Anthem, Inc. (now Elevance Health, Inc.) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing was made under the name Anthem, Inc.; it describes a U.S. health benefits company with approximately 40.9 million medical members.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $25.177B | $22.715B | $49.565B | $45.057B |
| Total revenues | $25.466B | $22.944B | $50.132B | $45.481B |
| Net income | $1.139B | $1.054B | $2.690B | $2.366B |
| Diluted EPS | $4.36 | $3.98 | $10.28 | $8.97 |
| Benefit expense ratio | 86.7% | 83.4% | 85.6% | 82.5% |
| SG&A ratio | 13.0% | 15.1% | 13.0% | 15.2% |
| Effective tax rate | 21.6% | 29.9% | 20.8% | 28.0% |
Q2 operating revenue rose 10.8% and net income rose 8.1%; first-half operating revenue rose 10.0% and net income rose 13.7%. Management attributed revenue growth mainly to Government Business membership and premium increases, with additional growth in Commercial & Specialty. Lower taxes, primarily because the non-deductible Health Insurance Provider Fee (HIP Fee) was suspended for 2019, supported earnings. Higher benefit expense and a higher benefit ratio reflected membership growth, elevated Medicaid medical costs, and the revenue effect of the HIP Fee suspension. First-half earnings also benefited from higher net realized investment gains.
Operating cash flow for the first half was $3.067B, versus $2.757B a year earlier. Investing activities used $1.817B and financing activities used $1.106B; cash increased $144M to $4.078B. Capital spending was $455M, share repurchases were $752M, and cash dividends were $412M. The quarterly dividend was $0.80 per share.
At June 30, cash and cash equivalents were $4.078B; current assets were $37.805B and current liabilities $23.090B. Total assets were $75.851B and shareholders’ equity $30.793B. Long-term debt, including its current portion, was $18.286B; short-term borrowings were $1.010B. Commercial paper outstanding was $900M. Management’s debt-to-capital measure, which includes lease liabilities, was 39.4%, compared with 40.2% at year-end 2018. The company reported $25.235B of cash, cash equivalents, and fixed-maturity and equity investments, including $1.359B held at the parent company for general corporate use.
Material changes and operating developments
- Medical membership increased 3.3% year over year to 40.852 million. Government Business membership grew 10.3%, including 10.7% growth in Medicaid and 16.0% in total Medicare membership.
- Government Business revenue increased 14.1% in Q2, but segment operating gain fell 10.2% to $478M; management cited elevated Medicaid costs and the HIP Fee suspension. Commercial & Specialty revenue increased 4.0%, while operating gain declined 6.2% to $983M. First-half Government Business operating gain declined 16.3%; Commercial & Specialty operating gain increased 5.3%.
- IngenioRx began operations in Q2, with CVS Health providing certain pharmacy benefit management services under a five-year agreement. The Express Scripts agreement terminated March 1, 2019, followed by a 12-month transition. IngenioRx recorded $98M of cost of products sold in the first half.
- Medical claims payable was $8.758B at June 30, up from $7.454B at December 31, 2018. First-half prior-period claims development was favorable by $414M, compared with $795M in the prior-year period.
- Adoption of lease accounting on January 1, 2019 added $728M of operating lease liabilities and $637M of right-of-use assets to the opening balance sheet; it did not affect reported income or cash flows.
Outlook, risks, contingencies, and unusual items
- Management estimated 2019 Local Group medical cost trend at 5.5%–6.5%. The filing provides no clear full-year revenue, earnings, or EPS guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- The HIP Fee was suspended for 2019 and is scheduled to resume in 2020. The ACA’s legal and regulatory outlook remained uncertain, including an appeal of a federal district court decision challenging the ACA. The company had reduced Individual ACA participation to 73 of 143 rating regions.
- Management agreed to acquire behavioral-health provider Beacon Health Options, serving about 40 million individuals; closing was expected in Q4 2019, subject to customary conditions and approvals.
- In litigation against Express Scripts, Anthem sought more than $14.8B in pharmacy-pricing damages, plus other claimed damages. The company also faced a consolidated Blue Cross Blue Shield antitrust case, a California tax dispute, Cigna merger-related litigation, and a continuing multistate investigation arising from the 2015 cyberattack. Outcomes were undetermined. Aggregate reasonably possible legal losses above established reserves were estimated at $0–$250M, where estimable; some exposures could not be reasonably estimated.
- Investment impairment losses recognized in income were $17M for the first half. Management noted that further investment impairments remained possible as markets and credit conditions change.
- Credit facilities were amended or added in June: the five-year revolver was extended to June 2024 and reduced from $3.5B to $2.5B; a new $1.0B 364-day facility matures in June 2020. Neither facility had borrowings during the first half.
Important facts for investors to verify
- Whether Medicaid medical-cost pressure persists and how it affects benefit ratios and Government Business margins.
- Whether membership and premium growth continue to translate into earnings growth, particularly given the HIP Fee’s scheduled return in 2020.
- IngenioRx’s transition execution, economics, and related obligations under its CVS agreement, alongside the continuing Express Scripts litigation.
- Beacon acquisition timing, final terms, financing, integration costs, and expected contribution.
- Developments and potential financial exposure in the Cigna, antitrust, California tax, cyberattack, and other regulatory matters.
- Medical-claims reserve development, investment valuations and impairment exposure, and the effect of debt, capital returns, and regulated-subsidiary dividend restrictions on liquidity.