Anthem, Inc. 10-Q Summary
Business context and reporting period
Anthem, Inc. (now Elevance Health, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The company operated health plans and related services across commercial, Medicaid, Medicare and other markets, with 38.5 million medical members at quarter-end, up 4.3% year over year.
Financial and operating results
- Revenue: Operating revenue was $18.85 billion, up 6.8%; total revenue, including investment income and realized gains, was $19.05 billion, up 6.7%.
- Profit: Net income was $865 million, up 23.4%. Diluted EPS was $3.09, up 28.8%; fewer shares outstanding from repurchases contributed to EPS growth. Continuing-operations income was $865 million versus $691 million.
- Margins: Benefit expense ratio improved to 80.2% from 82.7%. SG&A was 16.7% of operating revenue versus 16.2%. Net income was 4.5% of total revenue versus 3.9%.
- Cash flow: Operating cash flow was $1.65 billion, compared with $1.39 billion. Investing used $2.71 billion, including $636 million for Simply Healthcare; financing provided $312 million. Cash and cash equivalents ended at $1.40 billion, down from $2.15 billion at year-end.
- Liquidity and debt: Cash, cash equivalents and investments totaled $24.61 billion, including long-term investments. Parent-company cash and investments available for general corporate use were $2.82 billion. Debt-to-capital was 39.4%, up from 38.5% at December 31, 2014. Balance-sheet long-term debt was $14.76 billion, with a $625 million current portion; short-term borrowings were $450 million. The company reported $638.8 million outstanding under its commercial paper program.
- Segments: Commercial and Specialty operating revenue fell 3.4% to $9.37 billion, while operating gain rose 43.0% to $1.27 billion. Government Business revenue grew 19.4% to $9.48 billion and operating gain rose 35.4% to $324 million. Government membership growth, including Medicaid, was a major driver.
Material changes versus the prior comparable period
- Operating revenue increased $1.21 billion, primarily from Government Business premiums and higher administrative fees; Commercial fully insured Local Group membership declines partly offset growth.
- Benefit expense rose 3.4%, slower than revenue growth, and the benefit expense ratio improved 250 basis points. Management attributed improvement chiefly to Commercial medical-cost experience and certain Medicaid markets.
- SG&A increased 9.9%, reflecting membership-related costs and the Health Insurance Provider Fee (HIP Fee). The estimated quarterly HIP Fee was $323.7 million versus $230.0 million.
- The effective tax rate increased to 44.9% from 38.8%, reflecting the non-deductible HIP Fee and favorable discrete tax items in 2014.
- Simply Healthcare was acquired on February 17, 2015, adding preliminary goodwill of $488.9 million and $388.0 million of other intangible assets. 1-800 CONTACTS had been divested in January 2014; its one-month 2014 result was reported as discontinued operations.
Outlook, risks and unusual items
- Management estimated a 2015 cost-of-care trend of 7.0%, plus or minus 50 basis points, for its Local Group fully insured business. The filing gives no consolidated earnings or revenue guidance; first-quarter results are not necessarily indicative of full-year results.
- Management cited lower medical utilization than in prior periods, provider rate increases as a cost driver, and new high-cost Hepatitis C therapies as upward pressure on pharmacy costs. It described contracting, plan-design, care-management and payment-reform initiatives to manage costs.
- In February 2015, the company disclosed a cyber attack involving unauthorized access to systems and personal information. It had incurred remediation costs and expected further expense; related claims and government investigations were ongoing. Potential ultimate costs could not be estimated, and insurance might not cover all liabilities.
- Key litigation included the Gold demutualization matter, out-of-network reimbursement cases and Blue Cross Blue Shield antitrust litigation. For certain other proceedings with estimable losses, the aggregate range of reasonably possible losses above established reserves was $0–$250 million. Cyber-related losses were not included in an estimable range.
- Other risks included health-care regulation and the HIP Fee, medical-cost trends and pricing adequacy, government-program funding and compliance, investment impairment, indebtedness and rating downgrades, and regulatory limits on subsidiary dividends. A potential Penn Treaty insolvency could lead to future guaranty-fund assessments; the company could not estimate its net exposure.
- Share repurchases were $774 million in the quarter, and cash dividends were $167 million. The quarterly dividend per share was $0.625, up from $0.4375 a year earlier. The company reported no amounts drawn on its $2.0 billion revolving credit facility.
Most important facts for investors to verify
- How much of the Government Business growth and margin improvement is sustainable, and what portion reflects Simply Healthcare or market expansions?
- Whether the improved benefit expense ratio persists as medical utilization, provider rates and pharmacy costs change.
- The eventual financial, regulatory and reputational impact of the cyber incident, including litigation, investigations, remediation costs and insurance coverage.
- Cash conversion and liquidity after acquisition spending, investment purchases, debt activity, dividends and continued share repurchases.
- Whether the 7.0% cost-trend estimate remains appropriate and whether premium rates adequately cover claims costs and health-care reform fees.