Anthem, Inc. (now Elevance Health, Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The filing is by Anthem, Inc.; it reports 39.6 million medical members and operates Commercial and Specialty, Government, and Other segments. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Operating revenue | $20,309.4 | $18,851.4; up 7.7% |
| Total revenue | $20,288.5 | $19,051.5 |
| Net income | $703.0 | $865.2; down 18.7% |
| Diluted EPS | $2.63 | $3.09; down 14.9% |
| Benefit expense ratio | 81.8% | 80.2%; up 160 basis points |
| SG&A ratio | 15.8% | 16.7%; down 90 basis points |
| Operating cash flow | $1,304.3 | $1,650.5 |
| Cash and cash equivalents | $1,676.0 | $2,113.5 at Dec. 31, 2015 |
| Total assets | $63,858.7 | $61,717.8 at Dec. 31, 2015 |
| Shareholders’ equity | $23,547.1 | $23,044.1 at Dec. 31, 2015 |
| Debt-to-capital ratio | 40.2% | 40.8% at Dec. 31, 2015 |
Net income as a percentage of total revenue was 3.5%, versus 4.5% a year earlier. Cash flows were $1,304.3 from operations, $(1,391.0) from investing, and $(353.2) from financing; cash declined $437.5 during the quarter. Cash, cash equivalents, and investments, including long-term investments, totaled $24,260.4 at quarter-end. Parent-company cash and investments available for general corporate use were $2,185.4.
Debt included $540.0 of short-term borrowings, $604.9 of commercial paper, $14,327.3 of notes, and $331.5 carrying value of convertible debentures. The balance sheet also reported $399.2 of current and $14,864.5 of noncurrent long-term debt.
Changes and management commentary
- Revenue growth reflected higher premiums, rate increases, Medicaid and ACA-compliant individual membership growth, and higher administrative fees. Medical membership rose 2.8% year over year, to 39.6 million.
- Benefit expense rose 10.0%, faster than operating revenue. Management cited overall cost trends, growth in Medicaid and individual business, Simply Healthcare, and an extra claims day. The benefit expense ratio also reflected higher Medicaid and Individual medical costs; improved Medicare medical-cost performance partly offset the increase.
- Net income fell principally due to increased investment losses, costs related to the pending Cigna acquisition, and higher interest expense; lower taxes and improved Commercial and Specialty results partly offset the decline. Investment results included $125.1 of net realized losses and $66.9 of impairment losses recognized in income, compared with $46.5 of realized gains and $14.0 of impairment losses in Q1 2015.
- Operating cash flow decreased $346.2, mainly due to claims-payment timing and membership growth and the timing of state Medicaid receipts. Lower investing outflows versus 2015 largely reflected the absence of a subsidiary acquisition in Q1 2016.
- Segment operating revenue was $9,509.8 for Commercial and Specialty, $10,793.9 for Government, and $5.7 for Other. Operating gain was $1,293.0, $325.0, and $(47.6), respectively. Government revenue grew 13.9%, while its operating margin declined to 3.0% from 3.4%.
Outlook, transactions, risks, and contingencies
- Cigna transaction: Anthem expected the approximately $53 billion acquisition to close in the second half of 2016, subject to regulatory and other approvals. Cigna shareholders were to receive $103.40 cash and 0.5152 Anthem shares per share. Management projected pro forma debt-to-capital of about 49% at year-end following closing and targeted the low 40% range about 24 months after closing. The filing provides no general full-year earnings guidance.
- Medical costs: For Local Group fully insured business, management considered a 2016 cost-of-care trend estimate of 7.0%–7.5% appropriate. Provider rate increases and high-cost Hepatitis C therapies were cost pressures; inpatient and pharmacy utilization were below prior periods.
- Express Scripts dispute: Anthem alleged pharmacy pricing exceeded contractual competitive benchmarks by approximately $13 billion over the remaining agreement term and sought more than $158 million for operational breaches. Express Scripts disputed the claims and asserted counterclaims. The outcome was uncertain.
- Other litigation and cyber incident: The filing describes ongoing antitrust, out-of-network reimbursement, demutualization, tax, and cyber-attack matters. For specified proceedings where loss estimates were possible, the aggregate reasonably possible loss range in excess of reserves was $0–$250 million. Cyber-incident losses could not be reasonably estimated; investigations, litigation, and remediation expenses continued.
- Additional risks: The Cigna deal’s completion and integration, healthcare cost and utilization trends, regulatory and Health Care Reform changes, investment-market losses, credit-rating downgrades, substantial debt, and potential guaranty-fund assessments could affect results or liquidity. Management warned Q1 results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether the Cigna acquisition received required approvals, closed on expected terms, and met financing, leverage, and deleveraging expectations.
- Subsequent benefit expense ratios and medical-cost trends, especially in Medicaid and Individual business, against the stated 7.0%–7.5% Local Group trend estimate.
- Cash-flow normalization and the effects of claims timing, Medicaid receipts, and reinsurance-program payments.
- Developments and potential financial exposure in the Express Scripts dispute, cyber-related matters, and other litigation.
- Future investment impairments and realized losses, and the implications of hedge-related losses and financing costs.