had been anticipating coming into the year. If you think about the Cigna Healthcare portfolio in aggregate, you can think of it as three broad components. So the largest portion of Cigna Healthcare, which represents about 60% of the Cigna Healthcare premium, and it's unrelated to stop loss, unrelated to Medicare, so think of everything else, broadly in line with expectations, and we ended the 2024 full year with an MCR of around 80% on that block of business. So that 60% ran at about 80% MCR and we're projecting a roughly similar MCR performance in 2025 for that portion of the book as our pricing yields are expected to track cost trends on that portion. The second component is our Medicare business, which represents about 25% of the Cigna Healthcare premium and ran broadly in line with expectations in 2024. And then the final 15% is the stop loss products. So for 2024, as I mentioned in Justin's earlier question, the overall stop loss ran in the low 90s on that 15% portion of the book. So we ended up seeing, within the total health care pie, a shift toward more high-cost individual claimants putting pressure on the stop loss line, but the all-in fully insured products ran broadly in line with expectations. David, do you want to add anything?

Question: Joshua Raskin - Nephron Research - Analyst : Just on the pending Medicare asset sale to Health Care Service Corp, are there any potential adjustments to the purchase price based on revenues, membership MLR, and maybe a comment on the strong membership to start 2025. And then any pending approvals or any sort of last-minute things you're looking for? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Josh, it's Brian. So overall, I'd just start by saying the Medicare businesses performed broadly in line with expectations in 2024, and we're on track to close the divestiture in the first quarter, as I mentioned earlier. We have a very collaborative, constructive relationship with HCSC. We've completed all federal antitrust approvals and nearly all state approvals, just one more state to get through. We have typical financial adjustments to the final purchase price in terms of subsidiary capitalization and things along those lines, but nothing else that I would note that's particularly relevant to the core of your question. Now as we approach 2025, as we always do, we employed a local market county level bid approach. And based upon our final product positioning, we did see attractive growth in this business, specifically in the geographies and the products where we were targeting. In particular, we're pleased to see net growth coming primarily from HMO products in our more mature markets where we have years of experience and strong provider relationships. So the business is on a solid footing. We're tracking for attractive growth in 2025, and we're ready to hand it off to HCSC.

Question: Adam Ron - Bank of America - Analyst : I'd like to dig a little deeper into the Evernorth guidance. I know we somewhat touched on it already, but if you could distill it down into a couple of more specific items. So just curious, like, this time last year, what gave you the confidence to raise the growth rate in the segment that is now coming worse than those higher expectations. It sounds like specialty growth, in particular, is coming in better, if anything. So are there any specific items like VillageMD or on trend guarantees that you gave customers that are driving the underperformance for 2025 in the outlook?

Question: Ann Hynes - Mizuho Securities - Analyst : I just want some more clarity on 2025 MLR. So I think you said earlier that off a $6.7 billion base of stop loss was off mid-single digit. So if I do the calculation, that's maybe like around $335 million or $340 million hit versus expectation. But when I look at the 2025 healthcare EBITDA it's about $800 million below the Street. So I'm just trying to figure out what the difference is versus our expectations. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare It's Brian. So as it relates to the stop loss dynamic we were discussing earlier, that was a 2024 reference when I described the low 90s MCR on the stop loss book on the $6.7 billion of premium. For '25, we're expecting a slightly higher MCR on the stop loss book because of the timing of repricing cycle. And as I made reference, we're unable to capture all of the elevated cost trend on the stop loss for 2025. So we expect a slightly higher MCR on stop loss in 2025, and that will be on a higher premium base because that $6.7 billion will grow at an attractive rate again. So that dollar amount will grow in '25. In addition, as I made reference earlier, we do not forecast future prior year development, which was a benefit to 2024, and we have earmarked up to $150 million at the enterprise level for the provider and patient-facing initiatives that David described, and a portion of that will be reflected in the Cigna Healthcare P&L. So those dynamics help to bridge, I think where you were going with the 2025 prior expectations to our 2025 guidance we've initiated today.

Question: Sarah James - Cantor Fitzgerald - Analyst : Since you started seeing the stop loss claims pressure in 3Q, was some of that pressure already included in the 3Q guide of more than 10% growth and was any of the $150 million investment spend, including in that? Because I'm trying to run the math, bridging the 8% to the more than 10%, and I kind of feel like I'm missing a few good guys. I'm wondering if your outlook improved on some of your other businesses. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Sarah, it's Brian. So the third-quarter commentary that we made again was not meant to be formal guidance. It was meant to be just directional guidance. And at the time, we had said at least 10% which we felt was a prudent growth rate range at that point in time. You may also recall, we had moved the MCR guide for the full year at that point in time toward the upper end of the range because we've started to see some indications of some pressure on the stop loss but not to the degree that ultimately manifested across the full year. So as you think about trying to do that bridge, the couple of things that I call out would be we have now factored in the up to $150 million of investment spend for the provider and patient-facing initiatives that David walked through, that's net new. The degree of the stop loss pressure for the full-year '24 was greater than what we had anticipated three months ago, that's net new. And then to your point, are there other things going better than expected across the company? Directionally, you should think of the growth as strong yet again. So if you remove the Medicare business, we expect top line for the Company will grow in the, call it, 6% range, so we expect to have another year of good growth across the enterprise. So broadly speaking, I would think of it in those different buckets. But again, the third-quarter commentary was not meant to be formal guidance; it's just trying to give you some directional sense.

Question: Benjamin Hendrix - RBC Capital Markets - Analyst : I just was hoping you could put a finer point on your 2025 earnings cadence comments. I appreciate the commentary that you would expect earnings to look a little bit more like 2023 patterns versus 2024. But knowing that we're going to be recapturing the stop loss margins over a number of years, any reason not to expect elevated 4Q cost trend in 2025 as well? Just any comments on that seasonality. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare Ben, it's Brian. So just the nature of the stop loss products that I was referencing earlier are really full-year products. And so each quarter, we're making estimates of where the final full-year MCR will land for stop loss. In 2024, when the pressure was identified, it was late in the year, which is why the earnings impact showed up predominantly in the fourth quarter. But you should take that earnings impact and kind of spread it over the course of the full-year 2024, which is why we're saying that '24 seasonality is not reflective of what a typical year should look like. So 2025, for that reason, you should think of it as more of a normal year, if you will, where typical cost-sharing seasonality will drive lower MCRs in the first half of the year and higher MCRs in the back half of the year. And we would expect the stop loss MCRs to have more of a level cadence over the course of 2025. In addition to that, there are some dynamics unique to Evernorth, for example, the VillageMD and the stranded overhead that I made reference to are more first half weighted. So they serve to depress the Evernorth income a bit on a year-over-year basis compared to the 2024 pattern. But again, the stop loss dynamic, I think, is the most important point as you reflect on the seasonality of our expected earnings. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 1:30PM, CI.N - Q4 2024 Cigna Group Earnings Call

Question: George Hill - Deutsche Bank - Analyst : Two more quick ones, I guess, to close it out on stop losses. Number one, Brian, are there any other considerations on the stop loss margin recovery besides price (as it relates looking out to '26 or '27) that we should be meaningfully thinking about? Like, are there benefit design or kind of breakpoint levers that get pulled here that get you guys back? And then the second one is you talked about high acuity surgical activity. I'd be interested if you could comment on whether this is elective versus nonelective and if there's any particular procedure types you would call out. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Officer - Cigna Healthcare George, it's Brian. So on the first question in terms of the stop loss recovery and are there other factors, to the comment I made earlier, given these are integrated client offerings, the stop loss is just one component of the conversation that we have when we go and renew with clients. And as a result of that, it is not just a price conversation, it's a total relationship conversation that we tend to have and it's not uncommon for a client to say, I want to move my pooling points or my attachment points up to reflect the cost inflation that's happened over time, which helps to mitigate the budget outlay for the employer clients. So those types of dynamics often do work their way into the renewal conversations. And I made reference to earlier, we have decades of experience with this business and have shown during times of both good and bad the ability to keep persistency at strong levels with the employer clients that choose our stop loss offerings. On the high acuity surgical activity that we saw specifically was a little more tilted toward inpatient. And as David and I both commented, a little bit more cancer-driven and cardiac-driven, which we don't necessarily see correlating with elective procedures. And broadly speaking, our planning assumptions for 2025 are for the high-cost claimant activity we saw in '24 to continue. So we see it as more of a structural shift than something that's temporary. And in the scenario where that assumption is incorrect and it is temporary, then that will offer some upside to the outlook that we've provided here this morning, but we don't see it as heavily correlated to electives.