Anthem, Inc. 2015 Form 10-K Summary
Entity and period: The supplied filing is Anthem, Inc.’s annual report for the fiscal year ended December 31, 2015—not a filing under the later name Elevance Health, Inc. It covers the full year, with quarterly data also reported. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Anthem was a large U.S. health benefits company and Blue Cross and Blue Shield Association licensee, serving 38.6 million medical members at year-end. It reported three segments: Commercial and Specialty Business, Government Business, and Other. The Simply Healthcare acquisition closed in February 2015 and expanded its Florida Medicaid and Medicare business.
Financial performance and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $78.4 billion | $73.0 billion | Up 7.4% |
| Total revenue | $79.2 billion | $73.9 billion | Up 7.2% |
| Net income | $2.56 billion | $2.57 billion | Down 0.4% |
| Diluted EPS | $9.38 | $8.99 | Up 4.3% |
| Benefit expense ratio | 83.3% | 83.1% | Up 20 basis points |
| SG&A expense ratio | 16.0% | 16.1% | Down 10 basis points |
| Operating cash flow | $4.12 billion | $3.37 billion | Up $746.7 million |
| Cash, cash equivalents and investments | $23.12 billion | $23.78 billion | Down $653 million |
| Long-term debt, less current portion | $15.32 billion | $14.02 billion | Up $1.30 billion |
Income from continuing operations before tax was $4.63 billion, compared with $4.37 billion. The effective tax rate rose to 44.7% from 41.4%, mainly reflecting the nondeductible ACA Health Insurance Provider Fee and an adverse California franchise tax ruling. Net income was 3.2% of total revenue, versus 3.5% in 2014.
Membership increased 2.9% to 38.6 million. Medicaid membership grew 13.9%, while Individual membership declined 6.6%. Government Business operating revenue rose 20.8% to $40.8 billion and operating gain rose 66.0% to $2.0 billion. Commercial and Specialty operating revenue fell 4.2% to $37.6 billion and operating gain fell 12.5% to $2.9 billion.
Year-end total assets were $61.7 billion and shareholders’ equity was $23.0 billion. The debt-to-capital ratio was 40.8%, versus 38.3% a year earlier. The company reported $2.11 billion in cash and cash equivalents and a $3.5 billion revolving credit facility with no year-end borrowings. Regulated subsidiaries exceeded applicable risk-based capital thresholds.
Material changes and unusual items
- Operating revenue growth was driven mainly by Government Business membership, including Simply Healthcare, and rate increases. Higher benefit costs broadly tracked revenue growth.
- The company recorded $800.2 million of favorable prior-year medical claims development in 2015, compared with $541.9 million in 2014. Claims reserves are actuarial estimates; the filing identifies this as a key estimation area.
- 2015 operating cash flow included reinsurance recoveries related to the 2014 ACA reinsurance program. Financing cash outflow included $1.52 billion of share repurchases and $656.6 million of cash dividends.
- Anthem repurchased $920 million of principal on its convertible debentures and settled repurchases and conversions with total cash payments of $2.06 billion. It also issued $1.25 billion of Equity Units.
- Investment-related items included $157.5 million of net realized gains and $83.4 million of impairment losses recognized in income. Other comprehensive loss was $464.5 million, largely reflecting investment-value changes.
- Fourth-quarter 2015 net income was $180.9 million and diluted EPS was $0.68, compared with fourth-quarter 2014 net income of $506.7 million and diluted EPS of $1.80.
Outlook, risks and contingencies
- Management estimated 2015 Local Group fully insured cost-of-care trend in the lower half of a 6.5%–7.5% range and anticipated 7.0%–7.5% medical cost trend in 2016.
- The proposed Cigna acquisition, approved by both companies’ shareholders in December 2015, was expected to close in the second half of 2016, subject to regulatory and other conditions. The estimated transaction value was approximately $53 billion; Anthem expected to fund the cash portion with cash and new debt. It projected a pro forma debt-to-capital ratio near 49% at closing and targeted the low-40% range about 24 months afterward.
- Key risks included medical-cost and utilization estimation, public-exchange adverse selection and ACA risk-adjustment uncertainty, government reimbursement and regulation, acquisition approval/integration and increased leverage, and investment-market exposure. The ACA risk-corridor program paid issuers approximately 12.6% of amounts requested in 2015, according to the filing.
- A cyberattack disclosed in February 2015 accessed personal information of individuals and employees. Anthem reported ongoing remediation, credit monitoring, litigation and government investigations; it could not reasonably estimate a loss range.
- Other material uncertainties included a California tax lawsuit, antitrust and out-of-network reimbursement litigation, and possible guaranty-association assessments if Penn Treaty were liquidated. The company estimated reasonably possible litigation losses in excess of reserves of $0–$250 million for proceedings for which it could estimate a range; certain matters, including the cyberattack, were not estimable.
- The annual industry Health Insurance Provider Fee was $11.3 billion in 2015; Anthem’s share was $1.21 billion. The filing states the fee was scheduled to remain at the industry level of $11.3 billion in 2016, be suspended in 2017, and rise to $14.3 billion in 2018.
- Anthem reported an unqualified independent audit opinion and effective internal controls. Management and the auditor excluded acquired Simply Healthcare from the internal-control assessment; its reported 2015 revenue was $1.09 billion.
Important facts for investors to verify
- Whether the Cigna transaction received approvals, closed on expected terms, and delivered anticipated synergies and leverage reduction.
- Whether 2016 medical cost trends and premium pricing aligned, especially in Individual and Small Group exchange business, and whether ACA stabilization recoveries were collected as expected.
- How much of 2015 earnings and cash flow reflected prior-period claims releases and ACA reinsurance receipts, and how claims reserves subsequently developed.
- The ultimate costs, insurance recoveries, regulatory outcomes and litigation exposure related to the 2015 cyberattack.
- Changes in debt, ratings, liquidity and regulated-subsidiary dividend capacity following acquisition financing and capital returns.