Earnings Call Transcript - CI Q3 2022

Ralph Giacobbe, Senior Vice President of Investor Relations

Great. Thanks. Good morning, everyone, and thank you for joining today's call. I'm Ralph Giacobbe, 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 third quarter 2022 financial results as well as an update on our financial outlook for 2022. 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. 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 third quarter, we recorded after-tax special item charges of $23 million or $0.07 per share for integration and transaction-related costs. We also recorded an after-tax special item benefit of $1.4 billion 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. Additionally, please note that when we 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.

David Cordani, Chairman and Chief Executive Officer

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. I'm going to spend a few minutes highlighting key drivers of our results in the third quarter and while 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, and I'll also provide some initial perspective relative to 2023. Brian will share more details about our third quarter results and our outlook for the rest of the year. Then we'll take your questions. With that, let's get started. During the third quarter, we delivered results that were better than our expectations, including total revenues of $45.3 billion and adjusted earnings per share of $6.04. We continued building out 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 strategy, including investing in our business to drive innovation and growth and repurchasing at least $7 billion of our shares this year, all while paying a meaningful dividend. 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. Evernorth, 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. 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 raise our full year outlook for medical customers. Our medical care ratio for Cigna Healthcare was better than expectations at 80.8% in the third quarter demonstrating the effectiveness of our affordability initiatives and targeted pricing actions. Overall, we're very pleased with the third quarter results. Now I'll take a few minutes to discuss our strong positioning for the future with Evernorth and Cigna Healthcare. Both platforms feature distinct businesses and a solid three-part growth strategy. First, our foundational businesses, which include our pharmacy benefit services and U.S. commercial and international health sectors, allow us to cultivate strong relationships with corporate clients, health plans, and government entities. Our capital-efficient operating models are designed to support steady growth and provide strategic and financial flexibility for our company. Looking ahead, we expect high client retention levels and new business wins in 2023 for pharmacy benefit services. We are also excited about our successful start to the selling season for 2024, highlighted by our new multi-year agreement for Express Scripts to serve as the pharmacy benefits and specialty services provider for Centene. This partnership aims to make prescription drugs more affordable and accessible for around 20 million Centene members. Collaborating with Centene enhances our reputation as a preferred partner and opens up growth opportunities for additional Evernorth Health services over time. We continue to demonstrate our unique ability to work across the healthcare landscape, reaching more customers and patients. This new health plan relationship builds on our previous partnerships with organizations like Prime Therapeutics, Oscar, and Kaiser Permanente. In our U.S. commercial sector, we've achieved strong customer growth through multiple wins in 2022, backed by our consultative sales approach and affordability enhancements which have increased our competitiveness across various regions while maintaining pricing discipline. The sales and net growth in our National Accounts segment have outperformed previous year results, and we're optimistic that this momentum will continue into 2023. In our international health sector, we are sharpening our focus on targeted growth opportunities, catering to individuals, employers looking for healthy employees, and government entities that appreciate our care management programs. We expect to maintain momentum in customer growth, revenue, and earnings throughout 2023. The second growth avenue is our Accelerate businesses, which encompass Accredo Specialty Pharmacy, Evernorth Care Services, and our U.S. government business. These areas present significant growth opportunities driven by compelling trends and our differentiated capabilities. We remain excited about value creation opportunities in specialty pharmaceuticals, especially biosimilars, over the next several years. Starting in 2023, we have become the exclusive specialty pharmacy provider for the Department of Defense, further affirming our commitment to sustained growth in Evernorth by enhancing clinical quality for patients and generating considerable savings for clients. In Evernorth Care Services, we are focusing on improving our care management and delivery approaches. One key area is enhancing virtual care to strengthen the patient-physician relationship, allowing for better anticipation of health issues and earlier interventions. With MDLIVE, we are offering improved experiences and affordability through personalized care, guiding patients effectively to the most suitable care options and reducing unnecessary emergency room visits by at least 10%. We aim to build upon this with our virtual primary care for patients with chronic conditions, which includes continuous engagement with their physicians, connected device monitoring, and real-time interventions. Within our U.S. government segment, we are positioning ourselves for growth through investments in our high-quality, affordable Medicare Advantage benefits, supported by geographical and network expansions and product enhancements. Lastly, we drive growth through cross-enterprise leverage, utilizing our company-wide capabilities to foster innovation and create greater impact collectively than individually. Our opportunities in this area are supported by extensive data and insights we possess, which we leverage to develop new and more effective solutions for clients and customers. Our Pathwell programs exemplify this. For instance, with Pathwell Specialty, we are working to lower the costs of specialty infusions and injectables by integrating medical and pharmacy benefits. Our Pathwell Bone and Joint program utilizes Evernorth’s digital navigation and advanced analytics to minimize unnecessary surgeries and deliver better-coordinated care. There is a considerable market potential for these initiatives, given that 50% of adults experience bone, joint, and muscle issues, which are significant contributors to U.S. healthcare expenses. Additionally, we continue to take a holistic view of our client relationships, deepening and broadening them through our suite of capabilities, resulting in several valuable wins, including a substantial new fee-based relationship for 2023 from our U.S. commercial team. Through our Evernorth and Cigna Healthcare platforms and our growth strategy, we expect another year of earnings, customer, and revenue growth in 2023. We will provide detailed guidance during our fourth-quarter earnings call. In summary, we're optimistic about the coming year, anticipating a balance of tailwinds and headwinds, consistent with what we shared during our Investor Day in June. A strong selling season bodes well for ongoing growth across our platforms. However, we will also make significant strategic investments in our accelerated growth businesses, which will bring additional costs as we strengthen our partnerships with the Department of Defense and Prime Therapeutics. As we onboard Centene, we expect it to create a temporary headwind. Altogether, we believe that these factors will largely offset each other in 2023, apart from the specific cost implications from Centene. In closing, our performance this quarter and throughout the year highlights how we are addressing the essential needs of our customers and clients while expanding our business. We are committed to innovation to enhance our capabilities for future growth and continue meeting the expectations of our stakeholders. We are confident in our ability to fulfill our full-year commitments, including raising our adjusted EPS guidance to at least $23.10. With that, I'll hand the call over to Brian.

Brian Evanko, Chief Financial Officer

Thank you, David, and good morning, everyone. Today, I'll review key aspects of Cigna's third quarter 2022 results, and I'll discuss our updated outlook for the full year. We're proud of another strong quarter and are pleased to drive continued momentum from the first half of 2022, with third quarter adjusted earnings per share exceeding our expectations. 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 $45.3 billion, after-tax adjusted earnings of $1.9 billion 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, with our client-centric approach, deep pharmacy expertise and strong track record of service continues to resonate with new and existing clients. 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 million customers starting in January of 2024. This mutually beneficial partnership will bring significant revenue and will be financially accretive over the course of the multiyear contract term. Turning to third quarter results for Evernorth. Revenues grew 6% over third quarter 2021 to $35.7 billion, and pretax adjusted earnings were $1.6 billion. Evernorth's results in the quarter were driven by continued expansion of our Accelerate growth businesses led by our specialty pharmacy, as well as our focus on affordability and 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 and expand our services portfolio and digital capabilities. Overall, Evernorth delivered another quarter of strong results, consistent with our expectations. Turning to Cigna Healthcare. Our 2021 results presented an opportunity to expand future margins, and our team has executed extremely well and achieved both strong membership growth and improved profitability here in 2022. Third quarter 2022 performance continued this pattern as adjusted revenues were $11.2 billion, pretax adjusted earnings were $1.1 billion and the medical care ratio was 80.8%. 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 million 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. 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 third quarter 2022 pretax adjusted loss was $299 million. As a reminder, this segment previously included our earnings contributions from the international life, accident and supplemental benefits businesses that we divested to Chubb on July 1, 2022. Overall, we delivered strong third quarter financial results 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. 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 adjusted revenue and adjusted earnings per share. We now expect full year 2022 consolidated adjusted revenues of at least $179 billion, 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 continue to grow customers while expanding margins over 2021. We are improving our expected 2022 medical care ratio outlook to 81.5% to 82.2%. We are raising our expected full year 2022 adjusted earnings to approximately $4.05 billion. And we are raising our medical customer growth expectation to approximately 900,000 customers, which reflects strong new business growth and attractive retention levels in our U.S. commercial and international health businesses. Our full year 2022 enterprise SG&A ratio is 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 million shares of common stock for $5.8 billion, including the accelerated share repurchase agreements announced in June. We also continue to expect to deploy at least $7 billion to share repurchases for the full year 2022. And during the third quarter, we delivered strong cash flow from operations of $3.3 billion. We remain on track for another strong year of cash generation, providing us the fuel and flexibility for ongoing capital deployment opportunities. Our balance sheet and cash flow outlook remains strong, benefiting from our asset-light framework that drives strategic flexibility, dollar margins, and attractive returns on capital. Now to recap. Results in the third quarter 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. 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 two-year compounded EPS growth rate from 2022 to 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. We look forward to providing you with more detailed 2023 guidance during our fourth quarter call.

Stephen Baxter, Analyst

I wanted to ask about the Centene contract win and whether it's too early to estimate the implementation cost for 2023. It seems like you're suggesting that we might want to account for that in 2023 as a starting point. Is it also premature to consider that by 2024, the contract will be financially beneficial? How should we approach this? Is 2024 too soon to expect financial gains?

Brian Evanko, Chief Financial Officer

Stephen, it's Brian. I appreciate the question very much. So maybe I'll give you a little bit of a flavor for the multiyear view here. 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 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 a smooth execution of their 20 million customers. And as I mentioned over the lifetime of the contract, the relationship will be accretive to our financials. But you 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 as being a headwind, as both David and I said, due to the implementation-related costs that are incurred prior to any revenue being received. We're currently sizing that at about $200 million 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 a small positive contribution standpoint in terms of the income. So you can think of that 2023 headwind essentially unwinding in the 2024 financials. And then for 2025 in the subsequent years, we would expect to be at approximately run rate contribution levels on the relationship.

A.J. Rice, Analyst

Maybe just to ask, I know last year or coming into '22, you made a comment that you wouldn't be doing any larger deals, and I think you define that as anything north of $10 billion in acquisitions. I wonder as you think about '23 now, a lot's changed over the course of the year. You've been very active on the 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? And then the flip side, of course, is your ongoing share repurchase activity. When you're giving these '23 comments, do you have any sense of where you might size share repurchase activity and all of that?

David Cordani, Chairman and Chief Executive Officer

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, first and foremost, to make sure the ongoing growth of the underlying business continues to be funded properly from a capital standpoint as well as from investments in innovation. Second, to obviously service very attractive dividend; and then third, we selectively pursue all attractive and financially attractive M&A and/or return excess capital to our shareholders through share repurchase. Specific to M&A priorities. As we discussed at our Investor Day, you can think about our M&A priorities, largely focused on our Accelerate business and within the Accelerate businesses, a bit more pinpointed within Evernorth Care in our U.S. government business. We may do tuck-ins in other aspects of our portfolio that are highly financially attractive, but the strategic accelerants would be more in the Accelerate business. To your question relative to earlier this calendar year, we deem 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 create well in excess of $10 billion that we had to steward forward. 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 '22 relative to our commitment to share repurchase that we're on track for. Looking forward, we'll maintain the capital discipline. We will be open to strategic M&A that advances us in the Accelerate businesses. And then the final note you asked relative to '23, as you have in the past, you just think about we will deploy capital in the way I talked about before, either in a shareholder accretive way to achieve through the shareholder share repurchase and/or through accretive M&A and our contribution to our EPS growth rate in the 3% to 5% range year in, year out from the successful capital deployment that remains intact.

Justin Lake, Analyst

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 in 2023. And then quickly, your medical cost reserves were down about 5% in the quarter. Just curious if there was anything driving that?

Brian Evanko, Chief Financial Officer

Good morning, Justin, it's Brian. Regarding the stop loss, we are very pleased with the strong growth we have experienced this year, as evidenced by both the quarter-over-quarter and year-over-year premium growth of 13% and 12%, respectively. It's important to note that several factors contribute to this. Firstly, we have seen significant growth in our fee-based Cigna Healthcare customers this year, many of whom come with stop-loss contracts, adding extra units of stop-loss to our year-over-year growth rate. Additionally, we have implemented strong price increases for our existing client base, which has resulted in double-digit growth, particularly with the 13% quarter-over-quarter, reflecting some of the later 2022 renewal dates that are seeing substantial price increases. Furthermore, we have noticed increased penetration of our stop-loss products among our existing ASO clients. These varied factors have driven our robust growth. As we previously discussed on past calls, we still have opportunities for margin expansion in our stop-loss business as we move into 2023, and we anticipate another year of strong premium growth for the stop-loss product in the 2023 calendar year. Concerning reserves, there is nothing specific I would highlight. We continue to use a consistent methodology for setting our reserves, and while there may be some natural variability due to product mix shifts and changes in inventory levels from quarter to quarter, we are confident in the suitability of our reserves. Year-over-year, the reserve levels and all key metrics we assess are appropriate and prudent.

Kevin Fischbeck, Analyst

Great. Could you help us understand the revenue related to the Centene contract, particularly how it compares to what CVS has been reporting? Will we see all of that revenue in 2024, or will it ramp up over time? Also, I'm curious about the M&A landscape. It seems that some competitors are actively acquiring companies to enhance their capabilities, while others are focusing more on share repurchases and selective smaller acquisitions. Do you view the current market as an arms race, and do you think that not engaging in M&A could put you at a disadvantage in the next three to five years if you aren't making deals today?

David Cordani, Chairman and Chief Executive Officer

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 the two data points to think about relative to the size of the relationship. And at today's state, there's about $40 billion relative to spend capacity. And as I noted in the prepared remarks, approximately 20 million customer relationships that will evolve and change over time. 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&A, first 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 from that standpoint. Hence, innovation, additional value creation, strong operating execution and then selectively expanding your addressable market demand the strategy we deem to be mission-critical. Two, now stepping back to ourselves, as we discussed in our Investor Day, we're positioned with strong performing foundational businesses and well positioned to accelerate business. Those accelerated 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 multipronged approach as opposed to M&A yes or no. 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 Pathwell programs, our unique longitudinal programs that take into consideration data, navigation support best-in-class clinical engagement with physicians and will increase value by taking costs out of the system through improving clinical quality. So organic investments are number one; two, is smartly and successfully leveraging our ventures capabilities to partner up with organizations to accelerate innovation; and the third is M&A. We remain quite open to M&A. 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&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.

Lisa Gill, Analyst

I just really wanted to better understand as we think about the comment on the tailwind for 2023 around biosimilars. As you think about the plan design for '23, 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 '23? And is that primarily HUMIRA? Or are we thinking about other biosimilars as well?

David Cordani, Chairman and Chief Executive Officer

Lisa, it's David. First, regarding the category, as we've discussed before, we see it positively from the perspective of clients, patients, and customers as we look ahead to 2023 and beyond. This also relates to further improvements in affordability, and given our Accredo capabilities, we believe this will work in our favor. So, to start, we have the capabilities to make this effective. Second, 2023 marks the beginning of another significant phase for biosimilars. Third, we will share our national formulary conclusions later this quarter, as you know, that's one aspect. Additionally, there are ongoing decisions regarding client-specific formularies. To address your core question, there will be variations in 2023 between international formulary decisions and those specific to clients moving forward. We expect this to be beneficial for the franchise in 2023. As I mentioned, it will provide support for us this year. This is specific to HUMIRA and the category, but we anticipate others will start to gain traction as we progress from 2023 into 2024. I see 2023 as a transitional year for the industry, with acceleration. Our formulary decisions will soon be communicated and finalized, and these will differ at the employer or health plan level. Our national formulary decisions will remain consistent across that part of our portfolio.

Josh Raskin, Analyst

So the $200 million you mentioned for Centene preparation costs, is that pretax or after-tax? And then my real question is the outlook for Medicare Advantage for 2023. I'm curious, 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 county expansions have gone in recent years, that would be helpful.

Brian Evanko, Chief Financial Officer

Josh, it's Brian. I'll take the first part of your question, and I think David will comment on the Medicare Advantage component. The $200 million that we quoted is a pretax figure. And again, as we work through the detailed implementation plans in terms of rate and pace. We'll continue to refine that estimate. But you should think of that as a $200 million pretax number for 2023 specifically. David, do you want to talk about Medicare?

David Cordani, Chairman and Chief Executive Officer

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. Second, as you would expect, your early sales in a net new market would tend to have a lower contribution than your sales in mature existing markets. The sheer nature of the operating cost environment and getting those businesses up and running from that standpoint. . Having said that, while we are very early in the 2023 decision-making process cycle as everyday kicks on, early presence 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 2023 to be a year of growth for our Medicare Advantage portfolio, and we look forward to updating you on that as we get through the latter part of this year.

Lindsay Golub, Analyst

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

David Cordani, Chairman and Chief Executive Officer

Lindsay, it's David. Thank you for the acknowledgment. And as Brian noted earlier, we're excited and we're proud to be given the opportunity, and we'll seek to earn that opportunity day in, day out. And as Brian noted, before going to the core of your question, the team is 110% focused on a successful implementation and initiation of the relationship on January 1, 2024, and is heads down relative to that. As it relates to future opportunities, I want to get ahead of ourselves relative to that, but we've demonstrated over time when we successfully partner and successfully collaborate, we have an opportunity to broaden and deepen relationships. And we enter this relationship with Centene, first and foremost, needing to, wanting to and fully committed to performing on the existing commitment. And then availing Centene as a partner relative to our Evernorth capabilities and our broad service capabilities to co-collaborate and innovate. So we see opportunity 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. Our track record demonstrates deepening of relationships and broadening relationships like co-collaboration and co-development, and that's what we will seek to do with Centene after we successfully deliver on this promise.

Scott Fidel, Analyst

I wanted to ask about the ACA exchange market and your plans for 2023. There are some shifting dynamics in the competition that could be beneficial for enrollment growth. I'm interested in your thoughts on enrollment growth for 2023 and your confidence in your pricing strategy for this year, especially if you end up gaining more members than anticipated due to competitor exits. Additionally, how confident are you in achieving your target margins for that segment?

David Cordani, Chairman and Chief Executive Officer

Scott, it's David. We see this space as one with growth potential over time. There has been some volatility since it began, but we've been in the market since the start and are continuing to grow. In 2023, we plan to expand our geographical presence. We anticipate net customer growth this year and a positive margin contribution. Both Brian and I believe that the Cigna Healthcare portfolio has further opportunities for margin expansion. We think this part of our sector will contribute positively to margins in the future. I won't comment on your question regarding target margins, but we know how the underlying book is performing and what we expect it to do. We will make investment choices in 2023 for 2024, which may slightly affect margins. These decisions are intended for ongoing growth. Overall, we are well positioned for 2023, expecting net growth and solid margin performance for the portfolio.

Gary Taylor, Analyst

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 nonrecurring in terms of potential run rate on investment income. And then for David, I had a couple of clients ask lately about the DOJ intervening in the AMA lawsuit as well as the AMA joining the class action on the multiplan lawsuit. I guess the question really is just the legal profile of the company changed in any material way. I just wanted to give you a chance to comment on those.

Brian Evanko, Chief Financial Officer

Good morning, Gary. As it relates to our investment income, within the third quarter, 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 Healthcare, which allowed us to outperform both our Cigna Healthcare and Enterprise income outlook. Two things that are important to keep in mind as you reflect on that, and you referenced this in your question. The first one is the Chubb divestiture that was completed on July 1, resulted in a step-down of our investment income, and you can think of that as in the range of $50 million to $60 million per quarter. That's essentially removed starting in the third quarter. 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 is private market, non-coupon assets. And 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 third quarter and the fourth quarter, and that did transpire. Some of the downward marks were a little bit larger than what we had been projecting. But as I said earlier, strong medical care ratio performance in the quarter allowed us to exceed our overall income and EPS outlook. And 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 '23, you can think of it as approximately similar to the all-in 2022 investment income. So either a tailwind or a headwind as we step into '23 and the investment income one. David, I'll let you comment on the Medicare Advantage.

David Cordani, Chairman and Chief Executive Officer

Thank you, Brian. Gary, I'd like to take a moment to emphasize that we operate in a heavily regulated environment. Additionally, we have a strong history as an organization of maintaining good governance and robust compliance programs. Regarding your question about legal exposure, I believe that the profile of the company has not changed significantly in that regard. In fact, given the strategic direction of our franchise towards more services, I would argue that our legal exposure is relatively lighter due to the service-oriented nature of our portfolio. While it's important to note that this will continue to be an active area for us, we take pride in our governance and compliance capabilities.

Ricky Goldwasser, Analyst

Yes. So a couple of follow-up questions here. Just to clarify, for 2023, is the EPS starting point that we should use is the $23.10. And then as we think about the Centene headwind of $200 million around 2% of earnings growth, are you assuming that excluding Centene, sort of the core business would have grown at that long-term target of 10% to 13%?

Brian Evanko, Chief Financial Officer

Good morning, Ricky, it's Brian. So let me 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. 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 two-year 2022 to '24 growth rate, we would expect that to be within our 10% to 13% compounded annual EPS growth rate range.

Ricky Goldwasser, Analyst

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 book of business.

David Cordani, Chairman and Chief Executive Officer

It's David. Broadly speaking, a framework of growth always presents opportunity. So I think your basic tenet is positive here. Additionally, our opportunity to further enhance the value we're able to deliver to existing clients especially 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 yes, no answer, but a directional answer that growth is a net positive, whether it's the ongoing investment back in innovation, the capabilities in subsectors of the space in terms of being much more government intensive within this portfolio or otherwise, I would say, net directional positive.

Steven Valiquette, Analyst

I guess with the increase in membership guidance for '22 and the Commercial risk membership growth year-over-year actually accelerating as the year progresses. Just curious to hear a little more color just on the positive tailwinds there, kind of what's driving the extra commercial risk membership success?

David Cordani, Chairman and Chief Executive Officer

Steven, it's David. I want to elaborate on the selling season and the dynamics involved. As I mentioned earlier, we are pleased with the results of our commercial portfolio business for 2022, especially the MLR performance, retention, and net growth. A key contributor to this growth has been strong performance in our middle market along with continued success in our Select segment. In the Select segment, we consistently offer ASO or self-funded plans with stop-loss options, as well as various risk alternatives. We provide different choices regarding funding, and our sales and underwriting processes are designed to highlight these options. Over the years, the mix between ASO, stop-loss, and risk business has varied, but we are happy with the net risk results supporting this. The overall message is the ongoing strong performance of the Select segment. Looking at the broader portfolio, our fee-based business continues to grow, particularly in stop-loss. Moving toward 2023, we expect a robust national account on January 1, primarily consisting of fee-based business. There will be retention and expansion, along with new large middle market fee-based relationships in the pipeline. Thus, our underlying net growth remains consistent, and we see solid quality in the MLR and strength in our risk business within the Select segment.

Lance Wilkes, Analyst

Yes. Congratulations on that Centene win, a great job. Two just cleanup questions. One is in Evernorth, just understanding the driver of fees in the Evernorth segment? 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 nonmedical products. Like what's kind of the environment you're operating in, they're seeing right now?

Brian Evanko, Chief Financial Officer

It's Brian. Regarding the fees in Evernorth, we are seeing strong performance in this area, with a 16% increase quarter-over-quarter and 21% growth year-to-date. Several factors contribute to this growth. First, our MDLIVE business continues to experience strong utilization throughout the year. Additionally, some of our Express Scripts clients prefer a pure fee-based relationship, which allows them to choose how they want to work with us, such as opting for a formulary or network-only arrangement. We also see contributions from our Evercore business in medical benefit management and post-acute care solutions. Collectively, these elements are driving impressive growth for the Evernorth segment. As for your second question about Cigna Healthcare and the utilization environment, the third quarter performed better than we expected, primarily in the U.S. commercial sector, while our government lines met our expectations. During this quarter, both COVID and non-COVID costs in the U.S. commercial segment were more favorable than anticipated. The favorable non-COVID costs were mainly due to inpatient and emergency room services. On the COVID front, the third quarter costs were similar to those in the second quarter, which was contrary to our expectation of an increase. Overall, our commercial business is slightly above what would be expected at pre-pandemic levels, with Medicare hovering just below that.

David Windley, Analyst

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 '23? And how do you think the business is positioned to be resilient against that?

David Cordani, Chairman and Chief Executive Officer

It's David. So I think a really important question and that we didn't spend time on that. So thanks for the opportunity. First, 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. And to date, important grounding, we've seen little direct impact for the demand of our services or the underlying performance for our portfolio, right? Movement in costs here or there. But broadly speaking, we've seen a little direct impact. As we look forward, by and large, we still see an environment where net-net employers are more oriented in terms of maintaining and/or hiring employees seeking to get to full employment. We do see instances where that has slowed. We do see instances where employers are putting freezes. But when you balance the portfolio as a whole right now, there's still a net hiring environment that sits in front of us, not to 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 in 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 a position to deliver another strong 2023. Ending with, we acknowledge the fact that the economy is in a bit of a challenged environment in the current state. But all in, we believe our portfolio will be durable and is in a position to perform next year because of the strong start we'll have to the year and the various levers we have to manage in our portfolio. 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 Centene 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. We are delivering for our shareholders 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, our partners, our customers, and patients and I thank them for the commitment to making a positive impact on people's lives each and every day. We thank you again for your interest in Cigna, and we look forward to continuing our conversation as we go into the latter part of this year. Have a good day.

Operator, Operator

Ladies and gentlemen, this concludes Cigna's Third Quarter 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 (203) 369-3350. There is no pass code required for this replay. Thank you for participating. We will now disconnect.