Cigna Corporation (CI) CEO David Cordani on Q2 2020 Results - Earnings Call Transcript

Cigna Corporation (NYSE:CI) Q2 2020 Earnings Conference Call July 30, 2020 8:30 AM ET

Company Participants

Will McDowell - VP, IR

David Cordani - President and CEO

Eric Palmer - CFO

Conference Call Participants

Ralph Giacobbe - Citi

Matthew Borsch - BMO Capital Markets

Justin Lake - Wolfe Research

Kevin Fischbeck - Bank of America Merrill Lynch

Ricky Goldwasser - Morgan Stanley

Frank Morgan - RBC Capital Markets

Whit Mayo - UBS

Gary Taylor - JP Morgan

Josh Raskin - Nephron Research

Lance Wilkes - Bernstein

Sarah James - Piper Sandler

A.J. Rice - Credit Suisse

Stephen Tanal - SVB Leerink

Bob Jones - Goldman Sachs

Charles Rhyee - Cowen & Company

Operator

Ladies and gentlemen, thank you for standing by for Cigna's Second Quarter 2020 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 the queue to ask questions at that time. [Operator Instructions] As a reminder, ladies and gentlemen, this conference including the Q&A session is being recorded.

We will begin by turning the conference over to Mr. Will McDowell. Please go ahead, Mr. McDowell.

Will McDowell

Good morning, everyone, and thank you for joining today's call. I'm Will McDowell, Vice President of Investor Relations. With me on the line this morning are David Cordani, our President and Chief Executive Officer; and Eric Palmer, Cigna's Chief Financial Officer. In our remarks today, David and Eric will cover a number of topics, including Cigna's second quarter 2020 financial results, as well as an update on our financial outlook for 2020.

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 this same basis as our principle measures of financial performance.

In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2020 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports 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 second quarter we recorded an after tax special item charge of $99 million or $0.27 per share for integration and transaction-related costs. We also recorded a special item charge of $11 million after tax, or $0.03 per share for cost associated with the early extinguishment of debt. As described in today's earnings release, special items are excluded from adjusted income from operations in our discussion of financial results. Also, as we previously noted, prior year development is now disclosed on a gross basis, consistent with industry practice. Our financial supplement now includes a go-forward of year-to-date unpaid medical claims liability for the six months ended June 30, 2020, and 2019, as well for full-year 2019.

Additionally, please note that when we make prospective comments regarding financial performance including our full-year 2020 outlook, we will do so on a basis that excludes the impact of any future share repurchases. Finally, our outlook for 2020 assumes a full-year of earnings from Cigna's group disability and life business. We continue to expect our divestiture of that business to be completed in the third quarter of 2020.

And with that, I will turn the call over to David.

David Cordani

Thanks, Will, and good morning, everyone. Thank you for joining our call today. The current environment that we all live in and work in is more dynamic, more unsettled, and more complex than any time in recent history, and Cigna's mission to improve the health, wellbeing, and peace of mind of those we serve has never been more important, and it continues to guide the actions as we move forward. In recent weeks and months, we have taken decisive steps to support employers who are the driving force of a thriving economy to withstand and emerge from the COVID-19 pandemic, and to support our communities, customers, and patients, including our efforts to combat systemic racism, which we view as a critical health issue as a well.

Today, I'll offer several recent examples of how we continue to differentiate ourselves in the marketplace and with our key stakeholders by delivering on our promises and working to make healthcare more affordable, predictable, and simple by creating innovative solutions to solve for healthcare's most complex challenges and by partnering with our clients, some of whom are viewed as competitors, but who we see as strategic partners capable of extending our reach to making even greater impact for customers around the globe. We view all of this with the goal of maintaining and improving the health and vibrancy of our clients, communities, and customers. I will also give you an update on our financial results that we delivered for the quarter, and how these results provide a further testament to the strength of our businesses and the value we create for our customers and clients, as well as a few comments on our growth path forward, and then, I will conclude with a brief update on our outlook before turning the call over to Eric.

Cigna's longstanding commitment to our clients, communities, and customers is fundamental to who we are as a global health service company, and it has been critical in shaping our ongoing response to COVID-19 crisis. This response begins with our more than 70,000 colleagues around the globe, who worked tirelessly and with great empathy throughout this pandemic. They wake up each and every day with the sole focus to serve the needs of our customers, patients, and clients around the globe, and I am proud to be teamed up with such a talented group of co-workers, and I thank them for what they do to positively impact millions of lives each and every day.

Nowhere is their commitment more evident than in their deep support of our employer clients; large, small, public, private. These businesses have always been critical to a robust economy, and today more than ever companies will play an essential role in serving individuals, reenergizing their communities and returning economies around the world to economic vibrancy. From the outset of the COVID-19 crisis, Cigna's leverage of breadth of solution, strength of our team, and a consultative approach in our broad data and analytical capabilities to support our employer clients and their employees in numerous ways from taking rapid and decisive steps to eliminate cost as a barrier to testing and treatment, to expanding to access to care, to helping them safely work to return their employees to worksites, most recently, for example, with the launch of our COVID-19 high risk dashboard.

This new suite of innovative analytical tools combines the power of data, predictive models, and clinical expertise to help clients project how COVID-19 might impact the health and safety of their employee populations, and to model forward impacts of different pandemic scenarios going forward. For example, the dashboard compiles and analyzes COVID-19 case data on the health of that client-specific employees at national, state, and county levels, giving them essential insights to guide their decision-making for bringing employees back to work safely. In cases, where employers see concerning trends in the reports, Cigna is prepared to help them take action. For instance, through routes like COVID-19 testing and triage services delivered from on our Cigna onsite health solutions.

Our COVID-19 high risk taskforce represents just one powerful example of how Cigna is helping employers navigate the complexities of the pandemic, and serves as a reinforcement of why employers rank Cigna highest amongst its competitors for driving healthcare quality and value as reported in a recent study conducted by The Leapfrog Group, an independent national organization representing employers.

Turning to our support of communities where we live, work, and play each and every day, our commitment is reflected in our efforts to increase understanding of the impacts of, and to drive positive changes to combat systemic racism, and only is systemic racism an issue of human rights, we also view it as a critical health issue, contributing to well-documented disparities in health treatment and outcomes that disproportionately impact communities of color. Two weeks ago, we launched our new five-year initiative, our building equity and equality program, which commits a mix of local community grants, scholarship funds, and employee volunteer hours to continue to drive Cigna's efforts to eliminate racism, bias, and health and economic disparities for people of color. This new initiative is another important part of Cigna's ongoing commitment to partner with our communities and government leaders to effect positive sustainable change, and we will continue to expand and evolve our engagement programs going forward.

All of Cigna's efforts to partner with our clients and communities is ultimately rooted in our mission to improve the health wellbeing and peace of mind of those we serve, specifically focused on customers and patients. Today, more than ever, they are looking for us to make healthcare more affordable, predictable and simple. We continue to introduce new innovative programs and solutions designed to deliver on this promise. For example, our Customer Protection Program, which safeguards our customers from unexpected costs from COVID-19 through surprise or balance bills from out-of-network providers.

In addition, our pharmacy solutions leverage existing and newly-created tools to put resources and medicines and treatments in the hands of those who need the most. For example, we help Americans who lose their prescription coverage from recent job loss to secure their medications at affordable predictable prices through our Express Scripts Parachute Pharmacy Program. Further, as demonstrated by our most recent drug term report, we also delivered affordability and predictability to our health service customers and clients, who in 2019, experienced an overall rate of increase of drug spending of just 2.3%, a result that is in line with the Consumer Price Index, and important to note, more than one-third of our commercial plans experienced a decrease in overall spending in 2019. Taken altogether these examples I've shared with you today are reflective of how Cigna is and will continue to deliver on our promises, create innovative solutions, and partner effectively to further reach and drive impact.

Now turning briefly to our results, we once again delivered strong financial performance in this quarter, and we remain on track to complete our integration and reach our deleveraging objectives by year-end. Our consolidated revenue is $39.2 billion, and after tax earnings of $2.2 billion reflect continued strong execution of our strategy and the fundamental strength of our four well-positioned diversified growth platforms. In particular, the continued strong performance of our Health Service segment demonstrates the range of services and value we provide to diverse health plan, employer, federal and state government clients.

Our Integrated Medical segment results reflect lower consumption of medical services, as individuals have deferred some services during the COVID-19 pandemic. Additionally, integrated medical customers continue to track much better than the national unemployment figures, as many employers have maintained benefits through this disruptive time, and importantly, because our client mix is less weighted to industries that have been most impacted by COVID-19. As our employer clients have continued to support their employees' health and wellness needs, we've provided hundreds of millions of dollars in assistance to our employer clients, both through direct financial support and by leveraging our flexibility of our full suite of funding alternatives, all of which are already reflected in our second quarter results. I would also note that our self-funded medical clients have directly benefited from well in excess of $2 billion of reduced spending this year. Overall, I'm pleased that by maintaining the strength and health of our franchise, we've effectively balanced and responded to the needs of our stakeholders in this challenging environment.

Now, to bring my comments to a close, the current environment we live in and work in is highly dynamic, unsettled and complex, and as I noted, more than any time in recent history. Cigna's strong second quarter results reflected continued strong execution of our strategy and the underlying strength of our four well-positioned diverse growth platforms. We have confidence that we will continue to effectively support our clients, communities, customers and patients, all while working to deliver on our EPS and revenue outlook for 2020, as well as our 2021 EPS target of $20 to $21 per share. This is driven by our sustained culture of innovation in our organization, the value we deliver to the marketplace each and every day, and aided by the financial strength and flexibility of our franchise.

And with that, I'll turn the call over to Eric.

Eric Palmer

Thanks, David, and good morning, everyone. First, we've recognized that the current environment is even more dynamic, disrupted and complex than usual as we navigate the ongoing COVID-19 pandemic, and I'm proud of the many ways that Cigna has responded as we drive to be the champions for affordable, predictable, and simple health care. Today, I will review key aspects of Cigna's second quarter results, including the impact of COVID-19 on our business and discuss our outlook for the full-year.

Regarding our second quarter consolidated results a few key financial highlights include adjusted revenue of $39.2 billion, adjusted earnings of $2.2 billion after tax, adjusted earnings per share of $5.81, and continued strong operating cash flow of $3.3 billion. Within the second quarter, we continue to execute on the fundamentals of our businesses as we deliver value for customers and clients.

Regarding our segments, I'll first comment on health services. Second quarter adjusted revenues grew 22% to $29 billion, and adjusted pre-tax earnings grew 7% to $1.2 billion. These results were driven by growth and customer event script volumes, favorable impacts from supply chain initiatives, strong specialty performance as our leading Accredo's specialty pharmacies proactively work with patients with complex and chronic conditions to maintain continuity of care for their medications, partly offset by an increase in operating expenses to support growth. We fulfilled $364 million adjusted pharmacy scripts in the second quarter of 2020, an increase of 24% over a second quarter 2019, driven by the in-sourcing of integrated medical script volumes and strong organic growth, partially offset by somewhat lower retail network scripts related to acute needs due to the COVID-19 pandemic. Overall, health services delivered another strong quarter as we continue to deliver value for our customers and clients.

Turning to our Integrated Medical Segment, second quarter adjusted revenues were $9 billion and adjusted pre-tax earnings were $1.5 billion. In the quarter, we experienced significantly lower utilization of medical services in both commercial and government as individual deferred care due to the pandemic. By month compared to baseline expectations, utilization was 30% to 35% lower in April, 20% to 25% lower in May, and closer to normal in June at approximately 0% to 5% lower. We also experienced strong customer retention as our clients' maintained coverage for furloughed employees and our commercial book of business less weighted to the most economically impacted industries.

In response to the pandemic and the tremendous burden is placing on those reserve, we are financially supporting our customers and clients. There are a series of actions including early on waiving all cost sharing for COVID-19 testing and treatment and for Medicare Advantage and individual and family plans additionally, waiving cost sharing for in office and telehealth visits for primary care, specialty care, and behavioral health.

Additionally, we've provided premium relief programs for clients and financial assistance programs to support providers. All in our results for the quarter include approximately $270 million of charges related to these initiatives. It's also important to note that we serve 85% of Cigna's U.S. commercial customers through self-funded arrangements. And as such, our medical cost performance is highly aligned with our clients, who have seen savings well in excess of $2 billion year-to-date related to deferred medical costs.

Turning to our international markets business, second quarter adjusted revenues were $1.4 billion and adjusted pre-tax earnings were $319 million, reflecting deferred medical utilization primarily in our global health benefits business. Claims volumes as well as sales activities increased throughout the quarter as global economies reopened. For our Group Disability and Other Operations segment, second quarter adjusted revenues were $1.3 billion. Second quarter adjusted pre-tax earnings for the segment were $132 million, reflecting elevated life claims primarily due to the pandemic partially offset by favorable performance and disability. Overall, our businesses remained focused and delivered strong performance in the second quarter as we work to rapidly innovate to serve our customers and patients in this disruptive environment.

Now, looking forward to our outlook for the full-year, we continue to focus on driving strong performance across our businesses to continue to be able to improve the health wellbeing, and peace of mind of those we serve. Aided by our strong and diverse portfolio of businesses, we continue to expect full-year 2020 consolidated adjusted revenues in the range of $154 billion to $156 billion, and we continue to expect to deliver full-year adjusted earnings per share in the range of $18 to $18.60. As we look to the balance of the year, we expect medical utilization to increase. We expect additional COVID-19 treatment costs, and we expect lower enrollment as well as continued lower net investment income, due to recessionary pressures.

Inside in our guidance, we considered a range of scenarios regarding the rate and pace of the return of medical utilization, as well as the rate and pace of the reopening of the U.S. and global economies and subsequent impact on employment and customer levels. Our ability to deliver in a range of scenarios, underscores the strength and diversity of our portfolio of businesses, which continue to deliver solutions directly aligned with marketplace needs. We will continue to dynamically manage our businesses, ensuring that we are delivering on the fundamentals and meeting our customer's needs, while also continuing to provide financial support to our customers and clients in a thoughtful and deliberate manner. Taken as a whole, we continue to expect full-year consolidated adjusted earnings per share in the range of $18 to $18.60.

I would remind you that our financial outlook excludes the impact of future share repurchases and assumes a full-year of contributions from a group disability and life business, although, we continue to expect our divestiture of that business to close in the third quarter. Overall, these expected results are driven by strong underlying fundamentals and disciplined expense management and deployment of capital.

Now, moving to our 2020 capital and liquidity position and outlook, our capital efficient businesses, generate a substantial amount of cash flow, which provides us with significant capital and financial flexibility. In the second quarter, we generated $3.3 billion of cash flows from operations, due to strong fundamental as well as the timing impact of approximately $900 million of delayed tax payments permitted under the CARES Act. Through the end of second quarter, we also deployed $1.1 billion to debt repayment. And on a year-to-date basis, we have repurchased $8.3 million shares of stock for $1.5 billion. For 2020, we continue to expect greater than $7.5 billion of cash flow from operations, reflecting the strong capital efficiency of our well performing businesses. And as of June 30th, we had $1.7 billion of cash available at the parent.

Finally, we remain on track to close the sale of our group disability and life business in the third quarter, generating $5.3 billion in net proceeds, which we expect to deploy the share repurchase and debt repayment in 2020. Our debt-to-capitalization ratio was 43.5% as of June 30th, an improvement of 170 basis points from December 31st of 2019, and we remain on track to return on debt-to-capitalization ratio to the upper 30s by the end of 2020. Our balance sheet and cash flow outlook remains strong benefiting from our highly efficient service-based orientation that drives strategic flexibility, strong margins and returns on capital.

Now to recap, through the exceptionally dynamic and disruptive environment associated with COVID-19, Cigna has remained intensely focused on delivering affordability, predictability, and simplicity for the benefit of our customers, patients, and all of our stakeholders. We're fully committed to helping create vibrant, diverse, high performing communities, whether through partnerships with our employer, health plan or government clients with our provider partners, or with our customers directly. We've delivered strong fundamental performance this year. We'll also see lower medical costs from deferred care, and we continue to provide financial support to our clients and customers. We expect our strong fundamentals across our diverse portfolio of growth businesses to enable us to manage through the various impacts of the current environment, and as such, we continue to expect 2020 full-year adjusted EPS of $18, $18.60 per share, and remain on track to deliver on our target of $20 to $21 of adjusted earnings per share in 2021.

With that, I'll turn it over to the Operator for the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ralph Giacobbe with Citi. You may ask your question.

Ralph Giacobbe

Thanks. Thanks, good morning. I guess can you just give us a sense of your conversations with existing employer customers an appetite, if any, for sort of revisiting funding scenarios? I think in the past, you've talked about shared return models, any of that resonating, and then ASR enrollment was down slightly, but you had a more pronounced decline in fees, can you just help reconcile that, and if that's at all related to some of those changing in those funding scenarios would be helpful?

David Cordani

Ralph, good morning. It's David. I'll take the first part, and I will ask Eric to take the second part of your question. At a macro level, yes to what you stated at the first part of your question. So, a lot of dynamic interaction back and forth with employer clients is a regular part of our business, even more elevated in the current environment, a lot of proactive engagement in the change relative to maximizing value for them through using our broad array of alternative funding mechanisms, and even the intra-year conversation, given the uniqueness how this year is playing out bringing more choice to clients. So, yes, continuation of we see it as a strength and continue to see movement in the use of funding mechanisms to best align ourselves with employers, and that plays to a strength of our company.

I'll ask Eric to comment on the second piece relative to the fee dynamic.

Eric Palmer

Yes, Ralph. It's Eric. I would note two items as it relates to the fee dynamics; first and most significantly, we had a reclassification of certain revenues that we implemented actually back at the beginning of the year, so effective January 1st. That did not have an impact on the P&L, but it reduced revenues and has an exact offset in lower SG&A as well. So, that's showing up in the comparison of this year versus last year, and second, as you know, we did see some declines in self-funded enrollment, but just think that is consistent with the impact of COVID-19 and the economic environment overall.

Ralph Giacobbe

Okay, thank you.

Operator

Thank you, Mr. Giacobbe. Our next question comes from Matthew Borsch with BMO Capital Markets. You may ask your question.

Matthew Borsch

Yes, thank you. Maybe if I could ask about the utilization trends that you're seeing. I assume that, you talked to a fairly steep decline in April; I'm curious how you saw the month of June, and then coming into July, given the surge of cases in the Southeast and West, how that has affected your view of trend?

Eric Palmer

Yes, Matt. It's Eric. I will give you a couple of perspectives here. As I noted in my prepared remarks, and we saw the decline of 30% to 35% back in April, and utilization is uptick since then. You've called out geography, and that's a really important dimension here is looking at this play out market-by-market and having the local perspective is important, and we're certainly seeing this play out different rates and phases in different geographies. As I noted also in the prepared remarks, we saw June at much closer to normal level of utilization. I'd say our early indicators for July are pretty consistent with June. So, still some impacts moving through different geographies, but at this point, we'd say July looks an awful lot like June.

Matthew Borsch

And have you seen in the Northeast as things have settled there, are you seeing evidence of flow-through of deferred electives and pent-up demand is there, can you see signs of temporary period of higher than normal trends coming in the wake of this?

Eric Palmer

I wouldn't call anything out on that yet, Matt. I think again, our outlook for the full-year does assume some additional utilization coming in the back-half of the year, but I think it'd be too early to say that we've seen anything like that within the second quarter.

Matthew Borsch

Thank you.

Operator

Thank you, Mr. Borsch. Our next question comes from Justin Lake with Wolfe Research. You may ask your question.

Justin Lake

Thanks. Good morning. I wanted to focus on the PBM here. Specifically, two things; one, your first-half growth has been significantly ahead of at least the initial guidance for the full-year. So, by my math, it implies, you know, about 3% growth in the back-half versus about 8% growth in the first-half. So I'm just curious, I know you haven't updated in the guide, so do you expect this first-half performance to be indicative of the full-year, or not with the kind of swing factors first-half to the second-half? And then also your scripts are running kind of better than I think a lot of people would have expected, given the slowdown in scripts in the second quarter overall, so can you give us some color there, and maybe any color on kind of mail order mix in the second quarter and the kind of profitability drivers there? Thanks.

Eric Palmer

Hi, Justin. It's Eric. Good morning. So, on the first part of your question for the health services and kind of the pattern of the earning, we just step back, the normal pattern for this business is for income to grow throughout the year, as you know, just reflects the overall utilization patterns, and our efforts to manage the supply chain, and we think that will continue to play out throughout the course of 2020. Now I'll remind you, in 2019, the pattern was a little bit extra weighted towards the back-half of the year just given the timing of the supply chain initiatives. So, when you are comparing 2020 to 2019, you'll see that the impact of that kind of play out to the year. We think of 2020 as being more of a normal pattern this year. We think of 2019 was a little bit backend weighted. So, that'd be the biggest dynamic I'd call out as it relates to the pattern.

Now, as it relates to the script volumes, overall, we're executing very well and very much in line with the pattern that we had expected to play itself out. As I noted back at our call a quarter-ago, we did see, or we estimated to be about five million scripts get refilled a little earlier that moved from the second quarter into the first quarter, and since that played out, and additionally we've seen nice utilization within our home delivery pharmacy. There's a lot of benefits to the mail order pharmacy and such for our customers and clients. We've seen that adoption continue to be good, but again, nothing else I'd call out in terms of major dynamics.

Justin Lake

Great.

Operator

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

Kevin Fischbeck

Great, thanks. I want to ask about the commercial membership trends, I guess that you're thinking about for the back-half of the year, I appreciate that, you mentioned that furloughs has impacted as well as your customer exposure, but just maybe if you go down to both of those a little bit, have you had any conversations with clients about membership at risk from furloughs just to sign kind of size, what that might mean in the back-half of the year, and then the comment about being less exposed to the markets most impacted by COVID, are you seeing a differential in trend, or are you seeing those customers in the segments you expect to be impacted seeing larger declines in enrollment already versus the other sectors? So, any color there?

David Cordani

Kevin, good morning. It's David. So, let me try to paint the 2020 picture, and then maybe even bleed in a little bit of comments in terms of how we expect to unfold beyond that going into 2021. So, first and foremost, a significant amount of interaction with clients, always part of our consultative approach, elevated even further in the current environment and the dynamism. So, we're looking at this as best we can through a client-by-client framework. As we noted previously, a high percentage of clients have maintained benefits either through the use of the word that we talk about is furloughs or layoffs with benefit continuity taking place, and I think that's a testament to how committed employers are to the health safety and wellbeing of their employees, and the optimism they continue to hold on to return employees back to work to keep their businesses running on a go-forward basis.

As it relates to the second-half of the year, we expect the following: we expect to see those employees who are furloughed, or with continuity of benefits, we expect to see those furloughs dissipate or go away, and one or two things transpire either (a), no benefits for the employee and they transition to [indiscernible] or other alternatives, or (b), they return to full employment, and client-by-client, we're going through patterning of what the expectations are relative to that. Therefore, we expect to see the effect of lower levels of employment across our book continue throughout the second-half of the year, and that's fully factored into the outlook that Eric made reference to. And then finally, maybe at the most macro level, the way we're thinking about it is essentially over the next 18 months, second-half of '20 and 2021, we expect to see a slow recovery to the overall employment marketplace in the United States, and that's what's factored into our thinking, said otherwise, we expect to see pressure of through the second-half of this year and 2021 to what would otherwise be a normal course of business from a membership standpoint, and that's factored into our thinking for 2020 as well as 2021.

Operator

Thank you, Mr. Fischbeck. Go ahead, sir.

Kevin Fischbeck

Do you have any color about the impact on the members, who are [indiscernible] impacted by COVID versus those [infected] [ph] that you don't see disrupted, any difference in trend there?

David Cordani

Kevin, stay on the line. Are you asking the question of medical trend or employment dynamic?

Kevin Fischbeck

Sorry. It's the employment dynamic. Second part of my question was, you know, are you seeing a differential in employment -- or job losses or in markets where you said that you have low exposure to those segments that are impacted by COVID, so just wanted to see if you are seeing any differential in the employment trends.

David Cordani

The answer to that is absolutely yes. So, as we parse our business by sector, and then employer-by-employer, there is no doubt, there are some employers that are having either de minimis impact to their employee base as a result of COVID, or there are some factors that you're seeing actually the need for more employees, given the environment. So there is no doubt that the phenomenon we're talking about is incredibly uneven or unique not just to sector, but to employers within the sector. That's why our approach is a client-by-client approach, so yes to that portion, unequivocally high variability there.

Kevin Fischbeck

Okay, thanks.

Operator

[Operator Instructions] Thank you, Mr. Fischbeck. Our next question comes from Ricky Goldwasser. Your line is open; from Morgan Stanley.

Ricky Goldwasser

Yes, hi, good morning. Thank you for taking my question. David, going back to one of the comments in prepared remarks, you talked about partnering with some competitors, could you just share some details of the recent partnership with Oscar, how do you think about this developing, and I'm curious what is your appetite is for the exchange market?

David Cordani

Ricky, good morning. So, appreciate you referencing the prepared remarks. My remarks said, of what some view is traditional competitors, we view as strategic partners. So stepping back, our philosophy has been we seek to be the undisputed partner of choice. And our view is that the ability to partner with others and work to create shared value presents an opportunity for mutual growth, which means more customers to serve in a larger impact.

So, now stepping back, whether that's through an expanding portfolio of health plan clients through a health service portfolio, where we challenge ourselves to continue to bring additional innovations for the benefit of our health plan clients to help them deliver better affordability, better value and continue to grow or specifically to come to your question with Oscar. We have an exciting partnership with Oscar where we're bringing mutual capabilities to the table to bring some additional innovation to the small employer market, a marketplace that both organizations feel has been underserved as relates to benefiting from more innovative programs around health engagement, personalization, value based care, more comprehensive clinical engagement programs, and together we're going to be able to bring the best of both companies together. And at the later part of this year, we'll be opening up some additional markets where we're already quoting today, jointly, so the philosophy of the corporation is defined mutually aligned organizations where we could create leverage value together, and then pursue that and Oscar is a wonderful example of it. And actually, we had to check in with the team earlier this week, Eric and the team is working exceptionally well to get around the innovation here.

Operator

Thank you, Ms. Goldwasser. Our next question comes from Frank Morgan with RBC Capital Markets. Your line is open. You can ask your question.

Frank Morgan

Yes, just one question around the difference. Could you distinguish any difference in what you saw regarding deferrals into commercial versus the Medicare book? Thanks.

Eric Palmer

Frank, this is Eric. With a pattern was with similar in terms of how we progress through time, we would note we saw more of a deferral percentage in the commercial book than what we saw in the Medicare Advantage book, but again, kind of the progression month-to-month has been pretty consistent, just more significant impact in the commercial business.

Frank Morgan

Thank you.

Operator

Thank you, Mr. Morgan. Our next question comes from Whit Mayo with UBS. You may ask your question. Mr. Mayo, please check your mute feature.

Whit Mayo

Sorry about that. Can you maybe -- I appreciate the question, can you maybe help us understand the impact of commercial leakage on the PBM? I'm just trying to crosswalk the two and think through what percent of your wrist members are with your PBM, and presumably, all the self-funded are, but I'm not sure that this is necessarily a one-to-one relationship. So any help would be great. And then also maybe just on the Medicaid enrollment that we're seeing sort of nationally. I know this isn't really impacting you per se, but maybe just the overall impact on the PBM given its exposure to Medicaid?

David Cordani

Whit, it's David, can you repeat the first part of your question because Eric, and I didn't hear a couple of your words and we want to make sure we understand the query.

Whit Mayo

Yes, I'm just trying to sort of cross walk the impact of commercial leakage. The declining commercial membership across risk and ASO how that impacts your PBM, and I think that the majority of your risk members are probably not with your -- with your PBM, and presumably the self-funded also I'm just trying to square the commercial leakage with the PBM?

David Cordani

Great, I will ask Eric to take the first part of the question and I'll come back and take the second part of your question on Medicaid.

Eric Palmer

Good morning, Whit. On the leakage, as you termed it, maybe step back the -- I think the way I think about that is we have a kind of spectrum across our different customer segments. So within our Select segment, offering, really think about all of our Select segments as having a comprehensive bundle of our services, so pharmacy, behavioral, disease, and care management et cetera, all tied together with stop loss and administration or in our fully insured product, but to that point, think about the Select segment as being effectively 100% penetrated with our pharmacy offering, as you move into the middle market segment, reasonably high degree of penetration there, but you see more buyers that have smaller cart offerings are purchasing and such we've provided some statistics on this at the past and some of our past Investor Day materials, but think about, you know, a meaningful portion but not all of the middle market is having purchased an integrated offering, which then flows to the PBM, and then that same dynamic holds through in the national segment, it's even more à la carte, if you will, in terms of the pieces that are, but the I think about it more along the segment lines than I would around just kind of the funding on it is true that the insured business also carries a high degree of penetration, but I encourage you to think about it by segment

David Cordani

And Whit relative to Medicaid, we currently serve very attractive portfolio of Medicaid relationships through a health service portfolio. As a result of our diversion, high performing health plan, portfolio businesses, we see that as growing. We've grown that successfully. Notwithstanding the COVID pandemic ramifications and looking forward, we see that as a continued growing base of an opportunity for us to expand into servicing the Medicaid population, but servicing them through the health service platform.

Whit Mayo

Okay, thanks.

Operator

Thank you, Mr. Mayo. Our next question comes from Gary Taylor with JP Morgan. You may ask your question.

Gary Taylor

Hi, good morning. I have a two part question about your MLR expectations. And your -- I think relatively appropriate conservatism or, you know, caution as we head into the back-half, but the question is, now as you anticipate higher MLR in the back-half, is that explicitly from an expectation around the deferred electives coming through or around an expectation about higher acuity care being required because of necessary, you know, deferred care during the pandemic, and do you have any evidence around those? That's the first part. The second is just given where you stand on your three year rolling, commercial MLR minimum positions, if we don't see this, pick up some MLR transpire should we still can -- should we assume that in the second-half, there is still pretty substantial flow through of MLR EPS?

Eric Palmer

Yes, Gary, this is Eric. So we'll take that one on a couple of different dimensions we've talked about there. First of all, stepping back, we expect a loss ratio to be somewhat elevated in the back-half of the year. Think about that as 150 to 200 basis points increase over what we previously would have expected for the second-half of the year. Not dimensioned that off a couple of things. One, we do think that there will be some deferred care utilization and the potential for higher acuity coming back in, and then, two, the ongoing effect of the programs we put in place to reduce co-payments or make care more accessible and affordable within quality drive of some additional utilization. I don't have a precise kind of identification of each of those components, but think about those as the biggest drivers for our outlets over the course of the back-half of the year. On the minimum MLR, as you know it's a three-year calculation for the minimum MLRs for the commercial business. So again, we generally speaking, do have a margin between where we are at and the minimum. Now I would know that we increased our accrual in the second quarter by $95 million, and we've got $175 million on the balance sheet for this as a provision at this point, and so it's something we watch, but would still know that there's across the board. Still a margin there before we did not see any of the impact kind of flows through the bottom-line.

Gary Taylor

Thank you.

Operator

Thank you, Mr. Taylor. Our next question comes from Josh Raskin with Nephron Research. You may ask your question.

Josh Raskin

Hi, thanks. So, good morning, it's Josh here with [indiscernible] as well. What you see as more permanent changes as a result of the COVID pandemic, and what are you doing to make sure that Cigna is positioned to take advantage or capture those opportunities going forward?

David Cordani

Josh, good morning. It's David. I'd identify two; one in terms of access, two, in terms of programmatic. As it relates to access, it's indisputable that the COVID pandemic has either required caused or pushed more utilization of technology as a mechanism to access care coordinate care et cetera. You recall that our view has been for some time that we believe a meaningful amount of care can be delivered through a combination of technology, you can call it tele, you call it virtual et cetera, but it needs to be highly coordinated care, and then, further augmented by in-home care that is also aided by technology. So one, we believe that the rate and pace of adoption and acceleration of reformatting care access, utilizing technology to coordinate care and deliver care in a personalized high-quality basis. And then augmenting it with re-envisioning what could take place in the home is mission critical and accelerated by COVID, that's on strategy for us, and we are aggressively investing in and innovating in those categories off of a variety of platforms.

Secondly, a lot of what we talked about before. It's a little back to the future, but COVID re-highlights for all societies around the globe that as challenging as COVID is, it's exponentially more challenging for individuals who have chronic conditions or who are polychronic, so it presents another opportunity to engage with employers, with health policymakers and from a public health policy standpoint to make sure we're investing in and innovating programs with physicians and individuals to lower health risks or increase health quality for those who are chronic or polychronic because all things remaining equal, if you have a better health status, you're more likely to withstand COVID or the next generation, a decade from now and beyond, and that's an area where Cigna excels on our current state of basis in terms of what we're able to bring to bear from that standpoint, as well as with the health service portfolio, and then, putting up over that of COVID-19 highlights the mental health dimension that is, highlighted in societies around the globe, where the mental health and the physical health needs to come together to best manage overall wellbeing. So, reformatting, utilizing technology, chronic condition management and improving overall health risk and then taking mental health and the physical health together are all areas we see as being accelerated because of COVID and additional opportunities and areas that Cigna is heavily investing in.

Josh Raskin

Thank you.

Operator

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

Lance Wilkes

Yes. Good morning guys. Just wanted to get your updated views on your strategic capital deployment priorities and in particular I was interested in, how you're prioritizing buybacks given the group sale, and then, if you've had any change in perspective or evolution involved in Medicaid, owning positions or other aspects of value-based care, and how you're looking at global now?

David Cordani

Lance, good morning. It's David. I'm going to ask Eric to comment on the portion of your question specifically because of the uniqueness of the group sale, and then, I'll come back and talk about M&A priorities more broadly.

Eric Palmer

Yes, Lance, good morning. So just on the group sales specifically, so first of all, we do expect that transaction to close within the third quarter reminder, we expect $5.3 billion of after-tax proceeds once that transaction closes, so that is coming in, in the relatively near-term. As we've talked about for some time now, we've had a goal of and are committed to obtaining a debt or achieving a debt-to-capital ratio of under 40% by the end of the year. We're driving towards that, and we've committed to deploying a significant amount of the proceeds from the group transaction to share repurchase to offset the dilution, the effect of the not having the group insurance business for a portion of the year. So again, at the most macro level, those are the pieces we're navigating. We do continue to fund significant organic growth; we continue to have capital investments to advance our capabilities, but definitely, we see share repurchase as a really excellent use of capital to drive shareholder value in the near-term, and the last thing I note is just add our recent board meeting, our board increased the share repurchase authorization consistent with our expectation of closing the New York Life transaction later this quarter. And as we sit here today, we have $4.4 billion of share repurchase authority outstanding.

David Cordani

And Lance relative to the portfolio of businesses today and going forward. First to be clear, we like our portfolio in the strategic positioning and are pleased with its performance from a growth standpoint, from a service standpoint and from a capital and fiscal flexibility standpoint that portfolio is positioned to deliver sustained 6% to 8% revenue growth. As it relates to M&A priorities, we continue to remain focused on five specific M&A priorities; one, to further strategically and smartly over global footprint, second, to further enhance our U.S. seniors' capabilities, third, continue to broaden our digital and information capabilities, fourth, looking to continue to expand our care coordination capabilities, and five, as we've talked before, exploring state-based risk program capabilities as we see states who are under budgetary pressure for within their Medicaid programs, seek to further sub segment their programs and seek either high credit -- high cost complex critical programs to be able to perform on their behalf and deliver more value. So, we see opportunity going forward, but building off of a very strong base and low performing portfolio.

Lance Wilkes

Great, thanks.

Operator

Thank you, Mr. Wilkes. Our next question comes from Sarah James with Piper Sandler. You may ask your question.

Sarah James

Thank you. Can you talk about any slowdown that you've seen in the pace of receiving claims from the date of service, and then on your risk business, what impact that's made on your reserving policy or any impact to MLR? Thanks.

Eric Palmer

Hi, Sarah, it's Eric. Broadly, I wouldn't call out any change in terms of impact. Since again nothing that would rise to being inevitable. With respect to our reserving approaches and policies has been very consistent, because the same team and the same approach to working through those calculations for some time, it served us really pretty well so I wouldn't note anything unusual here.

Sarah James

But are you seeing a slowdown in claims, especially timing?

Eric Palmer

No.

Sarah James

Okay. Thank you.

Operator

Thank you, Ms. James. So our next question comes from A.J. Rice with Credit Suisse. You may ask your question.

A.J. Rice

Hi, everybody. Just wondering some discussion about the selling season I'd seen in your press release; you're talking about in the health service division [indiscernible] I wonder, if you could just talk through a little bit what you're seeing for the 2021 selling season related to integrative medical and the health services division, how the COVID impact is on that process whether it slows it down or causes people to defer decisions, and if I could just slip in as well on the healthcare services division. And I know you're not seeing much attrition in the integrative medical, but how is the economic slowdown impacting the PBM side of the business, if at all?

David Cordani

A.J., it's David. I'll take the selling season. I'll ask Eric to comment briefly on the year equivalent of its enrollment on the integrated medical what we're seeing on the health service portfolio. First broadly on the selling season, I appreciate you asked about multiple segments of business. Headline is well we're not guiding for 2021 yet, we will expect another year of attractive revenue growth for the franchise in 2021. For the health service portfolio that will be anchored in a third consecutive year of truly outstanding client retention, where our clients continue to reward us by staying with us and expanding the relationship because of the services we're delivering because of the continued innovation we're delivering, and because of the outstanding affordability or market trends we're delivering on their behalf.

Before I jump over to Integrated Medical comments on Medicare Advantage, we would expect another year of attractive customer growth within our Medicare Advantage portfolio, and I will remind you we set a strategic objective to grow Medicare Advantage customers 10% to 15%. We're tracking well to that objective in 2020. We would expect to know the year of contribution in 2021, and specific to the Integrated Medical, our visibility in 2021 is largely through the national accounts at this point in time, and to remind you we defined that as commercial employers with 5,000 or more employees. We're a multi-state, at this point in time, we expect to see that tracking to a bit higher retention rate than recent past. And while we have some new business wins, we expect the new business wins to be a little less than recent past taken as a whole, probably performing a little better as we step into 2021 off of that portfolio, and then the middle market or regional and select segments are currently in the throes of their growth trajectories as we look into 2021. Wrapping it up, we would expect again another year of very attractive and profitable revenue growth for 2021. Eric, maybe just a little color on the health services dynamic of the equivalent disenrollment?

Eric Palmer

Thanks, David, and good morning, A.J. So, on the health services business, again within the segment, I think we've talked about in the past we've got a really diversified book of business here with customers through a variety of channels and players that are helped play on government relationships, some direct programs and the like, we've had a really strong degree of client retention and we've had a high degree of continuity in terms of enrollment within those clients as well. So note in my prepared remarks, we did have a bit of a dip of retail acute scripts, especially earlier in the quarter, but that'd be really the only thing I would call out is particularly impactful. Overall, the enrollment levels within our clients and within our health plan clients have held up quite nicely.

A.J. Rice

Okay, great. Thanks a lot.

Operator

Thank you, Mr. Rice. The next question comes from Stephen Tanal with SVB Leerink. You may ask your question.

Stephen Tanal

Hey good morning, guys. Thanks for the question. Maybe just one really quick follow-up on strategic M&A, and then an actual question, so I just want to understand what would you say we should expect with respect to the size of any future deals you might choose to do, and your willingness to do another large deal just following up on that question earlier, and I also just wanted to get your latest thoughts, obviously in the executive order last Friday order HHS to put out the rebate rule again, but it was conditioned on being able to demonstrate no increase in premium or really any kind of cost any payers, which looks pretty unlikely given the CBO scoring the first time around, but just given the prospect, I guess it'd be helpful if you could just remind us how to think about that rule and its potential effect on the economics of the PBM business and Medicare? That'd be helpful. Thank you.

David Cordani

Sure, good morning. It's David. I'll take both questions. On the first question as I noted before, we're really pleased with the configuration of our business portfolio today and its performance. I'm not going to comment on size of assets. We've been quite disciplined over a long period of time relative to strategic alignment and financial alignment relative to assets we would pursue. And it would be inappropriate to say that there's an asset of the certain type or size from that standpoint that we would limit ourselves to. Specific to the executive order, stepping back; first, at the more macro level, we share the administration's objectives to further improve affordability of prescription drugs. There's no doubt about that and concrete examples, including we were the first to step into the need to reformat the diabetes and insulin environment with a patient insurance program that caps cost at $25 for 30-day supply. It truly creates affordable, simple, predictable, or embark program that focuses on high cost specialty drugs, or recent launch of our Parachute program for workers who've been displaced. So we will continue to drive innovation, and our clients are benefiting from that relative to our market leading trends. Specific to the rebate rule, your overall framing I think is right. Specifically, we do believe the rebate rule, if implemented in its current configuration would have a material effect on Cigna. It focuses on the government programs and as you know as designed today, the government run programs required and are facilitated by full pass-through, fully transparent rebate economic to start with. They were designed in the pricing scheme as indicated by government rules that we all comply with as an industry. The result of this rebate rule change is designed will result in increasing cost all seniors as an example, and thereby decreasing cost for some depending on their point-in-time drug utilization, and the rule is written today would create a conflict in terms of what would transpire around that, but from a Cigna perspective, we do not see that as having an impact on our book of business and overall performance even if the rebate rule was implemented.

Stephen Tanal

Okay. Thanks.

Operator

Thank you, Mr. Tanal. Our next question comes from Bob Jones with Goldman Sachs. You may ask your question.

Bob Jones

Great, thanks for taking the questions. I guess, Eric, maybe just to go back to one on the PBM comment you made earlier in Q&A about not pulling anything major as far dynamics. I was just wondering how the Prime roll on has been going. Had that any major impact on the quarter? Is that kind of going according to plan, and then maybe just you haven't spent a lot of time on Accredo, maybe just any kind of parsing out of volumes of the traditional pharmacy business have trended relative to the specialty pharmacy. Have you seen any differential impact there as a result of the COVID environment?

Eric Palmer

Yes, Bob. It's Eric. Good morning. So with respect Prime, we announced the collaboration with Prime last December. We worked quite diligently over the end of the year and through the first quarter to get ready for that when we began servicing that collaboration on April 1st. It's really performed very well and very much consistent with our expectations both in terms of services provided, timing and the volumes and the like such to getting up to a great start. We are delighted to have the relationship there.

In terms of specialty, I appreciate you calling out Accredo. Accredo continues to be industry leading capability here, and it does continue to drive growth as we see more and more specialty products and as more and more clinical needs the clients those we serve or both of those things drive an additional growth within Accredo. So again, continued strong growth there as well and that's a real bright spot even in the strong health services results.

Bob Jones

Right, thank you.

Operator

Thank you, Mr. Jones. Our last question comes from Charles Rhyee with Cowen. You may ask your question.

Charles Rhyee

Yes, thanks for squeezing me in here. Maybe I could ask a question about the international segment, David. You kind of said earlier sort of lower claims volumes benefiting the quarter, but maybe you can give us some sense in what your expectations are sort for maybe for the back-half. And give a sense of what the trends you are seeing globally related to COVID. And if there is anything that you can take from that as we think about how COVID may progress here in the States. Thanks.

Eric Palmer

Yes, Chuck, it's Eric. I will start here. With respect to international if you noted it was a strong result year-to-date. And the segment overall continues to perform really well. We've got as I think you know two platforms within the international business. A global health benefits platform that serves employers and a more individually oriented platform that serves both kind of health and supplemental needs and such. With the employer book of business, I would say globally the dynamics were pretty similar to the dynamics that we talked about in our Integrated Medical segment. So, we saw a deferral, less utilization earlier in the quarter. Some of that's come back over the balance of the quarter. We continue to expect to see a slower recovery in terms of employment levels and the like within this business, but I think of it is having a lot of parallels with the U.S. medical business. On individual business, I think here we saw disruption back in first quarter even in terms of both sales and in terms of claims experience and such. Really seen a lot of that come back in Asia, and our Asian market is already and very much kind of back to normal in a lot of our individually oriented businesses at this point. So again, looking forward from here, we would see a continued strong performance in a business, continued growth trajectory from a growth perspective.

David, what else you would like to add here?

David Cordani

Just add in the learning category, as we are learning in the United States, state-by-state, we are seeing around the globe the imperative of being flexible as the pandemic ebbs and flows from that standpoint from community standpoint from health access standpoint, from the academic standpoint, from the employer standpoint, and secondly, we have seen consistently around the globe a more aggressive adoption of as I referenced before technologically-enabled health access solutions, even in environments where they previously were at a really low adoption rate, less desire to go to physical proximity to access care, if it could be delivered through technology, and we see an elevation of that those services being utilized around the globe. We think that trend will continue.

Charles Rhyee

Great, thank you.

Operator

Thank you, Mr. Rhyee. At this time, I turn the call back over to David Cordani for closing remarks.

David Cordani

Thanks. Just briefly wrap up, I want to first and foremost again acknowledge and thank Cigna's more than 70,000 colleagues around the globe who worked tirelessly with great empathy throughout this pandemic to serve the needs of our customers, our patients, work within our communities, and support our clients around the world. At Cigna, our mission to improve health wellbeing and peace of mind of those we serve has never been more important, and that continues to guide our actions, and will as we go forward. In recent weeks and months, we've taken decisive actions to support our employers who we believe are the driving force to a thriving economy to withstand and emerge from the COVID-19 pandemic, as well as to support the communities and customers we work and serve in each and every day, including our efforts to combat systemic racism, which we also view as a critical health issue.

From a results perspective, we once again delivered strong financial performance this quarter, and we remain on track to complete our integration and reach our de-leveraging objectives by the end of this year. We continue to expand and innovative programs and services to support our clients, our customers, our patients, and our communities, and we are on track to deliver our revenue and EPS outlook for 2020, as well as our 2021 EPS target of $20 to $21 per share.

With that, I thank you for joining our call today, and we look forward to future discussions.

Operator

Ladies and gentlemen, this concludes Cigna's second quarter 2020 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 800-839-1171 or 203-369-3030. No passcode is required for the replay.

Thank you for participating. We will now disconnect.5