Elevance Health, Inc. quarterly report, Q2 FY2020

Business context and reporting period

Anthem, Inc. (now Elevance Health, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company served 42.5 million medical members. Its businesses include commercial and specialty health plans, government programs, pharmacy benefit management through IngenioRx, and other health services.

Financial and operating performance

• Quarterly revenue rose 15.9% and net income rose 99.8%; first-half revenue rose 18.3% and net income rose 41.2% year over year. Management attributed revenue growth mainly to IngenioRx pharmacy revenue and higher Government Business premiums.
• Q2 benefit expense ratio was 77.9%, down from 86.7%; first-half ratio was 81.1%, down from 85.6%. Lower claims from postponed routine and elective care during the pandemic were the primary driver. SG&A ratio increased to 13.9% from 13.0% in Q2 and to 13.4% from 13.0% for the first half.
• At June 30, cash and equivalents were $6.028 billion; total assets were $87.976 billion and shareholders’ equity $34.455 billion. Cash, cash equivalents, and fixed-maturity and equity securities totaled $32.036 billion.
• Long-term debt, including its current portion, was $21.476 billion; short-term borrowings were zero. Consolidated debt-to-capital was 39.5%. The company reported compliance with debt covenants and $3.5 billion of revolving credit facilities.

Material changes versus prior comparable periods

• IngenioRx, which began operations in 2019, drove a substantial increase in pharmacy product revenue as the transition of Anthem’s members from Express Scripts was completed by January 1, 2020. Segment reporting was reorganized to show IngenioRx separately.
• Government Business revenue increased 11.0% in Q2, supported by Medicaid and Medicare growth. Commercial & Specialty revenue declined 6.7%, reflecting membership declines, COVID-related premium credits, and pharmacy revenue moving to IngenioRx.
• Anthem acquired Beacon Health Options on February 28, 2020, for an undisclosed consideration in the provided text. The acquisition added $1.070 billion of preliminary goodwill and contributed to the increase in Other segment activity.
• Operating cash flow increased by $4.958 billion year over year for the first half, partly from higher net income, deferred tax payments, and higher premium receipts. Cash increased by $1.091 billion from year-end 2019.
• Net investment income declined to $57 million in Q2 from $285 million, and to $311 million for the first half from $495 million, primarily reflecting energy-related investment losses and market conditions.

Outlook, commentary, risks and unusual items

• The filing provides no specific full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
• Management said COVID-19 had not materially adversely affected results, cash flows, or financial condition through the reporting date, but warned that future effects could be material. Risks include higher COVID-related claims, deferred care followed by later utilization, membership and mix changes, delayed or uncollectible receipts, investment losses, and reduced access to credit.
• The company waived cost sharing for specified COVID-19 testing and treatment, expanded telehealth, offered certain premium credits, and provided support to providers and communities. These measures, along with deferred care, affected claims and revenue.
• The Health Insurance Provider Fee resumed in 2020, adding estimated expense of $837 million for the first half; it was suspended in 2019 and is scheduled to be eliminated in 2021. The fee is not deductible for federal income tax purposes.
• Anthem issued $2.5 billion of senior notes in May 2020. It temporarily suspended share repurchases in March and resumed them in late June. First-half repurchases totaled $584 million; dividends totaled $482 million.
• Legal and regulatory matters include a DOJ Medicare risk-adjustment lawsuit and investigations involving CareMore and HealthSun. The company disclosed an aggregate estimated range of reasonably possible losses, in excess of established reserves, of $0 to approximately $800 million; it could not estimate losses for many individual proceedings. Other material matters include Blue Cross antitrust litigation, disputes with Express Scripts and Cigna, and a California tax case.
• Market volatility may cause further investment impairment. The company recorded a $24 million allowance for credit losses on fixed-maturity securities under newly adopted credit-loss accounting guidance. A new vendor agreement for IT infrastructure and support carries an approximate $1.7 billion commitment through June 2025.

Important facts for investors to verify

1. How much of the unusually low Q2 claims ratio reflected temporary care deferrals, and whether later utilization or COVID-related treatment costs reverse that benefit.
2. IngenioRx’s sustainable external and affiliated economics, including how reported product revenue and cost of products sold compare with operating contribution.
3. Beacon’s final purchase accounting, integration progress, and contribution to segment results.
4. Medical claims reserve assumptions and subsequent development; the filing reports $700 million of favorable prior-period claim development for the first half.
5. Developments and potential financial exposure in the DOJ risk-adjustment matter, CareMore and HealthSun investigations, and other litigation and regulatory proceedings.
6. Liquidity and leverage after the 2020 note issuance, acquisition spending, deferred tax payments, resumed repurchases, and the $1.7 billion IT services commitment.