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Anthem Reports Fourth Quarter And Full Year 2018 Results Reflecting Strong Core Performance

Anthem, Inc. (NYSE: ANTM) reported fourth quarter and full year 2018 financial results that reflected enhanced performance across the core businesses and increasing operating momentum.

"In 2018, we achieved our objectives of improving execution and strengthening our value proposition with innovative and affordable solutions designed to more effectively meet the unique needs of our customers," said Gail K. Boudreaux, President and CEO. "Our fourth quarter and full year performance provides a strong foundation for 2019. In addition, I am pleased to announce that we are accelerating the launch of IngenioRx and now expect to begin transitioning members in the second quarter of this year. Since announcing our intent to create IngenioRx, we have been carefully planning the transition, including the possibility of an early launch, and are confident in our ability to execute the transition under the accelerated schedule. This will allow us to go to market with better economics earlier, and also accelerate our whole person health strategy, which is proven to reduce total cost of care."

Anthem continues to expect gross annual savings through IngenioRx of greater than $4 billion, with more than 20% of that amount being returned to our shareholders. The Company, pursuant to the terms of its pharmacy benefits management services agreement with Express Scripts, Inc. (the "PBM Agreement"), has provided notice to Express Scripts that it will exercise its contractual rights to terminate the PBM Agreement earlier than the original expiration date of December 31, 2019 due to the recent acquisition of Express Scripts by Cigna Corporation. As a result of exercising our early termination rights, the PBM Agreement will now terminate on March 1, 2019 and the twelve month transition period to migrate the business will begin on March 2, 2019.

Anthem expects its full year 2019 adjusted net income to be greater than $19.00* per share, which reflects the benefit from the accelerated launch of IngenioRx, including expected expenses related to the revised transition schedule.

* Refer to the GAAP reconciliation tables.

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled approximately 39.9 million members at December 31, 2018, an increase of 37 thousand members from September 30, 2018. Commercial & Specialty Business enrollment increased by 30 thousand members, as the Company experienced growth in the fully insured and fee-based Local Group businesses and growth in the National business. The increase was partially offset by a decline in Individual enrollment. Government Business enrollment increased by 7 thousand members, driven by growth in Medicare that was partially offset by a decrease in Medicaid membership.

Medical enrollment declined by 361 thousand members from 40.3 million members at December 31, 2017. The decrease reflected declines due to a reduced footprint in the Individual ACA-compliant marketplace and declines in Local Group enrollment. These declines were partially offset by growth in the Medicare, National, and Medicaid businesses.

Operating Revenue: Operating revenue was $23.3 billion in the fourth quarter of 2018, an increase of $857 million, or 3.8 percent, versus $22.4 billion in the prior year quarter. The growth in operating revenue reflected premium rate increases to cover overall cost trends and the return of the health insurance tax in 2018 as well as growth in Medicare. The increase was partially offset by a reduced footprint in the Individual ACA-compliant marketplace.

Benefit Expense Ratio: The benefit expense ratio was 86.8 percent in the fourth quarter of 2018, a decrease of 180 basis points from 88.6 percent in the prior year quarter. The decrease, as expected, was largely driven by the return of the health insurance tax in 2018 and improved medical cost performance in our Commercial & Specialty Business.

Medical claims reserves established at December 31, 2017 developed moderately better than the Company’s expectation during 2018.

Medical Cost Trend: For the full year 2018, Local Group medical cost trend was approximately 5.9%. The Company anticipates medical cost trend will be in the range of 6.0% +/- 50 bps in 2019.

Days in Claims Payable: Days in Claims Payable (“DCP”) was 36.2 days as of December 31, 2018, a decrease of 2.5 days from 38.7 days as of September 30, 2018.

SG&A Expense Ratio: The SG&A expense ratio was 15.5 percent in the fourth quarter of 2018, an increase of 40 basis points from 15.1 percent in the fourth quarter of 2017. The increase, as expected, was primarily driven by the return of the health insurance tax in 2018, partially offset by expense efficiency initiatives.

Operating Cash Flow: Operating cash flow was $463 million, or 1.1 times net income in the fourth quarter of 2018, bringing full year 2018 operating cash flow to $3.8 billion, or 1.0 times net income.

Share Repurchase Program: During the fourth quarter of 2018, the Company repurchased 1.8 million shares of its common stock for $493 million, or a weighted average price of $270.66. For the full year, the Company repurchased 6.8 million shares of its common stock for $1.7 billion, or a weighted average price of $248.34. As of December 31, 2018, the Company had approximately $5.5 billion of Board-approved share repurchase authorization remaining.

Cash Dividend: During the fourth quarter of 2018, the Company paid a quarterly dividend of $0.75 per share, representing a distribution of cash totaling $193 million.

On January 29, 2019, the Audit Committee declared a first quarter 2019 dividend to shareholders of $0.80 per share. On an annualized basis, this equates to a dividend of $3.20 per share. The first quarter dividend is payable on March 29, 2019 to shareholders of record at the close of business on March 18, 2019.

Investment Portfolio & Capital Position: During the fourth quarter of 2018, the Company recorded net realized losses on financial instruments totaling $185 million and other-than-temporary impairment losses totaling $8 million. During the fourth quarter of 2017, the Company recorded net realized gains of $7 million and other-than-temporary impairment losses totaling $12 million.

As of December 31, 2018, the Company’s net unrealized loss position in the investment portfolio was $201 million, consisting of fixed maturity securities. The adoption of a change in accounting standards has resulted in the Company accounting for unrealized changes in the value of equity securities in realized gains or losses. As of December 31, 2018 cash and investments at the parent company totaled approximately $1.9 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 certain eliminations and corporate expenses not allocated to either of our other reportable segments).

                         
Anthem, Inc.
Reportable Segment Highlights
(Unaudited)
                         
(In millions)   Three Months Ended December 31   Twelve Months Ended December 31
    2018   2017   Change   2018   2017   Change
Operating Revenue                        
Commercial & Specialty Business   $8,843     $10,006     (11.6 )%   $35,782     $40,363     (11.3 )%
Government Business   14,462     12,444     16.2 %   55,567     48,702     14.1 %
Other   (1 )   (3 )   NM2   (8 )   (4 )   NM2
Total Operating Revenue1   $23,304   $22,447   3.8 %   $91,341     $89,061     2.6 %
                         
Operating Gain / (Loss)                        
Commercial & Specialty Business   $322     $67     380.6 %   $3,629     $2,847     27.5 %
Government Business   444     360     23.3 %   1,895     1,445     31.1 %
Other   (16 )   (46 )   NM2   (98 )   (117 )   NM2
Total Operating Gain1   $750   $381   96.9 %   $5,426     $4,175     30.0 %
                         
Operating Margin                        
Commercial & Specialty Business   3.6 %   0.7 %   290 bp   10.1 %   7.1 %   300 bp
Government Business   3.1 %   2.9 %   20 bp   3.4 %   3.0 %   40 bp
Total Operating Margin1   3.2 %   1.7 %   150 bp   5.9 %   4.7 %   120 bp
                                 

(1) See “Basis of Presentation.”

(2) "NM" = calculation not meaningful.

Commercial & Specialty Business: Operating gain in the Commercial & Specialty Business segment totaled $322 million in the fourth quarter of 2018, an increase of $255 million, or 380.6 percent, from $67 million in the fourth quarter of 2017. The increase reflected improved medical cost performance and a decrease in certain general and administrative expenses compared to the prior year quarter.

Government Business: Operating gain in the Government Business segment was $444 million in the fourth quarter of 2018, an increase of $84 million, or 23.3 percent, from $360 million in the fourth quarter of 2017. The increase is a result of the acquisitions of HealthSun and America's 1st Choice and the return of the health insurer fee in 2018. The increase was partially offset by higher medical costs in the Medicaid business.

Other: The Company reported an operating loss of $16 million in the Other segment for the fourth quarter of 2018, compared with an operating loss of $46 million in the prior year quarter.

OUTLOOK

Full Year 2019:

  • GAAP net income is expected to be greater than $18.00 per share, including approximately $1.00 per share of net unfavorable items. Excluding these items, adjusted net income is expected to be greater than $19.00* per share.
  • Medical membership is expected to be in the range of 40,900,000 - 41,300,000. Fully-insured membership is expected to be in the range of 15,500,000 - 15,700,000 and self-funded membership is expected to be in the range of 25,400,000 - 25,600,000.
  • Operating revenue is expected to be approximately $100.0 billion, including premium revenue of $90.5 billion - $92.5 billion.
  • Benefit expense ratio is expected to be in the range of 86.2% plus or minus 30 basis points.
  • Cost of products sold of $1.6 billion - $1.8 billion.
  • SG&A ratio is expected to be in the range of 13.5% plus or minus 30 basis points.
  • Operating cash flow is expected to be greater than $5.2 billion.
  • Share count is expected to be between 261 - 263 million.
  • Effective tax rate is expected to be between 19.5% - 21.5%.
  • Investment income is expected to be $1.0 billion.

* Refer to the GAAP reconciliation tables.

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, interest expense, amortization of other intangible assets, gains/losses on extinguishment of debt or income taxes, as these items are managed in a corporate shared service environment and are not the responsibility of operating segment management. Refer to the GAAP reconciliation tables.
  2. Operating margin is defined as operating gain divided by operating revenue.

 

 
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