Anthem, Inc. Form 10-Q Summary — Quarter Ended June 30, 2017
Entity note: The supplied filing is for Anthem, Inc., the company named in the 2017 report; the request metadata identifies Elevance Health, Inc. The filing covers the three and six months ended June 30, 2017, with comparisons to 2016. Amounts below are in millions of dollars except per-share data, membership, and ratios.
Business context
Anthem operated health benefits and related businesses through Commercial and Specialty, Government, and Other segments. It reported 40.4 million medical members at June 30, 2017, up 1.6% year over year. Government Business membership grew 2.7%; Commercial and Specialty membership grew 1.3%.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Operating revenue | $22,198.0 | $21,274.5 | $44,517.5 | $41,583.9 |
| Total revenue | $22,407.2 | $21,456.2 | $44,933.1 | $41,744.7 |
| Net income | $855.3 | $780.6 | $1,865.2 | $1,483.6 |
| Diluted EPS | $3.16 | $2.91 | $6.89 | $5.54 |
| Operating cash flow | — | — | $3,081.3 | $2,029.4 |
- Operating revenue rose 4.3% in Q2 and 7.1% in H1, primarily from premium rate increases and growth in Medicaid, Medicare, and large-group business. Total revenue also reflected investment income and realized investment gains or losses.
- Net income increased 9.6% in Q2 and 25.7% in H1. Lower tax expense and improved investment results more than offset weaker segment operating results. Effective tax rates were 29.1% for Q2 and 31.4% for H1, versus 46.1% and 46.3% in 2016; the HIP Fee suspension and other tax items contributed materially.
- Benefit expense rose 6.6% in Q2 and 9.6% in H1. The benefit expense ratio increased to 86.1% from 84.2% in Q2 and to 84.9% from 83.1% in H1. Management cited cost trends, the mix and growth of Medicaid membership, the HIP Fee suspension, and less favorable risk-adjustment estimates.
- SG&A increased 2.9% in Q2 and 1.2% in H1. The SG&A ratio declined to 13.8% from 14.0% in Q2 and to 14.0% from 14.8% in H1, reflecting lower health-reform fees, efficiency initiatives, and revenue leverage, partly offset by incentive compensation and unusual charges.
- Net income as a percentage of total revenue was 3.8% in Q2 versus 3.6% and 4.2% in H1 versus 3.6%. Pretax income as a percentage of total revenue fell to 5.4% from 6.8% in Q2 and to 6.1% from 6.6% in H1.
- H1 prior-period medical-claims reserve redundancies were $951.0, compared with $726.3 in H1 2016. Anthem identified claims-reserve estimation as a significant judgment area.
Liquidity, debt, and capital
- Cash and cash equivalents were $4,561.2 at June 30, 2017, versus $4,075.3 at year-end 2016. Cash, cash equivalents, and investments, including long-term investments, totaled $28,261.5, up $2,742.5 from year-end.
- H1 operating cash flow was $3,081.3; investing activities used $2,268.8 and financing activities used $329.5. The operating cash-flow increase reflected premium receipts and payment timing, partly offset by higher claims payments.
- Long-term debt, less current portion, was $15,088.0; short-term borrowings were $580.0 and current long-term debt was $624.4. Commercial paper outstanding was $1,976.8. The reported debt-to-capital ratio was 38.1%, compared with 38.5% at year-end 2016.
- Anthem had no amounts outstanding under its $3.5 billion revolving credit facility. It reported $2,842.8 of cash and investments at the parent company available for general corporate use, subject to applicable restrictions and needs.
- Anthem repurchased $509.0 of common stock and paid $344.0 in cash dividends during H1. The quarterly dividend was $0.65 per share for the first two quarters; a $0.70 third-quarter dividend was declared after period-end.
Changes, outlook, risks, and unusual items
- Segment results weakened: Q2 operating gain declined 10.0% in Commercial and Specialty and 34.9% in Government; H1 declines were 4.1% and 21.1%, respectively. Government operating margin was 2.5% in Q2 and 2.6% in H1. Anthem attributed pressure to the HIP Fee suspension, incentive compensation, membership and cost mix, and other items.
- Management outlook: Anthem considered a 2017 cost-of-care trend estimate of 6.5%–7.0% appropriate for its Local Group fully insured business. It described higher inpatient utilization, though still negative, and increasing outpatient and professional utilization trends. No company-wide earnings or revenue guidance is stated in the supplied filing text.
- Marketplace exposure: Anthem had notified regulators it planned to largely exit the Individual ACA-compliant marketplaces in Indiana, Ohio, and Wisconsin for 2018, representing less than 10% of current Individual ACA-compliant enrollment. Final participation decisions were still under review. Management cited uncertainty around health-reform changes, subsidies, exchange membership, regulation, and rate adequacy.
- Cigna transaction termination: After courts blocked the proposed acquisition and the Delaware court denied Anthem’s request to prevent termination, Anthem terminated the merger agreement in May 2017. Litigation between Anthem and Cigna continued. Cigna sought, among other damages, a $1.85 billion termination fee; the ultimate outcome was undetermined.
- Other unusual items: Q2 SG&A included a $115.0 accrual for a proposed settlement of cyber-attack class claims, with preliminary approval still pending at filing. H1 SG&A included an estimated $253.8 assessment related to the Penn Treaty liquidation; the company expected substantial recovery through future premium surcharges and tax credits. H1 interest expense included $107.9 of amortization related to bridge-facility and other merger-related fees.
- Legal and regulatory contingencies: Anthem reported an estimated aggregate range of reasonably possible losses, in excess of established reserves, of $0–$250.0 for proceedings where a loss estimate could be made. It said outcomes of significant cases and investigations could not be determined; the DOJ was investigating Medicare chart-review and risk-adjustment programs. Anthem also faced Blue Cross antitrust litigation, a California tax case, Express Scripts disputes and related member litigation, and remaining cyber-incident matters.
- Additional risks: Medical-cost trends, pricing and rate approvals, Medicaid and Medicare funding and regulation, indebtedness and ratings, investment-market changes, subsidiary dividend restrictions, and cyber-security and litigation exposures could affect results. Management stated that funds from operations, cash and investments, and available financing were expected to be sufficient for operations and commitments.
Investor verification priorities
- Confirm the filing entity and period: the document is Anthem, Inc.’s 2017 Q2 Form 10-Q, notwithstanding the Elevance Health metadata.
- Assess whether premium growth and pricing can keep pace with medical costs, particularly given the rising benefit expense ratio and management’s 6.5%–7.0% trend estimate.
- Separate earnings growth from lower taxes, the HIP Fee suspension, investment results, prior-period claims reserve releases, and other nonrecurring items.
- Track Government segment margins, Medicaid membership and rate adequacy, and the final 2018 ACA marketplace participation decisions.
- Monitor outcomes and potential financial effects of Cigna litigation, Express Scripts disputes, the cyber-incident settlement and investigations, and other legal contingencies.
- Verify debt levels, commercial-paper usage, regulatory capital and subsidiary dividend constraints, and the sustainability of repurchases and dividends.