Business context and reporting period
The filing is Anthem, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The supplied filing names Anthem, Inc. as the registrant, not Elevance Health, Inc. Anthem operated health benefits businesses across Commercial & Specialty, Government, and Other segments and reported 39.5 million medical members at quarter-end.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages, and membership.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $22,714.8 | $22,198.0 | $45,057.1 | $44,517.5 |
| Total revenue | $22,943.7 | $22,407.2 | $45,481.2 | $44,933.1 |
| Net income | $1,053.4 | $855.3 | $2,365.9 | $1,865.2 |
| Diluted EPS | $3.98 | $3.16 | $8.97 | $6.89 |
| Benefit expense ratio | 83.4% | 86.1% | 82.5% | 84.9% |
| SG&A ratio | 15.1% | 13.8% | 15.2% | 14.0% |
Net margin on total revenue was 4.6% in Q2 and 5.2% for the first half, up 0.8 and 1.0 percentage points year over year, respectively. Operating cash flow for the first half was $2,757.1, down from $3,081.3; cash and cash equivalents ended June at $4,682.0. Cash, cash equivalents, and fixed-maturity and equity investments totaled $24,719.3.
At June 30, total assets were $74,367.4, total liabilities $45,642.4, and shareholders’ equity $28,725.0. Debt-to-capital was 40.2%, down from 42.9% at year-end 2017. Debt consisted of $1,120.0 in short-term borrowings, $650.2 in current long-term debt, and $17,515.4 in long-term debt. Anthem had no outstanding balance under its $3.5 billion revolving credit facility.
Material changes versus prior periods
- Q2 operating revenue rose 2.3%, net income 23.2%, and diluted EPS 25.9%; first-half operating revenue rose 1.2%, net income 26.8%, and diluted EPS 30.2%.
- Growth reflected higher Government Business premiums, Medicare membership growth and acquisitions, premium rate increases, and higher administrative fees. Commercial & Specialty revenue declined as Anthem reduced participation in ACA individual marketplaces and fully insured membership contracted.
- Medical membership fell 2.2% year over year to 39.499 million. Individual membership declined 60.0% and fully insured membership 7.9%; Medicare membership increased 17.1%, partly from acquisitions.
- Government Business operating revenue increased 14.0% in Q2 and 12.1% for the first half. Commercial & Specialty revenue declined 11.1% and 11.5%, respectively. Operating gains increased in both segments.
- First-half operating cash flow decreased $324.2, which management attributed mainly to growth investment, membership declines, and higher incentive compensation payments.
Outlook, commentary, risks, and unusual items
- Anthem estimated Local Group fully insured medical cost trend at 5.5%–6.5%; this is a cost-trend estimate, not full-year earnings guidance. The filing provides no clear full-year financial forecast and cautions interim results may not indicate full-year performance.
- The Health Insurance Provider Fee (HIP Fee) resumed in 2018 after suspension in 2017. Anthem recorded estimated expense of $398.1 for Q2 and $795.0 year to date; management said the fee contributed to higher SG&A and tax expense. The 2018 fee is non-deductible for federal tax purposes.
- Acquisitions of America’s 1st Choice (completed February 2018) and HealthSun (completed December 2017) supported Medicare Advantage growth. First-half cash paid for acquisitions was $1,722.5. Purchase accounting remained preliminary; goodwill included $1,020.9 for America’s 1st Choice and $1,602.8 for HealthSun.
- Anthem adopted accounting guidance requiring fair-value changes on certain equity investments to be recognized in income. First-half net realized losses on financial instruments were $22.1, versus gains of $23.5 in 2017; equity-security fair-value changes contributed to volatility.
- Major contingencies include the Blue Cross Blue Shield antitrust litigation; the Express Scripts PBM dispute, in which Anthem seeks more than $14.8 billion for alleged pricing damages plus other claims; Cigna merger litigation, including Cigna’s claim for a $1.85 billion termination fee; and government investigations into Medicare risk-adjustment programs. Outcomes were undetermined. Anthem estimated aggregate reasonably possible losses above established reserves of $0–$250 million where losses could be estimated, but said it could not estimate exposure for many proceedings.
- The cyberattack class-action settlement of $115 million had preliminary approval, with final approval pending; related investigations and state court cases remained outstanding. Anthem said it expected continuing remediation expenses.
- Management identified regulatory and ACA changes, medical cost trends, enrollment and pricing, Medicare/Medicaid funding and compliance, litigation and investigations, data security, debt and credit-rating exposure, and investment-market changes among key risks. Management stated regulated subsidiaries exceeded mandatory risk-based capital requirements based on the latest required reporting date, December 31, 2017.
Important facts for investors to verify
- Confirm issuer identity and period: the filing is for Anthem, Inc., quarter ended June 30, 2018.
- Track membership mix and whether Medicare growth offsets continued declines in ACA individual, fully insured, and Medicaid enrollment.
- Assess medical cost trend and claims-reserve development: first-half prior-period claims redundancies were $804.5, and claims estimates depend on trend and completion assumptions.
- Monitor cash generation, acquisition spending, capital returns, debt maturities, and the effect of the HIP Fee on expenses and taxes.
- Follow the Express Scripts, Cigna, antitrust, cyberattack, and DOJ matters; the filing does not establish their ultimate outcomes or a complete possible-loss range.