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Anthem Reports Second Quarter 2017 Results

INDIANAPOLIS--(BUSINESS WIRE)--Anthem, Inc. (NYSE: ANTM) today announced that second quarter 2017 net income was $855.3 million, or $3.16 per share. These results included net negative adjustment items of $0.21 per share. Net income in the second quarter of 2016 was $780.6 million, or $2.91 per share, which included net negative adjustment items of $0.42 per share.

“I am pleased with our second quarter 2017 results, carrying forward our operating momentum. Our commitment to improving the quality and affordability of health care for our customers is resonating in the marketplace and benefiting our shareholders”

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Excluding the items noted in each period, adjusted net income was $3.37 per share in the second quarter of 2017 compared to the adjusted net income of $3.33 per share in the prior year quarter (refer to the GAAP reconciliation table for the most directly comparable measure calculated in accordance with U.S. generally accepted accounting principles, or “GAAP”).

“I am pleased with our second quarter 2017 results, carrying forward our operating momentum. Our commitment to improving the quality and affordability of health care for our customers is resonating in the marketplace and benefiting our shareholders," said Joseph Swedish, president and chief executive officer.

“Our solid second quarter financial results reflect solid performance across our various business segments, which is reflected in our updated 2017 outlook,” said John Gallina, executive vice president and chief financial officer.

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled approximately 40.4 million members at June 30, 2017, an increase of 0.6 million members, or 1.6 percent, from 39.8 million at June 30, 2016. Commercial & Specialty Business enrollment increased by 389 thousand medical members as the Company experienced growth in both fully insured and self-funded Local Group businesses, partially offset by a decline in membership in the National Account and Individual businesses. Enrollment also grew by 193 thousand in the Medicaid business and 58 thousand in the Medicare business.

Medical enrollment increased by 468 thousand during the first six months of 2017. Enrollment gains were primarily in the Local Group, Individual, and Medicare businesses.

Operating Revenue: Operating revenue was $22.2 billion in the second quarter of 2017, an increase of $0.9 billion, or 4.3 percent, versus the $21.3 billion in the prior year quarter. The growth in revenue reflected premium rate increases to cover overall cost trends across our business. Additionally, the increase was driven by higher enrollment in the Local Group insured and self-funded businesses, as well as in Medicaid and Medicare. These increases were partially offset by the impact of the one year waiver of the health insurance tax in 2017 and less favorable adjustments to the prior year risk adjustment estimates.

Benefit Expense Ratio: The benefit expense ratio was 86.1 percent in the second quarter of 2017, an increase of 190 basis points from 84.2 percent in the prior year quarter. The increase, as expected, was largely driven by the impact of the one year waiver of the health insurance tax in 2017 and less favorable adjustments to the prior year risk adjustment estimates. The increase was partially offset by improved medical cost performance in the Local Group and Individual businesses.

Medical claims reserves established at December 31, 2016 developed moderately better than the Company’s expectation during the first six months of 2017.

Medical Cost Trend: For the full year 2017, the Company continues to expect underlying Local Group medical cost trend to be in the range of 6.5% - 7.0%.

Days in Claims Payable: Days in Claims Payable (“DCP”) was 40.5 days as of June 30, 2017, a decrease of 0.1 days from 40.6 days as of March 31, 2017.

SG&A Expense Ratio: The SG&A expense ratio was 13.8 percent in the second quarter of 2017, a decrease of 20 basis points from 14.0 percent in the second quarter of 2016. The decrease, as expected, was primarily driven by the impact of the one year waiver of the health insurance tax in 2017, the impact of operating expense efficiency initiatives taken by the company, and fixed cost leverage on operating revenue growth. The decrease was partially offset by higher performance-based incentive compensation accruals and the 2015 cyber attack litigation settlement recorded during the quarter.

Operating Cash Flow: Operating cash flow was $393 million, or 0.5 times net income in the second quarter of 2017, and approximately $3.1 billion, or 1.7 times net income for the first six months of 2017. The Company continues to expect its full year 2017 operating cash flow to be greater than $3.5 billion.

Share Repurchase Program: During the second quarter of 2017, the Company repurchased 2.5 million shares of its common stock for $0.5 billion, or a weighted-average price of $182.83. During the first six months of 2017, the Company repurchased 2.8 million shares of its common stock for $0.5 billion, or a weighted average price of $180.37. As of June 30, 2017, the Company had approximately $3.7 billion of Board-approved share repurchase authorization remaining.

Cash Dividend: During the second quarter of 2017, the Company paid a quarterly dividend of $0.65 per share, representing a distribution of cash totaling $171.8 million.

On July 25, 2017, the Audit Committee declared a third quarter 2017 dividend to shareholders of $0.70 per share, an increase of $0.05 per share from the second quarter dividend. On an annualized basis, this equates to a dividend of $2.80 per share. The third quarter dividend is payable on September 25, 2017 to shareholders of record at the close of business on September 8, 2017.

Investment Portfolio & Capital Position: During the second quarter of 2017, the Company recorded net realized gains on financial instruments totaling $16.2 million and other-than-temporary impairment losses totaling $7.2 million. During the second quarter of 2016, the Company recorded net realized gains of $12.5 million and other-than-temporary impairment losses totaling $25.7 million.

As of June 30, 2017, the Company’s net unrealized gain position in the investment portfolio was $846.3 million, consisting of net unrealized gains on equity and fixed maturity securities totaling $450.5 and $395.8 million, respectively. As of June 30, 2017 cash and investments at the parent company totaled approximately $2.8 billion.

REPORTABLE SEGMENTS

Anthem, Inc. has three reportable segments: Commercial & Specialty Business (comprised of the Local Group, National Accounts, Individual and Specialty businesses); Government Business (comprised of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program); and Other (comprised of unallocated corporate expenses and certain other businesses that do not meet the quantitative thresholds for separate reportable segment disclosure).

Anthem, Inc.
Reportable Segment Highlights
(Unaudited)
(In millions) Three Months Ended June 30 Six Months Ended June 30
2017 2016 Change 2017 2016 Change
Operating Revenue
Commercial & Specialty Business $10,308.8 $9,898.3 4.1 % $20,598.4 $19,408.1 6.1 %
Government Business 11,883.4 11,371.1 4.5 % 23,909.1 22,165.0 7.9 %
Other 5.8 5.1 13.7 % 10.0 10.8 (7.4 )%
Total Operating Revenue1 $22,198.0 $21,274.5 4.3 % $44,517.5 $41,583.9 7.1 %
Operating Gain / (Loss)
Commercial & Specialty Business $967.9 $1,075.3 (10.0 )% $2,270.3 $2,368.3 (4.1 )%
Government Business 293.3 450.5 (34.9 )% 611.9 775.5 (21.1 )%
Other (34.2 ) (25.6 )

NM

2

(69.8 ) (73.2 )

NM

2

Total Operating Gain1 $1,227.0 $1,500.2 (18.2 )% $2,812.4 $3,070.6 (8.4 )%
Operating Margin
Commercial & Specialty Business 9.4 % 10.9 %

(150)

bp

11.0 % 12.2 %

(120)

bp

Government Business 2.5 % 4.0 %

(150)

bp

2.6 % 3.5 %

(90)

bp

Total Operating Margin1 5.5 % 7.1 %

(160)

bp

6.3 % 7.4 %

(110)

bp

(1)

See “Basis of Presentation.”

(2)

"NM" = calculation not meaningful.

Commercial & Specialty Business: Operating gain in the Commercial & Specialty Business segment totaled $967.9 million in the second quarter of 2017, a decrease of $107.4 million, or 10.0 percent, from $1,075.3 million in the second quarter of 2016. The decrease was driven by less favorable adjustments to the prior year risk adjustment estimates, the one year waiver of the health insurance tax in 2017, and higher performance-based incentive compensation accruals. The decrease was partially offset by improved medical cost performance in the Local Group and Individual businesses.

Government Business: Operating gain in the Government Business segment was $293.3 million in the second quarter of 2017, a decrease of $157.2 million, or 34.9 percent, from $450.5 million in the second quarter of 2016. The decrease reflected higher performance-based incentive compensation accruals and the impact of the one year waiver of the health insurance tax in 2017.

Other: The Company reported an operating loss of $34.2 million in the Other segment for the second quarter of 2017, compared with an operating loss of $25.6 million in the prior year quarter.

OUTLOOK

Full Year 2017*:

  • Net income is expected to be greater than $10.35 per share, including approximately $1.35 per share of net unfavorable items. Excluding these items, adjusted net income is now expected to be greater than $11.70 (refer to the GAAP reconciliation table).
  • Medical membership is expected to be in the range of 40,200,000 - 40,400,000. Fully insured membership is now expected to be in the range of 15,200,000 - 15,300,000 and self-funded membership is expected to be in the range of 25,000,000 - 25,100,000.
  • Operating revenue is now expected to be in the range of $88.5 - $89.5 billion.
  • Benefit expense ratio is expected to be in the range of 87.0% plus or minus 30 basis points.
  • SG&A ratio is expected to be in the range of 13.6% plus or minus 30 basis points.
  • Operating cash flow is expected to be greater than $3.5 billion.

* This outlook includes the impact of the Penn Treaty assessments, 2015 cyber attack litigation settlement, and terminated Cigna acquisition transaction costs incurred during the first half of 2017, but does not include any transaction or legal costs associated with the terminated Cigna acquisition beyond those incurred in the first half of 2017.

Basis of Presentation

  1. Operating revenue and operating gain are the key measures used by management to evaluate performance in each of its reporting segments, allocate resources, set incentive compensation targets and to forecast future operating performance. Operating gain is calculated as total operating revenue less benefit expense and selling, general and administrative expense. It does not include net investment income, net realized gains/losses on financial instruments, other-than-temporary impairment losses recognized in income...

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