Business context and reporting period
Anthem, Inc. (the registrant in this filing; now Elevance Health, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2018. It served 39.6 million medical members and reported through Commercial & Specialty, Government, and Other segments. Amounts below are in millions of dollars, except per-share data and percentages.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Operating revenue | $22,342.3 | $22,319.5; up 0.1% |
| Total revenue | $22,537.5 | $22,525.9 |
| Net income | $1,312.5 | $1,009.9; up 30.0% |
| Diluted EPS | $4.99 | $3.73; up 33.8% |
| Benefit expense ratio | 81.5% | 83.7% |
| SG&A expense ratio | 15.3% | 14.3% |
| Operating cash flow | $2,214.9 | $2,688.2 |
| Cash and cash equivalents | $4,630.6 at March 31 | $3,608.9 at December 31, 2017 |
| Total assets / liabilities | $73,300.4 / $46,288.0 at March 31 | $70,540.0 / $44,037.1 at December 31, 2017 |
| Debt-to-capital ratio | 42.4% | 42.9% at December 31, 2017 |
Net income margin was 5.8%, compared with 4.5% a year earlier; income before tax was 7.9% of total revenue, compared with 6.7%. Cash from investing activities was a use of $565.9, including $1,346.1 for subsidiary acquisitions; financing activities used $627.7. Cash and investments in fixed-maturity and equity securities totaled $24,598.4 at quarter-end. The filing says $1,051.3 of cash and investments was held at the parent company and available for general corporate use.
Material changes versus the prior comparable period
- Revenue was nearly flat, as growth in Government Business and self-funded administrative fees was largely offset by lower Commercial & Specialty premiums and reduced Individual marketplace participation.
- Net income rose 30.0%, reflecting improved operating results in both principal segments and a lower effective tax rate (26.3%, versus 33.3%). The federal corporate tax-rate reduction contributed; reinstatement of the non-deductible Health Insurance Provider Fee partly offset the benefit.
- Benefit expense fell 2.8%, and the benefit expense ratio improved by 220 basis points. SG&A rose 7.4%, with its ratio up 100 basis points, in part due to the Health Insurance Provider Fee and growth-related spending.
- Operating cash flow declined $473.3, which management attributed to growth investment, membership declines in certain businesses, and higher incentive compensation, partly offset by cash receipts from rate increases and the 2018 fee.
- Membership declined 2.5% year over year to 39.6 million, chiefly reflecting a 60.0% drop in Individual membership and lower Medicaid membership. Medicare membership increased 16.1%, partly due to acquisitions.
Outlook, commentary, risks and unusual items
- Management estimated 2018 underlying medical cost trend for Local Group fully insured business at 5.5%–6.5%. The filing gives no consolidated earnings or revenue guidance and cautions that first-quarter results are not necessarily indicative of full-year results.
- Anthem completed the America’s 1st Choice acquisition on February 15, adding about 135,000 Medicare Advantage members; preliminary goodwill was $989.7. HealthSun, acquired in December 2017, added about 40,000 members. Both acquisitions supported the Government Business segment.
- Anthem announced IngenioRx and a five-year agreement with CVS Health to provide pharmacy benefit management services beginning January 1, 2020, when the Express Scripts agreement was scheduled to end.
- The company issued $1,250.0 of 4.101% senior notes due 2028 and $850.0 of 4.550% notes due 2048 in March, and recorded a $19.1 loss on extinguishment of debt. It repaid $625.0 of notes at maturity in January. The $3,500.0 revolving credit facility had no borrowings at quarter-end.
- Material legal matters include the Blue Cross Blue Shield antitrust litigation, California gross-premiums-tax litigation, disputes with Express Scripts, and ongoing Cigna merger-related litigation. For proceedings where a loss was reasonably possible and estimable, the company reported an aggregate range of $0–$250.0 in excess of established reserves; many outcomes and potential losses could not be estimated.
- The 2015 cyberattack class settlement for $115.0 plus non-monetary relief had received preliminary approval; final approval and regulatory matters remained pending. The company stated that investigations and other related cases continued.
- Other notable items: the 2018 Health Insurance Provider Fee generated $396.9 of first-quarter SG&A expense; favorable prior-period medical-claims reserve development was $645.2; and investment securities had $244.7 of net unrealized losses in other comprehensive income. Management identified medical claims reserves, income taxes, goodwill and intangible assets, investments, and retirement benefits as significant-estimate areas.
Important facts for investors to verify
- Whether the improved benefit ratio and favorable claims-reserve development persist, and how medical cost trends compare with management’s 5.5%–6.5% Local Group estimate.
- Membership and profitability trends by segment, particularly continued Individual and Medicaid declines and the contribution and integration of the Medicare acquisitions.
- Cash-flow conversion, acquisition-related spending, share repurchases and dividends, and the effect of regulated-subsidiary capital and dividend restrictions on parent liquidity.
- Debt levels, borrowing costs, credit ratings, and settlement of the Equity Units’ stock-purchase obligations due May 1, 2018.
- Developments, potential costs, and reserve adequacy for the Express Scripts, Cigna, antitrust, tax, cyberattack, and government-investigation matters.
- Final purchase accounting for the acquisitions and any further effects of tax-law estimates or investment-market movements.