Anthem, Inc. (now Elevance Health) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing registrant was Anthem, Inc.; the filing does not report results under the Elevance Health name. Figures below are in millions of dollars except per-share data, ratios, and membership.
Business context and results
Anthem operated health benefits businesses in Commercial and Specialty, Government, and Other segments, serving 38.5 million medical members at quarter-end, up 3.4% year over year. Government membership grew 13.1%, chiefly reflecting Medicaid growth and the Simply Healthcare acquisition; Commercial and Specialty membership rose 0.8%.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $19,758.3 | $18,230.0 | $38,609.7 | $35,874.8 |
| Total revenue | $20,015.5 | $18,473.4 | $39,067.0 | $36,332.8 |
| Net income | $859.1 | $731.1 | $1,724.3 | $1,432.1 |
| Diluted EPS | $3.13 | $2.56 | $6.22 | $4.95 |
| Benefit expense ratio | 82.1% | 82.7% | 81.2% | 82.7% |
| SG&A ratio | 15.4% | 15.8% | 16.0% | 16.0% |
| Net income / total revenue | 4.3% | 4.0% | 4.4% | 3.9% |
Quarterly operating revenue rose 8.4% and net income 17.5%; six-month operating revenue rose 7.6% and net income 20.4%. Management attributed growth principally to Government Business premiums and membership, rate increases, and Simply Healthcare. Lower diluted share counts from buybacks also supported EPS growth. Government Business operating gain nearly doubled in Q2 to $609.7; Commercial and Specialty operating revenue declined 6.0% in the quarter, while six-month operating gain improved 20.7%.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $2,823.5, versus $2,458.5 a year earlier. Investing cash outflow was $2,026.7 and financing cash outflow was $1,391.1; cash and equivalents ended at $1,553.0, down $598.7 from year-end.
- Cash, cash equivalents, and investments, including long-term investments, totaled $23,967.0 at June 30. Parent-company cash and investments were $2,219.2 and available for general corporate purposes, subject to applicable restrictions.
- Total liabilities were $41,201.2 and shareholders’ equity $23,062.6. Long-term debt, including current portion, was approximately $16,093.3; the reported consolidated debt-to-capital ratio increased to 41.9% from 38.3% at year-end. The $2,000 revolving credit facility had no amounts drawn; commercial paper outstanding was $697.4.
- Anthem issued $1,250.0 of Equity Units and received $1,228.8 net proceeds. It also repurchased or settled convertible debentures, with total cash payments of $1,646.3 in Q2. Six-month share repurchases were $1,410.6, and cash dividends were $330.5.
Material changes, outlook, and notable items
- Medical costs and outlook: Management estimated a 2015 cost-of-care trend for Local Group fully insured business of 7.0%, plus or minus 50 basis points. It noted lower utilization than in previous periods, provider rate increases, and upward pharmacy-cost pressure from high-cost Hepatitis C therapies. This is a cost-trend estimate, not earnings guidance.
- Acquisition activity: Anthem completed its $641.6 net-cash acquisition of Simply Healthcare in February 2015, expanding its Florida Medicaid and Medicare business. On July 24, after quarter-end, Anthem announced an agreement to acquire Cigna for an estimated $53 billion at the then-current share price, payable in cash and Anthem shares. Closing was expected in the second half of 2016, subject to approvals and other conditions. Anthem expected to fund the cash component with cash and new debt, had a $26.5 billion bridge commitment, projected pro forma debt-to-capital of about 49% at closing, and targeted the low-40% range about 24 months afterward. Management expected to maintain the dividend and generally suspend share buybacks for the current year.
- Cyber incident: A February 2015 cyberattack exposed personal information, including Social Security or health identification numbers, for many individuals and employees. Investigations and civil claims were pending; Anthem could not estimate the possible loss and warned expenses, fines, or other impacts could be significant. It said no evidence indicated that credit-card or medical claims information had been targeted or obtained, while noting that this could not be assured.
- Litigation and contingencies: Anthem estimated aggregate reasonably possible losses in specified legal proceedings, in excess of established reserves, at $0 to approximately $250. The cyberattack exposure was not included in that estimable range. A separate Pennsylvania insurer rehabilitation matter could result in future guaranty-fund assessments, but Anthem could not estimate its net exposure.
- Investment and tax items: Six-month net realized investment gains were $138.8, while impairment losses recognized in income were $35.8, up from $21.7. Other comprehensive income included a $171.5 six-month loss, mainly from investment valuation changes. The effective tax rate rose to 44.9% from 40.6%, with the non-deductible Health Insurance Provider Fee and favorable prior-year tax adjustments among the cited factors.
Most important facts for investors to verify
- Whether the lower benefit expense ratios and favorable prior-year claims reserve development are sustainable; Anthem reported $760.9 of favorable prior-year claims development in the first half.
- Government membership, Medicaid margins, and Simply Healthcare’s contribution, alongside the decline in Commercial and Specialty revenue and Individual membership.
- The Cigna transaction’s approvals, financing terms, closing timetable, integration costs, leverage, and planned pace of deleveraging and buybacks.
- The eventual financial, regulatory, and litigation consequences of the cyberattack, plus the adequacy of insurance coverage.
- Investment impairment exposure, the rising debt-to-capital ratio, and cash availability after debt service, acquisitions, dividends, and potential regulatory restrictions on subsidiary distributions.