Cigna Group Q3 2022 Earnings Call Transcript

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Provided by Quartr
November 3, 2022

Key Takeaways

  • Raised 2022 outlook: Cigna increased full-year adjusted EPS guidance to at least $23.10, reflecting 13% growth on strong Q3 results (revenues $45.3 B; EPS $6.04).
  • Evernorth and Cigna Healthcare delivered robust growth through market-leading pharmacy benefit services, specialty pharmacy, virtual care (MDLive) and U.S. commercial customer wins.
  • Centene partnership: Cigna will be the exclusive pharmacy and specialty services provider for ~20 M Centene members starting January 2024, with a $200 M pretax implementation cost headwind in 2023 and neutral contribution in 2024.
  • Cigna reinforced capital return plans by targeting at least $7 B in share repurchases and maintaining meaningful dividends, supported by $3.3 B of Q3 operating cash flow.
  • For 2023, anticipated tailwinds (selling momentum, margin improvement, biosimilars) and headwinds (investments and Centene onboarding costs) largely offset, with detailed guidance due on the Q4 call.
AI Generated. May Contain Errors.
Earnings Conference Call
Cigna Group Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for Cigna's 3rd Quarter 2022 Results Review. At this time, all callers are in a listen only mode. We will conduct a question and answer session later during the conference and review procedures on how to enter queue to ask questions at that time. As a reminder, ladies and gentlemen, this conference, including the Q and A session, is being recorded. We'll begin by turning the conference over to Mr.

Operator

Ralph Giacobbe. Please go ahead, Mr. Giacobbe.

Speaker 1

Great, thanks. Good morning, everyone, and thank you for joining today's call. I'm Ralph Jacoby, Senior Vice President of Investor Relations. With me on the line this morning are David Cordani, Cigna's Chairman and Chief Executive Officer and Brian Evanko, Cigna's Chief Financial Officer. In our remarks today, David and Brian will cover a number of topics, including Cigna's Q3 2022 financial results as well as an update on our financial outlook for 2022.

Speaker 1

As noted in our earnings release, when describing our financial results, Cigna uses certain financial measures, Adjusted income from operations and adjusted revenues, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders' net income and total revenues, respectively, is contained in today's earnings release, which is posted in the Investor Relations section of cigna.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward looking statements, including statements regarding our outlook for 2022 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

Speaker 1

A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent report filed with the SEC. Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Regarding our results, In the Q3, we recorded after tax special item charges of $23,000,000 or $0.07 per share for integration and transaction related costs. We also recorded an after tax special item benefit of $1,400,000,000 or $4.52 per share associated with the sale of our international life accident and supplemental businesses to Chubb. As described in today's earnings release, Special items are excluded from adjusted income from operations and adjusted revenues in our discussion of financial results.

Speaker 1

Additionally, please note that when we will make prospective comments regarding financial performance, including our full year 2022 outlook, We will do so on a basis that includes the potential impact of future share repurchases and anticipated 2022 dividends. With that, I'll turn the call over to David.

Speaker 2

Thanks, Ralph. Good morning, everyone, and thank you for joining today's call. Our team is performing well in a dynamic environment and we delivered another strong quarter of revenue, earnings and cash flows. Dan, I'm going to spend a few minutes highlighting key drivers of our results in the Q3 and why we are once again raising our 2022 full year outlook for adjusted earnings per share as well as for growth in medical customers and enterprise revenues. Then I'll address how we continue to expand and enhance our capabilities for the evolving market needs.

Speaker 2

I'll also provide some initial perspective relative to 2023. Brian will share more details about our Q3 results and our outlook for the rest of the year. Then we'll take your questions. With that, let's get started. During the Q3, we delivered results that were better than our expectations, including total revenues of $45,300,000,000 and adjusted earnings per share of $6.04 We continue to building on our momentum this year, and we are confident we will deliver on our increased full year 2022 Adjusted EPS guidance of at least $23.10 We also expect to continue advancing our capital deployment Including investing in our business to drive innovation and growth and repurchasing at least $7,000,000,000 of our shares this year, all while paying a meaningful dividend.

Speaker 2

Our performance in the quarter reinforces the impact of our sustained commitment to service and innovation, our progress in retaining clients and expanding relationships with additional services as well as winning new business. Ever North, our health service platform performed well again with solid top line and bottom line results Driven by our market leading innovation and affordability across our pharmacy benefit services, specialty pharmacy and EverNorth Care solutions. Cigna Healthcare, our benefits portfolio also was key to continuing our momentum in the quarter. Our U. S.

Speaker 2

Commercial business is having a very good year with solid client retention levels and new business wins, particularly in the middle market and select segments, leading us to once again Our full year outlook for medical customers. Our medical care ratio for Cigna Healthcare was better than expectations at 80.8% in the 3rd quarter, demonstrating the effectiveness of our affordability initiatives and targeted pricing actions. Overall, we're very pleased with our 3rd quarter results. Now I'll take a few minutes to walk through how we are well positioned going forward with Evernorth and Cigna Healthcare. Within both platforms, we have differentiated businesses And a clear, durable, 3 part growth framework.

Speaker 2

1st, through our foundational businesses, including our pharmacy benefit services, With these mature scale businesses, we established core relationships with corporate clients, health plans and governmental entities. Our capital efficient operating models will further support steady growth as well as strategic and financial flexibility for our company. As we look ahead for these businesses, in 2023, in our pharmacy benefit services, we're expecting another year of high client retention levels, complemented with new business wins. We're also very pleased with our solid start to the selling season for 2024, including our new multiyear agreement for Express Scripts To be the pharmacy benefits and specialty services provider for Centene. Working with Centene, we will make prescription drugs More affordable and accessible for approximately 20,000,000 Centene members.

Speaker 2

The strategic collaboration with Centene builds on Express Scripts' track record as a partner of choice And we'll present growth opportunities to provide additional EverNorth Health Services over time. We continue showing how we have a unique ability to partner Our previous collaborations such as Prime Therapeutics, Oskar and Kaiser Permanente. For U. S. Commercial, we are driving Strong customer growth with wins throughout 2022 enabled by our consultative sales approach and our affordability gains enhancing more competitiveness in more geographies, all while maintaining ongoing pricing discipline.

Speaker 2

The sales and net growth in our National Accounts segment are solid and outpaced prior year results and we are confident this momentum carries into 2023. And in International Health, we are sharpening our healthcare focus For targeted growth opportunities in serving individuals, employers seeking healthy and productive employees and governmental entities that value our care management programs. We have momentum this year in customer growth, revenue and earnings and expect to sustain these results and performance throughout 2023. The second way we drive growth is through our Accelerate businesses, which include Accredo Specialty Pharmacy, Evernorth Care Services and our U. S.

Speaker 2

Government Business. These businesses have outsized opportunities to grow with compelling secular tailwinds as well as differentiated capabilities that benefit our clients and customers. Looking forward for our Accelerate businesses, we continue to be excited about the value creation opportunities in specialty pharmaceuticals, including biosimilars over the next several years. With our leading capabilities and expertise, we expanded our relationship to be the exclusive specialty pharmacy provider for the Department of Defense starting in 2023. This is further reinforcement of how we fuel sustained long term growth in EverNorth by improving clinical quality for the benefit of patients and achieving significant savings for our clients.

Speaker 2

In Evernorth Care Services, we are advancing our care management and delivery strategies. One area of focus is enhancing virtual care that strengthens relationships between patients and their physicians to better anticipate health issues and intervene earlier. For example, with MD Live, we're providing better experiences and improved affordability with personalized care that is more convenient and effective in directing patients to the most When in person care is needed, MD Life successfully guides patients to urgent care facilities or other alternative sites of care, Decreasing avoidable emergency room visits by at least 10%. We intend to further build on this progress by enhancing our virtual primary care offerings for patients With chronic conditions by providing continuous engagement with their physician, remote monitoring with connected devices and real time interventions between appointments. In U.

Speaker 2

S. Government, we are continuing to make investments, positioning us to grow in 2023 and beyond. We are strengthening this business by building on our high quality affordable Medicare Finally, a third way we drive growth is through our cross enterprise leverage. Here, we harness capabilities across our company to accelerate innovation And have a greater impact than any individual could have on its own. Our opportunities here are driven in part by rich longitudinal data and information we have to accelerate The development of new, more effective solutions for our clients and customers.

Speaker 2

Our PathWell programs are a good example. With PathWell Specialty, we're navigation and advanced predictive analytical capabilities to reduce unnecessary musculoskeletal surgeries and provide better coordinated care. There is a significant addressable market for these programs as 50% of adults suffer from bone, joint and muscle conditions, and these are major drivers with our overall suite of capabilities. This has supported a number of attractive wins and a good example is a very large new fee based relationship With our Evernorth and Cigna Healthcare platforms and our growth framework, we anticipate driving another year of earnings, Customer and revenue growth in 2023. We will provide detailed guidance as we always do on our Q4 earnings call.

Speaker 2

Having said that, I'll provide a view of some of the tailwinds and headwinds we see for 2023, which are largely consistent with the points we highlighted at our Investor Day in June. With a strong selling season, we anticipate a tailwind of continued growth across both our Evernorth and Cigna Healthcare platforms. We expect additional margin improvement in Cigna Healthcare And with our leading position in the rapidly growing specialty pharmaceuticals market, we'll begin capturing value from biosimilars. Relative to anticipated headwinds, We will make meaningful strategic investments in our accelerated growth businesses. We will have additional costs as well as we prepare to support renewed and And the relationships with the Department of Defense and Prime Therapeutics.

Speaker 2

And a new development since Investor Day is our exciting strategic win with Centene, which will create a 1 year headwind as we onboard this new partner. Putting all that together, we anticipate that these tailwinds and headwinds We'll largely balance themselves off next year with the exception of our Centene headwind, which represents incremental cost for us in 2023. Now I'll briefly summarize. Overall, our strong performance in the quarter and throughout the year shows how we are addressing the most pressing needs of our customers and clients and growing our business. We're investing in innovation to enhance our capabilities for future growth and continue delivering for all of our stakeholders.

Speaker 2

We're confident we remain on track for our full year 2022 commitments, including our increased adjusted EPS guidance for this year of at least $23.10 And with that, I'll turn the call over to Brian.

Speaker 3

Thank you, David, and good morning, everyone. Today, I'll review key Thanks for Cigna's Q3 2022 results and I'll discuss our updated outlook for the full year. We're proud of another strong quarter With that, we are again increasing our full year adjusted 2022 earnings outlook to at least $23.10 per share, representing growth of 13% of our reported full year 2021 adjusted EPS. Looking at the quarter specifically, key consolidated financial highlights include total revenues of $45,300,000,000 After tax adjusted earnings of $1,900,000,000 and adjusted earnings per share of $6.04 Regarding our segments, I'll first comment on Evernorth. We are pleased with the continued profitable growth in Evernorth Our client centric approach, deep pharmacy expertise and strong track record of service continues to resonate with new and existing clients.

Speaker 3

One good example of this is our recently announced partnership with Centene that will deliver greater prescription drug affordability and access for their approximately 20,000,000 customers starting in January of 2024. This mutually beneficial partnership Turning to 3rd quarter results for Revenorf. Revenues grew 6% over Q3 2021 to $35,700,000,000 and pretax adjusted earnings were $1,600,000,000 Everdorf's results in the quarter delivering lowest net cost solutions for our clients and customers. We also continue to make meaningful strategic investments to both sustain and create new sources of differentiation. These include investments which serve to deepen our client relationships Our services portfolio and digital capabilities.

Speaker 3

Overall, Evernorth delivered another quarter of strong results, consistent with our expectations. Turning to Cigna Healthcare. Our 2021 results presented an opportunity expand future margins. And our team has executed extremely well and achieved both strong membership growth and improved profitability here in 2022. 3rd quarter 2022 performance continued this pattern As adjusted revenues were $11,200,000,000 pretax adjusted earnings were $1,100,000,000 and the medical care ratio was 80.8 Percent.

Speaker 3

Our medical care ratio was better than expectations and continues to demonstrate the impact of our affordability initiatives and pricing discipline. The favorable medical costs in the quarter were partially offset by lower net investment income. Turning to medical customers, we ended the quarter with 18,000,000 total medical customers, Growth of 873,000 customers or 5% year to date. We continue to drive strong customer and client growth in our U. S.

Speaker 3

Commercial and International Health Businesses. Overall, Cigna Healthcare results reflect continued execution against our commitment to increasing both customer relationships and profit margins in 2022. For corporate and other operations, the Q3 2022 pretax adjusted loss was $299,000,000 As a reminder, this segment previously included earnings contributions from the international life, accident and supplemental benefits businesses That exceeded our expectations, continuing our momentum with contributions across our foundational and accelerated growth businesses. Now turning to our outlook for full year 2022. We have positioned the enterprise for continued strong performance in these dynamic times, as demonstrated by our strong year to date results and heightened reinvestment into our business.

Speaker 3

With that said, we remain mindful of the current economic backdrop and utilization environment heading into the upcoming winter months. In light of these moving pieces, we are increasing our outlook for full year and adjusted earnings per share. We now expect full year 2022 consolidated adjusted revenues of at least $179,000,000,000 Enabled by continued growth and deepening of customer and client relationships in both EverNorth and Cigna Healthcare. We are also raising our adjusted earnings per share guidance to at least $23.10 per share, representing growth of 13% over reported full year 2021 adjusted EPS. In Cigna Healthcare, we expect to 81.5 percent to 82.2 percent.

Speaker 3

We are raising our expected full year 2022 adjusted earnings to approximately $4,050,000,000 and we are raising our medical customer growth expectation to approximately 900,000 customers, which reflects strong new business growth and attractive retention levels Our full year 2022 enterprise SG and A ratio It's now expected to be approximately 7.3%, an increase compared to our prior guidance as we further accelerate investments into our business. Now moving to our 2022 capital management position and outlook. Year to date through November 3, 2022, We expect to have repurchased approximately 22,000,000 shares of common stock for $5,800,000,000 including the accelerated share repurchase agreements announced in June. We also continue to expect to deploy at least $7,000,000,000 to share for the full year 2022. And during the Q3, we delivered strong cash flow from operations of $3,300,000,000 We remain on track for another strong year of cash generation, providing us the fuel and flexibility for ongoing capital deployment opportunities.

Speaker 3

Our balance sheet and cash flow outlook remains strong, Benefiting from our asset light framework that drives strategic flexibility, solid margins and attractive returns on capital. Now to recap. Results in the Q3 were above expectations, reflecting strong growth across our diversified portfolio. Evernorth continues to deliver attractive results. While Cigna Healthcare continues to grow and expand both customer relationships and margins, giving us confidence we will deliver on our increased 2022 adjusted EPS guidance of at least $23.10 per share.

Speaker 3

We remain well positioned and expect another year of customer Revenue and earnings growth in 2023. Relative to 2023, We deem the current consensus EPS to be reasonable when excluding the Centene contract win. Although consistent with our historical approach, our initial guidance would have likely started more prudently. As David mentioned, Centene implementation related costs introduced a net new headwind for our 2023 financials. That said, we expect the 2 year compounded EPS growth rate from 2022 The 2024 to be within our long term average 10% to 13% annual range, Driven by the strong earnings contribution from our broad portfolio as well as 2024 contributions from the Centene contract win, Following the implementation cost impact that we will incur in 2023.

Speaker 3

We look forward to providing you with more detailed 2023 guidance during our Q4 call. And with that, I'll turn it over to the operator for the Q and A portion of the call.

Operator

Our first question comes from Mr. Stephen Baxter with Wells Fargo. You may ask your question.

Speaker 4

Yes, hi. Thanks for the question. Just wanted to ask congratulations on the Centene contract win. I wanted to ask specifically, it's Suggesting that we should potentially add that back to 2023 to kind of create a jump off point. Is it too early to think that 2024 will see the contract Financially accreted, basically how should we be thinking about that?

Speaker 4

Is 2024 too early to think about accretion? Thank you.

Speaker 3

Good morning, Steven. It's Brian. I appreciate the question very much. So maybe I'll give you a little bit of a flavor for the multiyear So I'd be remiss if I didn't start by saying this is a huge win for the organization and a great validation of the value proposition In the EverNorth segment of our company and in particular the Express Scripts team, which did a great job partnering with our new client here. And we'll be laser focused on successfully implementing the new client over the course of the next 14 months to ensure smooth execution of their 20,000,000 customers.

Speaker 3

As I mentioned over the lifetime of the contract, the relationship will be accretive to our financials, We should think of the profit margin percentage being below the book average as is typical for a contract of this Size and scale, but in terms of the year by year pattern and how to think about that, you should think of 2023 being a headwind, as both David and I said, due the implementation related costs that are incurred prior to any revenue being received, we're currently sizing that at about $200,000,000 for the 2023 year. Given we're only a week or so into the contract award, we still have a lot of detailed planning to do to refine that, but that's our current best estimate for what 2023 implementation related costs will look like. For 2024, we are currently expecting to be in a neutral to small positive contribution standpoint In terms of the income, so you can think of that 2023 headwind essentially unwinding in the 2024 financials. Then for 2025 and the subsequent years, we would expect to be at approximately run rate contribution levels on the relationship.

Operator

Thank you, Mr. Baxter. Our next question comes from Mr. A. J.

Operator

Rice with Credit Suisse. You may ask your question.

Speaker 5

Hi, everybody. Maybe just to ask, I know last Here or coming into 2022, you made the comment that you wouldn't be doing any larger deals and I think you define that as anything north of $10,000,000,000 in acquisitions. I wonder as you think about 'twenty three now, a lot has changed over the course of the year. You've been very active on Share repurchase front, what is your current thinking about whether you'd be open to transactions? Any comment about priorities or The pipeline and what that looks like.

Speaker 5

And then the flip side, of course, is your ongoing share repurchase activity. When you're giving these 2023 Comments, do you have any sense of where you might size share repurchase activity and all of that?

Speaker 2

Morning, A. J, it's David. So let me provide a couple of landing points there. First, stepping back relative to our capital priorities. Our capital priorities remain consistent, which is 1st and foremost to make sure the ongoing growth of the underlying business continues to be funded properly from Capital standpoint as well as from investments in innovation.

Speaker 2

2nd, to obviously service our very attractive dividend. And then 3rd, we selectively Specific to M and A priorities, as we discussed at our Investor Day, you can think about our M and A priorities largely focused on our Accelerate business and within the Accelerate businesses, A bit more pinpointed within Evernorth Care and our U. S. Government business, we may do tuck ins in other aspects of our portfolio, from a that are highly financially attractive, but strategic accelerants would be more in the Accelerate business. To your question relative to earlier this calendar year, we deemed 2022 to be a bit unique for ourselves In that, as we step into fiscal year 2022, we had the strong operating cash flow that Brian articulated earlier as well as the anticipated inflow From the divestiture of a portion of our international business at Chubb, so those two numbers created well in excess of $10,000,000,000 that we had Stuart forward.

Speaker 2

That, coupled with our view of the price of our equity at that point in time, led us to create as much clarity as possible for our shareholders in 'twenty two relative to our commitment Strategic M and A that advances us in the Accelerate businesses. And then a final note you asked relative to 23. As you have in the past, just Think about we will deploy capital in the way I talked about before, either in a shareholder accretive way to achieve through shareholder share repurchase and or through accretive M and A and our contribution to our EPS growth rate in the 3% to 5% range year in,

Speaker 5

Just a couple of numbers questions. First, The accelerated growth in your stop loss revenue has been impressive this year. Just wanted to get some color on what's driving that and do you think it continues at, we'll call it, a solid double digit pace into 2023? And then quickly, your medical cost reserves were down about 5% in the quarter. Just curious if there was anything driving that?

Speaker 5

Thanks.

Speaker 3

Good morning, Justin. It's Brian. So on the stop loss, we're really pleased with the strong growth that we've shown this year. As you can see, both in terms of the quarter over quarter and the year over year premium growth with 13% and 12% Growth respectively on that. Important to keep in mind, there's a few components that drive that.

Speaker 3

One is we've shown a very strong growth in our fee based Cigna Healthcare customers this year and many of those bring with them stop loss contracts. So there's some Additional units, if you will, of stop loss that are embedded in the year over year growth rate. On top of that, we have had Strong firm price increases on our existing client base. And as you noted, now in the double digit level with the 13% quarter over quarter Representing some of the later 2022 renewal dates, seeing strong price increases. And then finally, we have seen A bit of increased penetration on our existing ASO clients as well of the stop loss product.

Speaker 3

So a few different factors that drove that strong growth. As we talked about in prior calls, we still have some margin expansion opportunity in our stop loss book of business as we head into 'twenty three. So we would expect another year of strong growth in premiums for the stop loss product in the 2023 calendar year. On the reserve side, there's really nothing in particular I'd call to your attention there. We continue to employ a consistent methodology to establishing our reserves.

Speaker 3

There will be some natural variability just between product mix shift and inventory levels changing from quarter to quarter. And overall, we feel good about the appropriateness of our reserves. And if you look year over year at the reserve levels, all the key metrics that we evaluate screen appropriate and prudent.

Operator

Thank you, Mr. Lake. Our next question comes from Kevin Fischbeck with Bank of America, you may ask your question.

Speaker 6

Great, thanks. Maybe just a quick That question and then jumping to the other question. But can you help us size the revenue? I guess there's a little bit of differences in how Centene talks about The revenue contribution versus what it looks like, CBS was booking from a revenue perspective. So can you have a size from a revenue perspective with The Centene contract and whether you get all of that in 'twenty four, whether that ramps up.

Speaker 6

But then I guess like the my main question is just going to be about maybe going back to that M and A point. I just find it very interesting that you've got some competitors who are just out there constantly buying things and adding capabilities, and other companies Focusing more on share repurchase and selective smaller acquisitions, I guess, do you not see this as an arms race? It almost feels to me like A lot of companies are out there building capabilities. Do you feel when you think about M and A that potentially Not pursuing M and A will be a disadvantage over the next 3 to 5 years if you're not doing deals today? Thanks.

Speaker 2

Good morning, Kevin. It's David. On your first piece, again, we'll look forward to providing you a lot more detail as we get into 2023 relative to 2024. At a macro level, I think 2 data points to think about relative to the size of the relationship. In today's state, there's about 40 $1,000,000,000 relative to spend capacity and as I noted in my prepared remarks, approximately $20,000,000 customer relationships That will evolve and change over time.

Speaker 2

And as we provide more detailed guidance going forward, we'll try to separate that versus the revenue contribution. To your strategic question relative to M and A, 1st and foremost, I think your framing is quite important. I wouldn't call it an arms race. I would call it, stepping back, The marketplace demand for further value creation is and will remain consistently aggressive

Speaker 7

from that standpoint.

Speaker 2

Hence, Innovation, additional value creation, strong operating execution and then selectively expanding your addressable market The strategy we deem to be mission critical. 2, now stepping back to ourselves, as we discussed in Investor Day, we're positioned with Strong performing foundational businesses and well positioned accelerate business. Those accelerate businesses are in sectors that have secular tailwinds. And then to the core of your point, how do we fuel additional capability growth? I'd ask you to think about it in a multi pronged approach opposed to M and A, yes or no.

Speaker 2

One is, significant targeted ongoing organic investment back into ourselves With new innovations and some of which I talked about today, some of which we profiled at our Investor Day, our new path to all programs, our unique longitudinal programs Take into consideration data, navigation support, best in class clinical engagement with physicians And we'll increase value by taking costs out of the system through improving clinical quality. So organic investments are number 1. 2 is Smartly and successfully leveraging our ventures capabilities to partner up with organizations to accelerate innovation. And then third is M and A. We remain quite open to M and A.

Speaker 2

We do not deem it to be a silver bullet. It's a part of the growth Support strategy. So organic execution, investments in organic innovation, smart leverage of our ventures capabilities As well as M and A over time, and I would just come back and anchor it. Hence, our track record of strong top line growth And strong bottom line growth with tremendous cash flow generation over the last decade by playing that recipe through which we will on a go forward basis.

Speaker 6

Okay. Thanks.

Operator

Thank you, Mr. Fischbeck. Our next question comes from Ms. Lisa Gill with JPMorgan. Please ask your question.

Speaker 8

Thanks.

Speaker 9

Thanks for taking my question. I just really wanted to better understand as we You had to comment on the tailwind for 2023 around biosimilars. As you think about the Plan design for 2023, are you seeing employers and health plans willing to put the biosimilars on the formulary? I mean, how much Color and visibility do you have to that tailwind for 'twenty three? And is that primarily HUMIRA?

Speaker 9

Or are we thinking about other biosimilars as well?

Speaker 2

Good morning, Elyse. It's David. First, relative to the category, as you know from prior conversations, we deem to be a net positive from a client, patient and customer standpoint as we look forward 'twenty three And beyond as it relates to further improvements in affordability and given the positioning of our accreto capabilities, a net positive for ourselves. So just grounding on that for starters in terms of the capabilities to bring this to bear. 2nd, 2023 represents the start of another step function, but the start of another step function as it relates to the biosimilars.

Speaker 2

3rd, we will communicate our national formulary conclusions later this quarter.

Speaker 4

As you very well know, that's one dimension and

Speaker 2

then there's client specific formularies, decisions that are made that are underway. So to the core of your question, it will vary in 2023 between our national formulary as well as client specific formularies on a go forward basis. We deem it to be a net positive for the franchise in 2023. As I noted, it will present a tailwind for us in 2023. That is Humira specific or the category specific, but others will begin to ramp as we move through 2023 into 2024.

Speaker 2

So A transitional I view 'twenty three as a transitional year for the space with acceleration. Our decisions are about to be communicated and finalized for all Formulary decisions and they're varied at an employer or health plan level. Our national formulary decisions will be consistent across that subset of our portfolio.

Speaker 9

Thanks for the

Operator

comments. Thank you, Ms. Gill. Our next question comes from Mr. Josh Raskin with Nephron Research.

Operator

You may ask your question.

Speaker 10

Hi, thanks. Good morning. So the $200,000,000 you mentioned for Centene preparation costs, is that pre tax or after tax? And then my real question is, the outlook for Medicare Advantage for 2023, I know you've made some investments through this year and you've talked about opportunities for margin next year, but I'd be curious on the growth front. And if you could just give us some color on how some of the newer

Speaker 3

Good morning, Josh. It's Brian. I'll take the first part of your question, and then I think David will Comment on the Medicare Advantage component. The $200,000,000 that we quoted is a pre tax figure. And again, as we work through the detailed implementation plans in In terms of rate and pace, we'll continue to refine that estimate, but you should think of that as a $200,000,000 pretax number for 2023 specifically.

Speaker 3

David, you want to talk about Medicare?

Speaker 2

Sure. Josh, good morning. So specific to Medicare Advantage, let me take it maybe a little bit in reverse order to your question Because as you articulate, we've been systematically adding new geographies net new geographies and adjacent counties over the last several years and Successfully opening those counties in those markets. 2nd, as you would expect, your early sales in a net New market, we tend to have a lower contribution than your sales in mature existing markets. This year, nature of the Operating cost environment and getting those businesses up and running from that standpoint.

Speaker 2

Having said that, while we were very early in the 2023 decision making process Cycle as every day ticks on. Early precincts reporting are positive as it relates to our current net growth algorithm and both in mature counties And markets as well as some of our new market entries. Looking at 2023, given the continued geographic expansion we've made, Network improvement we've made, investment in distribution and marketing support, as well as more resources And capabilities to begin to harness some of the commercial agents to Medicare, we expect 2,003 to be a year of growth for our Medicare Advantage

Operator

Thank you, Mr. Askin. Our next question comes from Mr. Nathan Rich with Goldman Sachs. You may ask your question.

Speaker 9

This is Lindsey Golub on for Nate. Congratulations again on the Centene contract win. Could you talk through some of opportunities for future Evernorth service expansion and just strategic collaboration with Centene.

Speaker 2

Good morning, Lindsey. It's David. Thank you for the acknowledgment. And as Brian noted earlier, we're excited and we're proud to be given We'll seek to earn that opportunity day in, day out. And as Brian noted, before we get to the core of your question, the team is 110% focused on Successful implementation and initiation of the relationship on January 1, 2024, and it heads down relative to that.

Speaker 2

As it relates to future opportunities, I don't want to get ahead of ourselves relative to that. But we've demonstrated over time when we successfully With Centene, 1st and foremost, needing to, wanting to and fully committed to performing on the existing commitment and then availing Centene is a partner relative to our EverNorth capabilities and our broad service capabilities to co collaborate and innovate. So we see Over time, but we're not getting ahead of ourselves. We're focused on the present, and the present is a significant win for us. I would wrap around it.

Speaker 2

Our track record demonstrates deepening of relationships and broadening relationships by co collaboration and co development, and that's what we will seek to do with Centene after we successfully

Operator

Our next question comes from Mr. Scott Fidel with Stephens.

Speaker 10

Hi, thanks. Good morning. Wanted to talk ask about the ACA Exchange market and how you're thinking about the setup for 2023 there. Obviously, some moving pieces on the competitive check score that Should be favorable for potential enrollment growth. So interested in how you're thinking about enrollment growth for 2023 and Confidence in your pricing set up for 2023.

Speaker 10

If you do end up adding more membership than expected given Some of the competitor exits, confidence in also achieving your target margins for that segment as well. Thanks.

Speaker 2

Scott, good morning. It's David. So broadly speaking, we have viewed this space as a space where we have an opportunity to grow over time. And as you very well know, there's been a little bit of volatility since its inception, and we were we entered at inception And remained in the marketplace and continued to systematically grow. We'll grow our geographies, as we step into 2023.

Speaker 2

As it relates to the volume, we would expect to have net customer growth. Our current outlook is to have net customer growth in 2023, And we would expect that there would be a positive margin contribution. As Brian and I both noted, we expect the Cigna Healthcare portfolio in aggregate To have some further margin expansion opportunity, we believe that this subset of our space will have net positive margin contribution going forward. I'm not going to comment in terms The last part of your question went back to target margins. As we continue to invest in, we know what the underlying book is We'll make investment decisions in 2023 for 2024.

Speaker 2

That may dampen a little bit of the margins. Those are Discretionary decisions for ongoing growth. But headline is well positioned for 'twenty three, expect to have net growth and expect to have

Operator

Our next

Speaker 7

One quick one for Brian and one for David. Brian, just on investment income in the quarter looked a little light even accounting for Divested assets, the return looked a little light. So just wondering if there was something there perhaps a little non recurring in terms of And then for David, I had a couple of clients ask lately about The DOJ intervening in the MA lawsuit as well as the AMA joining the class action on the multi I guess the question really is just, is the legal profile of the company changed in any material way? I just want to give you a chance to comment on those. Thanks.

Speaker 3

Good morning, Gary. As it relates to our investment income, within the Q3, In aggregate, the investment income did slightly trail our expectations, but that shortfall was more than offset by the favorable medical care ratio performance within Cigna Which allowed us to outperform both our Cigna Healthcare and Enterprise income outlook. 2 things that are important to keep in mind as you reflect And you referenced this in your question. The first one is the Chubb divestiture that was completed on July 1st, Resulted in a step down of our investment income and you can think of that as in the range of $50,000,000 to $60,000,000 per quarter. That's essentially removed starting in the Q3.

Speaker 3

So any comparisons to historical periods need to normalize for that factor. The second area is within our alternative asset portfolio, which consists of think of this as private market, non coupon assets, This represents a minority of our invested assets, but it's subject to mark to market accounting for U. S. GAAP requirements. And given some of the challenges in the public capital markets this year, We had expected some downward mark to market adjustments in the Q3 and Q4 and that did transpire.

Speaker 3

Some of the downward marks were a little bit larger than what We had been projecting, but as I said earlier, our strong medical care ratio performance in the quarter allowed us to exceed our overall income and EPS I'll look. I mean, as you think about the future and trying to run rate this, if you were to remove the Chubb related contributions from 2022, The all in net investment income for 'twenty three, you can think of as approximately similar to the all in 2022 investment income, so neither a tailwind or a headwind David, I'll let you comment on the Medicare Advantage lawsuit and such.

Speaker 2

Thanks, Brian. Good morning, Gary. Your broader framework, Gary, I'd step back and say, we have we do and continue to operate in an active Regulated space. 2, I'd point to, as we look at today in the past, we have a strong track record As an organization of being well governed and strong healthy compliance related programs. To that point and to the core of your question, I do not deem that the legal exposure, I think, is where you're going after or the profile of the company has changed meaningfully.

Speaker 2

And in some ways, given the strategic positioning of our franchise being more services based, I would make the argument that the legal exposure Bookprint on a relative basis to the space is lighter from that standpoint given the services based nature of our portfolio But no doubt, it's an active space, has been, is and will continue to be an active space, but we're proud of our governance and compliance

Operator

Our next question comes from Ms. Ricky Pohl Vosser with Morgan Stanley, you may ask your question.

Speaker 8

Yes. Hi, good morning. So a couple of follow-up questions here. Just to Clarify, for 2023, the EPS starting point that we should use is the $23,100,000 And then as we think about the Core business would have grown at that long term target of 10% to 13%.

Speaker 3

Good morning, Ricky. It's Brian. So let me I'll try to clarify some of the comments I made earlier as it relates to our 2023 outlook. So prior to the Centene contract award, The current 2023 consensus EPS estimate we see is reasonable. And so the last I looked, this was in the range of $25.30 give or take a few cents.

Speaker 3

With the recently announced Centene contract, this will create an incremental 2023 headwind that will essentially need to be deducted from that 2023 earnings per share figure that I just referenced. And then as I mentioned, as is normal, we typically start with our initial guide having some level of prudence in it, particularly since we have an at least EPS convention with the way that we communicate our outlook. So those are the different moving pieces that I would point to as you think about 2023. And then as I said earlier, relative to the 2 year 2022 to 2024 growth rate, we would Expect that to be within our 10% to 13% compounded annual EPS growth rate range.

Speaker 8

Okay. And then just one quick follow-up question. As we think about the Centene contract, is there any leverage that you gain with the additional scale that you'll see across the rest of the Evernorth bookings business.

Speaker 2

Good morning, it's David. Broadly speaking, a framework of growth always presents opportunity. So I think your basic tenet It's positive here. Additionally, our opportunity to further enhance the value we're able to deliver to existing clients, Actually those with higher government portfolios of business and or strengthen our value proposition even further relative to winning new clients On a go forward basis, so I would give you a directional answer, not a rigid yesno answer, but a directional answer that growth is a net positive, Whether it's ongoing investment back in innovation, the capabilities in subsectors of the space in terms of being much more government intensive within this

Operator

Our next question comes from Steven Valiquette with Barclays, you may ask your question.

Speaker 11

Great. Thanks. Good morning, everybody. So I guess with the increase in membership guidance for 2022 and the commercial risk membership growth year over year actually accelerating as Just curious to hear a little more color just in the positive tailwinds there, kind of what's driving the extra commercial risk membership Thanks.

Speaker 2

Stephen, it's David. Let me talk a little bit just more about the selling season, the dynamic in the process. As I noted in my opening, the 2022 results for commercial portfolio business, 1st and foremost, we're pleased with. We're pleased with The MLR performance, we're pleased with the retention. We're pleased with the net growth.

Speaker 2

2, in 'twenty two, our primary driver of that growth is Good performance in our middle market and sustained success in our Select segment. Within our Select segment, we regularly offer ASO, we're self funded with stop loss, shoulder to shoulder with derivatives of and specific risk alternatives. And we provide choice. We provide choice to clients relative to funding. And we've designed our sales process, our underwriting process, and our solutioning process that We're able to put that choice forward.

Speaker 2

And year in, year out, it ebbs and flows between the different mix between ASO and stop loss and risk business. We're pleased with the net risk results I'm going to underline that, but I think the overall headline is the sustained strong success of the Select segment. Now more broadly, as you look at the portfolio, our fee based business continues to grow. Brian pointed back to the meaningful growth in stop loss. And finally, in my comments 2023, we will have a very good national account in January 1.

Speaker 2

That's largely fee based business. That's retention, it's expansion and it's new business adds, As well as the addition of large, what we would call middle market fee based relationships going forward. So the underlying net growth The quality is there in the MLR and risk fitness you see is really fundamental strength within our Select segment.

Operator

Thank you, Mr. Valiquette. Our next question comes from Mr. Lance Wilkes with Bernstein. You may ask your question.

Speaker 12

Yes. Congratulations on that Centene win. Great job. 2 just cleanup questions. 1 is In Evernorth, just understanding the driver of fees in the Evernorth segment.

Speaker 12

And the other is just a comment on Utilization, obviously, MLR was really down this quarter. Just interested in getting any comments on relative to maybe a baseline or kind of pre COVID levels For commercial, public exchange and Medicare Advantage contrasted with sort of the non medical products, like what's kind of the environment you're operating in they're seeing right now?

Speaker 3

Good morning, Lance. It's Brian. So as it relates to the fees In Evernorth, and you can see the strength in this line if you look at the statistical supplement in terms of fees and other revenue with strong 15% quarter over quarter, 21% year to date growth. There's a few different components that contribute to this. So one, this is where MD Live business And we continue to see strong growth throughout the year in utilization of our MD Live services.

Speaker 3

Secondly, we have a number of Express Scripts or Pharmacy Benefit Services clients who choose a pure fee based relationship with us. So we offer choice relative to how they want to Some of them might want a formulary or a network only relationship, and so that shows up in this line item. And then also our eviCore business terms of medical benefit management, some of the post acute care solutions, etcetera, all roll up into this line. And so all these things in totality are showing nice growth As it relates to your second question, I think that was pointed at Cigna Healthcare more specifically in terms of the utilization environment. 3rd quarter did run favorable to our expectations.

Speaker 3

Most of that favorability was in the U. S. Commercial book of business with our government lines Essentially in line with expectations and within the quarter, both COVID and non COVID costs in the U. S. Commercial book were favorable to our expectations.

Speaker 3

Non COVID favorability was predominantly driven by inpatient and emergency room. And on the COVID side of the house, We saw 3rd quarter COVID related costs running at a very comparable level to what they were in the 2nd quarter, whereas we had assumed a bit of an uptick. So broadly speaking, that's how I would summarize what we saw in the Q3. All in, our commercial book of business is running just slightly above What a pre pandemic baseline would have been trended forward, to your question there with Medicare a touch below that.

Speaker 2

Great. Thanks a lot.

Operator

Thank you, Mr. Wilks. Our last question comes from Dave Windley with Jefferies. You may ask your question.

Speaker 1

Hi, thanks for squeezing me in. I joined late, so I apologize if this has been asked. But as you think about 2023 and kind of Fed pushing to slow labor market and potential recession implications, will you be thinking about Recession possibilities as you set your guidance for 'twenty three and how do you think the business is positioned to be resilient against that?

Speaker 2

Dave, good morning. It's David. So I think a really important question and that we didn't spend time on that. So 1st, from our point of view, there's little doubt the economy has been confronting some challenges. So Recession, non recession, there's been some challenges.

Speaker 2

And to date, important grounding, we've seen little direct impact For the demand of our services, what were the underlying performance for our portfolio, right, movement in costs here or there, but broadly speaking, We've seen little direct impact. As we look forward, by and large, we still see an environment where net net, employers are more In terms of maintaining and or hiring employees seeking to get to full employment, we do see instances where that has We do see instances where employers have put in freezes. But when you balance the portfolio as a whole right now, there's still a net hiring environment that sits in front of Not as of today. As we look forward, we absolutely play through scenarios that could have further softening of the economy or recessionary impact. At this point, we believe given the visibility we have into the starting point of 2023 with the net growth we expect to step in the year with, Coupled with the strength that we expect to end 2022 with, those two points and The various levers we have within our diverse services portfolio and benefits portfolio, we believe we'll be in position to deliver another strong 2023, Ending with, we acknowledge the fact that the economy is in a bit of a challenging environment in the current state.

Speaker 2

But all in, we believe our

Speaker 1

Great. Thank

Operator

you. Thank you, Mr. Windley. I will now turn the call back over to David Cordani for closing remarks.

Speaker 2

First, let me thank everybody for joining our call today, and I'll just wrap up with a few thoughts. First, our business is performing well. Our new collaboration with is great evidence of the strength of our value proposition and how it continues to resonate in the market. We're growing with high levels of retention and winning new clients. We're performing well in this dynamic environment and our sustained disciplined execution is benefiting those we serve as well as our shareholders.

Speaker 2

We are delivering 1st year holders and remain on track for our full year adjusted EPS outlook of at least $23.10 Which is elevated from our prior outlook, and we are confident we are well positioned over the long term to continue to deliver on our annual adjusted EPS growth of 10% to 13 Plus our meaningful dividend. This is all possible because of the breadth of capabilities we have across our organization, our proven commitment to innovation, but most importantly, the dedication of our more than 70,000 coworkers across the globe. I personally appreciate our team and what they do every day for our clients,

Operator

Ladies and gentlemen, this concludes Cigna's Q3 2022 results review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing 800-819-5739 or 2033 693350. There is no passcode required for this replay.

Operator

Thank you for participating. We will now disconnect.

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