Anthem, Inc. (now Elevance Health): Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. The filing reports under the name Anthem, Inc. and ticker ANTM. Unless stated otherwise, financial figures below are in millions of dollars.
Business context
Anthem provided health benefits and related services to 42.1 million medical members, up 3.2% year over year. Its businesses included commercial and specialty plans, government programs, and pharmacy benefit management through IngenioRx. Anthem completed its acquisition of behavioral-health company Beacon Health Options on February 28, 2020.
Financial results and condition
- Operating revenue: $29,448, up 20.7% from $24,388. Growth reflected IngenioRx product revenue, higher premiums and government-business membership growth.
- Net income: $1,523, down 1.8% from $1,551. Diluted EPS was $5.94 versus $5.91; the increase reflected fewer diluted shares outstanding.
- Margins and expense ratios: Benefit expense ratio was 84.2% versus 84.4%; SG&A ratio was 12.8% versus 13.0%. Net income as a percentage of total revenue fell to 5.1% from 6.3%, and pretax income as a percentage of total revenue fell to 7.1% from 7.9%.
- Cash flow: Operating cash flow was $2,515 versus $1,630. Investing activities used $2,784, including $1,908 for subsidiary acquisitions. Financing activities provided $679. Cash and cash equivalents ended the quarter at $5,345, up from $4,937 at year-end 2019.
- Liquidity and investments: Cash, cash equivalents and fixed-maturity and equity investments totaled $26,301 at March 31. Current assets were $41,256 and current liabilities $27,039.
- Debt and leverage: Balance-sheet short-term borrowings, current long-term debt and long-term debt totaled $21,683. Anthem’s reported consolidated debt-to-capital ratio was 41.7%, compared with 39.5% at December 31, 2019; it remained within its credit-facility covenant limits and reported compliance with covenants.
- Shareholder returns: The quarterly dividend was $0.95 per share, versus $0.80 a year earlier. Anthem repurchased $529 of shares in the quarter, then temporarily suspended repurchases amid market volatility.
Material changes versus Q1 2019
- Operating revenue rose 20.7%, including $2,344 of consolidated product revenue associated with IngenioRx; the PBM business began operating in Q2 2019.
- Net income decreased despite higher revenue. Anthem cited weaker Commercial & Specialty results, higher tax expense related to the reinstated Health Insurance Provider Fee (HIP Fee), and a shift from investment gains to losses.
- Government Business operating revenue increased 17.0%, while Commercial & Specialty revenue decreased 0.3%. Commercial & Specialty operating gain declined 11.1%; Government Business operating gain increased 9.9%.
- Operating cash flow increased by $885. The quarter also included acquisition spending and higher net borrowing.
- Anthem recorded $57 of investment impairment losses in income versus $10 in the prior-year quarter, and other comprehensive income included a $712 loss, primarily reflecting investment-market declines.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific full-year financial guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- COVID-19: Management said the pandemic could materially affect claims costs, membership and business mix, premium and self-funded receivable collections, operations, vendor services, investment values, credit access and liquidity. Deferred elective care could reduce claims in the near term but increase them later. Anthem waived cost sharing for certain COVID-19 treatment through May 31, 2020, and waived telehealth cost sharing for certain members through June 14, 2020. It described liquidity measures including reduced discretionary spending, delayed tax payments, temporary suspension of buybacks and use of borrowing facilities.
- Investments: Market volatility and energy-sector weakness drove a $51 allowance for credit losses on fixed-maturity securities, including $49 related to energy securities. Anthem warned further impairments could occur if market conditions deteriorate.
- Acquisition: Beacon was acquired for a reported cash outflow of $1,908, with preliminary goodwill of $1,049 and acquired intangible assets of $752. Purchase accounting remained preliminary.
- Taxes: The 2020 HIP Fee was reinstated; Anthem estimated its share at $417 for the quarter. Its non-deductibility contributed to an effective tax rate of 27.1%, versus 20.3% in Q1 2019.
- Claims estimates: Prior-period medical-claims reserve redundancies (favorable development) were $700, versus $455 a year earlier, benefiting current-period results. Claims liabilities and related estimates remain judgment-sensitive.
- Legal and regulatory contingencies: Anthem disclosed an aggregate range of reasonably possible losses in excess of established reserves of $0 to approximately $800, while noting that some matters could not be reasonably estimated. Significant matters include the DOJ Medicare risk-adjustment lawsuit, Blue Cross antitrust litigation, Cigna merger litigation and the Express Scripts PBM dispute. Anthem contests the claims; outcomes remain uncertain.
- Other commitment: A March 2020 technology infrastructure and support agreement carries an aggregate commitment of approximately $1,700 through June 2025, subject to specified termination provisions.
Investor verification priorities
- Track COVID-19’s effect on medical utilization, claims costs, membership, collections and the timing of deferred care.
- Assess the sustainability of earnings, including the $700 favorable prior-period claims development and the reinstated HIP Fee.
- Review investment portfolio credit quality and any further energy-related or market-driven impairments.
- Monitor debt, borrowing needs, credit ratings and the availability of liquidity as the pandemic evolves.
- Follow Beacon integration and the contribution, margins and external-customer growth of IngenioRx.
- Check developments in the disclosed litigation and regulatory matters, including potential exposure beyond recorded reserves.