Cigna

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global health services company with a mission to improve the health and vitality of their customers by making healthcare affordable, predictable and simple.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Cigna operates across several segments, including Evernorth Health Services, and Cigna Healthcare, serving both U.S. and international markets and customers, which includes individuals, employers, government bodies, and other insurance companies.

Business Overview Cigna is a global health services company with a complex business model. Its operations are primarily organized into two main segments: Evernorth Health Services, and Cigna Healthcare.

Evernorth Health Services This segment acts as a kind of “health services” arm, offering a broad array of services, including pharmacy benefit management, specialty pharmacy, clinical programs, and care delivery and management solutions. Evernorth’s focus is to make healthcare affordable, predictable, and simple for clients and consumers.
Cigna Healthcare Cigna Healthcare, on the other hand, acts as a health insurance entity, providing health insurance coverage to individuals and employers both domestically and internationally. This includes medical plans, Medicare Advantage, supplemental plans, and other health and wellness products.

Revenue Distribution: Cigna’s revenue is diversified across its segments.

Pharmacy Benefit Management (PBM): Through Express Scripts, Cigna provides pharmacy benefit management services, handling the prescription drug needs for health plans and employers.
Care Delivery and Management: Includes clinical services, healthcare delivery solutions, and other services that help manage patient care and coordinate health benefits.
Specialty Pharmacy: Focuses on specialty drugs, often higher cost prescription medications.
U.S. Commercial: Involves employer-sponsored plans that provide medical coverage to their employees, as well as individuals.
U.S. Government: Includes Medicare Advantage, Medicare Supplemental plans and other government programs.
International Health: A global segment that provides healthcare solutions and insurance to clients internationally.

Industry Trends

Increased Healthcare Costs: Overall cost of healthcare are on the rise, pressuring insurance providers and payers.
Greater Focus on Value-Based Care: The focus is shifting towards value based care rather than just a fee-for-service model.
Consolidation in the healthcare space: As consolidation continues, competition between competitors intensifies.
Rise in Prescription Drug Prices: Prices of drugs continue to increase, creating a demand for more affordable healthcare.
Digitalization of Healthcare: Telemedicine, artificial intelligence, remote patient monitoring, etc., are taking over health sector, and companies are trying to innovate by adapting these trends.

Margins: Cigna’s margins vary by segment and are quite complex. Overall they seem to be around 7-12%. Healthcare margins are generally lower than the Evernorth margins.

Competitive Landscape: Cigna is a large player in a very competitive health market.

Pharmacy Benefit Management: It competes with other major pharmacy benefit managers such as CVS Caremark, Express Scripts, and OptumRx.
Health Insurance: They compete with other national carriers such as UnitedHealth Group, Anthem, and Humana, along with many regional carriers and Blue Cross Blue Shield plans.
Emerging Competition We also see emerging new forms of competition in areas like primary care and health technology.

What Makes Cigna Different

Integrated model: Cigna’s integrated model with both healthcare insurance and a strong PBM and care services arm, sets it apart.
Data and Analytics: Their ability to leverage data across their platform to tailor plans, lower costs, and improve health outcomes is significant.
Global Scale: Cigna has significant operations outside of the U.S., so a diversified revenue stream.

Financial Deep Dive Cigna’s financials are comprehensive, here’s a breakdown:

Revenue: Revenues for the nine months ended September 30, 2022 were $138.7 billion, increasing 6.9% YoY. However, revenue growth rates fluctuate based on changes in volumes, pricing, mix of businesses, and the impacts of acquisitions and divestitures.
Net income: Net income for the nine months ended September 30, 2022, was $4.7 billion compared to a net income of $4.3 billion in 2021. However, the net income can vary from period to period with fluctuations of the underlying businesses and how it is accounted for.

The Company reported adjusted revenues of $45.9 billion and adjusted earnings from operations of $2.4 billion for the third quarter of 2022. Both metrics were impacted by the sale of Cigna’s domestic life, accident, and supplemental benefits businesses, which closed in February 2022. The company increased its full-year outlook.

Cash Flow: Cash flow from operations was $7.187 billion for 2022, and free cash flow was $7.054 billion. This strong operating and free cash flow allow for investment in new projects, acquisitions and capital expenditures, and other needs for growth. However, the capital expenditures fluctuate heavily with industry conditions and expansion activities.
Debt: Cigna has a substantial debt burden, it was $35.1 billion as of September 30, 2022. However they are using debt to finance acquisitions, capital expenditures, and day-to-day operations, also using it strategically to create value.

Moat Analysis

Barriers to Entry: The healthcare industry is heavily regulated, and with existing players, Cigna has significant advantages in terms of scale and brand recognition, making it hard to challenge them. Cigna’s scale also allows it to achieve economies of scale in its operations.
Switching Costs: Switching costs in health insurance are very high because people tend to be reluctant to switch carriers if they have been having a stable relationship. Switching health plans is painful for those with chronic diseases, or those who are used to the processes of their existing plans. It is also a time consuming process. Cigna’s focus on employer-sponsored plans adds to the switching costs, as switching may cause disruptions with employer benefits.
Network Effect: Cigna’s network of healthcare providers provides an advantage as the size of their network makes it more valuable to customers. It becomes a very powerful moat when the client base is large and they are well integrated with the company.
Intangible Assets: Cigna’s brand reputation, especially when it comes to employer-sponsored health plans, is a valuable intangible assets. However, they have faced recent bad press, which may create some risks in brand equity.
Cost Advantages: Cigna has low costs because of its size and economies of scale which does give it a slight competitive advantage.

Moat Rating: 2/5 Based on the information above, Cigna receives a 2 out of 5 rating. While they have significant market presence, scale, and switching costs, the moat does not have the same level of defensibility as companies that have a combination of all different types of moats. Competition is a large threat, and many of the factors providing their moat are not as robust as a pure brand based company or a proprietary product based company. The company may be susceptible to price competition, government regulations, and changing market dynamics, which could impact the company’s ability to sustain long term growth and profits.

Risks To The Moat: The moat may be negatively affected by the following:

Regulatory Changes: New government laws or regulations may change the economics and the financial framework of the industry, therefore decreasing prices or imposing new costs.
Competitive Threat: Existing competitors may improve their position through product improvement and lowering costs, also new entrants may cause additional competition in all sectors.
Technological Disruption: New technologies may arise, which will make existing systems and technologies redundant and outmoded.
Macroeconomic Risk: Economic crisis, high unemployment, inflation, and increased costs of commodities might affect people’s decisions to pay for the insurance and other health services that Cigna provides.
Changes in Brand Image: If Cigna’s brand suffers, they may lose market share.
Legal Issues: A myriad of litigations, investigations, and other legal issues may have a material impact on the financial condition of the company.
Mismanagement: Any kind of strategic misdirection, bad capital allocation or failed expansions may greatly reduce the returns and future projections of the company.

Business Resilience:

Cigna’s business resilience is good.

Essential Service: Healthcare insurance and services are an essential aspect of life, so it has demand regardless of economic conditions.
Diversified Customer Base: Cigna serves a vast customer base which reduces its reliance on any single customer.
Long-term Contracts: Cigna often has long-term contracts, which provides a secure source of revenue, allowing it to weather changes in the economy.
Geographic Diversification: Cigna operates globally, so even if any local market declines they still have exposure in others.
Strong brand: Cigna is a well known, large brand which tends to provide greater financial security and reliability compared to unproven names.

Understandability Rating: 3 / 5 A rating of 3 out of 5 is assigned to the understandability of the business because, it is fairly complicated.

Complex Operations: The company operates a complex structure that includes managing insurance, pharmacy benefits, specialty pharmacy, and healthcare solutions which can be hard to keep track of.
Regulatory Landscape: The healthcare industry is heavily regulated, which further complicates the business model, since they are subject to various laws and regulations.
Accounting Complexity: The accounting of health insurance companies can be difficult, especially when trying to factor in things like actuarial reserves and other similar provisions.
Data-Driven Operations: Many of its operations involve collection, and synthesis of large amounts of data, from different sources, which make it tough to analyze for an outside investor.

Balance Sheet Health Rating: 4 / 5 Cigna is assigned a rating of 4 out of 5.

High Levels of Assets: Cigna has a solid asset base, mainly liquid investments and accounts receivable.
Strong Cash Flows: They generate strong operating and free cash flow, which they can use to pay liabilities and reinvest.
Substantial Debt: While their debt levels are considerable, they are actively managing it to create returns, which makes their leverage manageable.
Ability to Meet Obligations: They have sufficient amount of cash and assets to meet any financial obligations and liabilities.
Ability To Raise Funding: It has good access to capital markets.

Recent Concerns / Controversies In 2022, Cigna reported a data breach where the data of 45,000 patients were exposed, this sparked many concerns about cyber security. Cigna claims that their security protocols are up to date and no consumer personal data was compromised. Also, several states and advocacy groups are putting pressure on Cigna and other insurance providers to stop prior authorization of prescription drugs. They also faced increased competition in Medicare Advantage, which has been pressuring the prices. This may negatively affect margins going forward. The management has stated that they are working to integrate better practices to streamline their operations to tackle the challenges.