Business context and reporting period
Anthem, Inc. (formerly WellPoint, Inc.; the name change took effect December 2, 2014) filed this Form 10-K for the fiscal year ended December 31, 2014. The request metadata identifies Elevance Health, but the filing itself reports Anthem’s 2014 results. Anthem operated commercial and specialty, government, and other businesses, serving 37.5 million medical members at year-end. The annual results include the fourth quarter; this is not a standalone quarterly filing.
Financial and operating performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total operating revenue | $73.02 billion | $70.19 billion | Up 4.0% |
| Total revenue | $73.87 billion | $71.02 billion | Up 4.0% |
| Income from continuing operations | $2.56 billion | $2.63 billion | Down 2.8% |
| Net income | $2.57 billion | $2.49 billion | Up 3.2% |
| Diluted EPS | $8.99 | $8.20 | Up 9.6% |
| Diluted EPS from continuing operations | $8.96 | $8.67 | Up 3.3% |
| Benefit expense ratio | 83.1% | 85.1% | Improved 200 basis points |
| SG&A expense ratio | 16.1% | 14.2% | Increased 190 basis points |
| Operating cash flow | $3.37 billion | $3.05 billion | Up $317 million |
Fourth-quarter 2014 total revenue was $18.98 billion, versus $17.90 billion in fourth-quarter 2013. Fourth-quarter continuing income was $506.7 million versus $308.9 million; diluted EPS from continuing operations was $1.80 versus $1.02.
Year-end cash, cash equivalents and investments totaled $23.78 billion; total assets were $62.07 billion and shareholders’ equity was $24.25 billion. Long-term debt was $14.75 billion, including its current portion, and short-term borrowings were $400 million. The debt-to-capital ratio was 38.5%, compared with 36.9% a year earlier. Anthem reported $2.0 billion of available revolving credit and no commercial paper outstanding at year-end. Regulated-subsidiary capital and dividend distributions are subject to regulatory limits.
Material changes and notable items
- Membership rose 5.2% to 37.5 million, led by Medicaid growth of 18.6%. Self-funded membership grew 12.3%, while fully insured membership declined 4.3%. Government Business operating gain increased 41.2% to $1.19 billion; Commercial and Specialty operating gain rose 2.7% to $3.26 billion.
- Higher premiums, including rate increases and Medicaid membership gains, supported revenue growth. The benefit ratio improved, partly reflecting pricing and better-than-expected Medicaid medical costs. High-cost Hepatitis C drug therapies added pharmacy cost pressure.
- SG&A increased 18.0% to $11.75 billion, principally reflecting ACA-related charges, including an $893.3 million health insurer fee and $447.7 million in reinsurance-program assessments. The insurer fee was not tax deductible; the filing attributes $312.6 million of 2014 tax expense, or $1.09 per diluted share, to that feature. Estimated reinsurance recoveries reduced benefit expense by $753.4 million.
- Continuing income fell despite higher operating revenue, largely because income tax expense rose to $1.81 billion and the effective tax rate increased to 41.4% from 31.4%. The filing cites the nondeductible insurer fee and 2013 tax benefits.
- Anthem repurchased 30.4 million shares for $3.00 billion in 2014 and paid $1.75 per share in dividends. In January 2015, the board raised the quarterly dividend to $0.625 per share. Anthem completed the sale of 1-800 CONTACTS and related assets on January 31, 2014; 2013 results included a $144.6 million after-tax discontinued-operations loss.
Outlook, risks and contingencies
Management estimated 2014 Local Group fully insured cost-of-care trends at approximately 6.5% and anticipated an increase of about 50 basis points in 2015. The filing does not provide a clear company-wide earnings or revenue guidance figure. Management described growth opportunities in Medicaid, public and private exchanges, organic membership, acquisitions and value-based provider arrangements, while noting uncertainty about exchange enrollment and profitability.
- ACA implementation, premium adequacy, adverse selection, risk-adjustment recoveries, insurer fees, MLR requirements and Medicare reimbursement changes could affect results. Management noted that 2014 exchange applicant risk characteristics tracked its pricing assumptions, but future experience remained uncertain.
- In February 2015, Anthem disclosed a cyberattack that exposed personal information relating to many current and former members and employees. The investigation was ongoing; remediation costs, lawsuits, regulatory inquiries and potential liabilities could be significant but were not reasonably estimable in the filing.
- Litigation included a Blue Cross antitrust matter and other class actions. For certain proceedings, the company estimated aggregate reasonably possible losses above established reserves at $0 to approximately $250 million; it could not estimate potential cyberattack losses.
- The company reported $6.86 billion of medical claims payable, a significant actuarial estimate. It recorded $541.9 million of favorable prior-year claims development in 2014. The filing describes sensitivity of approximately $155 million to completion-factor assumptions and $303 million to trend-factor assumptions.
- Anthem completed its acquisition of Simply Healthcare, a Florida Medicaid and Medicare managed-care company, on February 17, 2015, using cash and commercial-paper borrowings. The filing does not quantify the acquisition’s eventual financial contribution.
- Management stated that regulated subsidiaries exceeded applicable risk-based capital thresholds. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether 2015 medical cost trends and premium rates, especially in individual and small-group exchange business, remain aligned.
- The eventual financial and regulatory impact of the cyberattack, including litigation, remediation spending and any further disclosure of affected data.
- Medical claims reserve development and the assumptions underlying the $541.9 million prior-year redundancy.
- The effect of ACA fees, MLR rules, reinsurance and risk-adjustment settlements on margins, taxes and cash flow.
- How Medicaid growth and the Simply Healthcare acquisition affect Government Business profitability, capital needs and debt.
- Debt levels, regulated-subsidiary dividend capacity, and the balance between share repurchases, dividends and investment in the business.