Anthem, Inc. (now Elevance Health): Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing was made by Anthem, Inc.; the company served 38.7 million medical members across commercial, Medicaid, Medicare and other health-plan businesses.
Financial performance
Amounts below are in millions except per-share data and ratios. Year-over-year comparisons are with the corresponding 2014 period.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $19,771.4 | $18,370.7 | $58,381.1 | $54,245.5 |
| Total revenue | $19,901.6 | $18,557.0 | $58,968.6 | $54,889.8 |
| Net income | $654.8 | $630.9 | $2,379.1 | $2,063.0 |
| Diluted EPS | $2.43 | $2.22 | $8.66 | $7.18 |
| Benefit expense ratio | 83.6% | 82.5% | 82.0% | 82.7% |
| SG&A ratio | 15.6% | 16.2% | 15.9% | 16.1% |
- Q3 operating revenue rose 7.6%; net income increased 3.8% and diluted EPS rose 9.5%. Nine-month operating revenue rose 7.6%; net income increased 15.3% and diluted EPS rose 20.6%.
- Q3 benefit expense grew 8.9%, faster than operating revenue, and the benefit expense ratio worsened by 110 basis points. For the nine months, benefit expense grew 6.7% and the ratio improved by 70 basis points.
- Commercial and Specialty operating gain fell 32.4% to $619.2 in Q3, while Government Business operating gain rose 120.7% to $626.6. For the nine months, those gains were $2,798.2, up 2.8%, and $1,560.7, up 86.5%, respectively.
- Management attributed growth mainly to Government membership and Simply Healthcare, with lower Commercial premiums partly offsetting the increase. Medical membership increased 3.1% to 38.7 million; Medicaid membership grew 15.5%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $3,166.9, versus $3,064.2 a year earlier. Investing activities used $1,782.2 and financing activities used $1,985.0. Cash and cash equivalents declined $603.9 to $1,547.8 from year-end 2014.
- At September 30, total assets were $62,335.6 and shareholders’ equity was $23,236.1. Cash, cash equivalents and investments, including long-term investments, totaled $23,417.1; $1,608.7 of cash and investments were held at the parent company.
- Long-term debt was $15,719.6 and short-term borrowings were $540.0. The company also reported $965.8 outstanding under its commercial paper program. Its reported debt-to-capital ratio was 41.2%, up from 38.3% at December 31, 2014.
- Anthem repurchased $1,515.8 of common stock and paid $493.5 in cash dividends during the first nine months. Quarterly dividend per share increased to $0.625 from $0.4375 in 2014.
Outlook, material developments and risks
- Cigna transaction: Anthem agreed to acquire Cigna in a transaction estimated at approximately $53 billion at announcement, with expected closing in the second half of 2016, subject to shareholder, regulatory and other conditions. Funding plans included cash and new debt, a $22.5 billion bridge facility commitment and a $4.0 billion term loan facility. Management projected a pro forma debt-to-capital ratio near 49% at closing and committed to deleveraging to the low 40% range about 24 months afterward. It expected to maintain the dividend and generally expected to suspend share repurchases for the current year. No full-year EPS guidance is provided in the filing.
- Medical costs: Management estimated 2015 cost-of-care trend for its Local Group fully insured business at 7.0%, plus or minus 50 basis points. It cited provider rate increases and high-cost Hepatitis C therapies as cost pressures, and described care-management, contracting and plan-design initiatives to manage costs.
- Health Insurance Provider Fee: Anthem’s 2015 share was $1,207.5; the fee is nondeductible for federal tax purposes and contributed to higher expense and effective tax rates. The nine-month effective tax rate was 44.1%, versus 41.0% in 2014.
- Cyber incident: A February 2015 attack exposed personal information of many individuals and employees. The company reported ongoing remediation expenses, lawsuits and government investigations; potential costs could be significant but were not reasonably estimable. Insurance had covered the majority of claims and liabilities incurred to date.
- Legal and other contingencies: The filing described several class actions and other disputes, including a California tax case. For specified proceedings, estimated reasonably possible losses above established reserves ranged from $0 to approximately $250 million; the potential cyber-related loss was not estimable. A potential Penn Treaty insolvency could lead to future guaranty-fund assessments, but Anthem could not estimate its exposure.
- Investment and regulatory risks: Nine-month other-than-temporary investment impairment losses recognized in income were $54.9, up from $35.5. Management warned that further fair-value declines could result in additional impairments. The company also cited health-care regulation, premium adequacy, utilization, acquisition execution, debt ratings and subsidiary dividend restrictions as risks.
Important facts for investors to verify
- Whether Cigna’s required approvals are obtained, the transaction closes on schedule, and financing and integration plans remain achievable.
- Whether Government Business growth and membership translate into sustainable margins, and whether Commercial and Individual medical-cost performance improves.
- How medical-claims reserve development affects earnings: Anthem recorded $818.0 of favorable prior-year claims development in the first nine months, versus $534.7 in 2014.
- The ultimate financial and regulatory consequences of the cyber incident and material litigation, including exposures not currently estimable.
- Debt levels, financing costs and progress toward management’s stated post-acquisition deleveraging target.