Anthem Inc. (ANTM) reported fourth-quarter 2014 adjusted net income of $1.73 per share, beating the Zacks Consensus Estimate of $1.72. The bottom line also shot up 98.9% from 87 cents per share earned in the year-ago quarter.
The upside was driven by an improved underlying performance and increased membership across the Commercial and Government segments. Anthem remains adept in capitalizing on market opportunities and is taking up initiatives to enhance its membership base.
Including net realized gains on investments, other than temporary impairment losses on investments and loss on extinguishment of debt totaling 7 cents in the fourth quarter of 2014, Anthem posted net income of $1.80 per share against 49 cents in the fourth quarter of 2013.
Operating revenues of Anthem in the reported quarter were approximately $18.8 billion, below the Zacks Consensus Estimate of $19.0 billion. However, revenues rose 6.4% from the year-ago quarter. The year-over-year improvement resulted from increased premiums to make up for the overall cost trends and new fees related to the Health Care Reform.
Higher membership in the Medicaid, Individual and Commercial self-funded lines of businesses also contributed to the upside. However, these were partly offset by lower revenues associated with the State of New York contract conversion to a self-funded arrangement and lower enrollment in the Small Group and Medicare business.
Anthem’s premium revenues increased 5.8% to $17.6 billion, administrative fees surged 15.7% to $1.2 billion and other revenues rose 13.2% to $12 million, all on a year-over-year basis. Meanwhile, total expenses increased 3.8% to $18.1 billion.
Medical enrollment of Anthem increased 5.2% to 37.5 million as of Dec 31, 2014, from 35.7 million as of Dec 31, 2013 on higher enrolment in the Commercial & Specialty Business segment. The upside resulted from an improvement in the National, Local Group, and Individual markets. Increased enrollment in the Medicaid and Federal Employee Program (FEP) business also contributed to the improvement. However, a decline in membership in the Medicare business partially offset the positives.
Anthem posted a benefit expense ratio (benefit expenses as a percentage of premium revenues) of 84.5% in the reported quarter, reflecting an improvement of 330 basis points from 87.8% in the fourth quarter of 2013. Additional premium revenues that helped to cover new Health Care Reform fees led to an improvement in the Commercial and Specialty Business, which in turn improved the benefit expense ratio. An improvement in the Medicaid business was also a contributing factor.
Segment Results
Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues dropped 1.9% year over year to $9.7 billion in the reported quarter.
Operating gains in the segment, however, increased 112.3% year over year to $539.5 million in the quarter, mainly due to a change in the product portfolio mix and seasonality of the product portfolio that stemmed from implementation of the Health Care Reform.
Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the FEP. Operating revenues increased 17% year over year to $9 billion in the quarter under review.
Operating gains in the segment increased 114.4% to $354.9 million on retro rate adjustments recorded during the current year quarter and enrollment growth in 2014.
Other: This segment comprises the unallocated corporate expenses as well as some businesses which are not covered by the other two segments. Operating revenues in the reported quarter came in at $7.8 million, down 24.3% year over year.
The segment digested operating loss of 8.9 million, wider than a loss of $0.2 million in the year-ago quarter.
Full-Year Highlights
Adjusted net income of $8.85 per share was above the Zacks Consensus Estimate of $8.84. Earnings also improved 3.9% year over year on account of higher medical enrollment. In fact, medical membership also exceeded the company guided range. Adjusted net income was at the upper end of the company’s guided range of $8.75–$8.85 per share.
Including net realized gains on investments, other than temporary impairment losses on investments, loss on extinguishment of debt and 1-800 CONTACTS 2014 income totaling 14 cents, Anthem posted net income of $8.99 per share against $8.20 in 2013.
Operating revenues of $73 billion narrowly missed the Zacks Consensus Estimate of $73.5 billion. Full-year revenues were also tad below the company’s guided range of $$73.25–$73.5 billion. However, revenues improved 4% year over year.
Financial Update
As of Dec 31, 2014, Anthem had cash and cash equivalents of $2.2 billion compared with $1.6 billion as of Dec 31, 2013. Operating cash flow for 2014 amounted to $3.4 billion against $3.1 billion in 2013.
Long-term debt of Anthem increased to $14.1 billion as of Dec 31, 2014 from $13.6 billion as of Dec 31, 2013. Shareholder equity was $24.3 billion as of Dec 31, 2014, down from $24.8 billion as of Dec 31, 2013, while total assets increased to $62.1 billion from $59.6 billion at the end of 2013.
Share Repurchase
Anthem repurchased approximately 2.8 million shares for $343 million in the reported quarter, bringing the total share repurchase to $3 billion in 2014. The full-year share repurchases represent about 10.4% of the outstanding shares as of Dec 31, 2013. As of Dec 31, 2014, the company had approximately $5.7 billion worth of authorization remaining under its share repurchase program.
Dividend Update
In the reported quarter, Anthem paid a quarterly cash dividend of 43.75 cents per share. This resulted in a cash distribution of $117.6 million.
On Jan 27, 2015, the board of directors of Anthem declared first-quarter dividend of 62.5 cents per share, which represents an increase of almost 43% from the earlier dividend. The new dividend will be paid on Mar 25, to shareholders of record as of Mar 10.
Outlook for 2015
Anthem expects adjusted net income to exceed $9.70 per share, improving from the 2014 figure. The Zacks Consensus Estimate is pegged lower at $9.48. Including amortization of other intangible assets worth 40 cents per share, net income for 2015 is expected to exceed $9.30 per share.
Anthem’s operating revenue guidance stands at $78–$78.5 billion, higher than that reported in 2014.
Anthem expects Medical enrollment to increase in 2015 and the guidance is a band of 38–38.2 million. Fully-insured membership is estimated at 14.75–14.85 million, higher than 14.7 million in 2014. Self-funded membership forecast is 23.25–23.35 million, higher than 22.8 million in 2014.
Anthem expects benefit expense ratio in the range of 82.7–83.3%, while SG&A ratio outlook is projected in the 15.8–16.4% range.
The company expects operating cash flow to exceed $3.5 billion, higher than that of 2014.
Zacks Rank and Other HMOs
Anthem currently carries a Zacks Rank #2 (Buy). Among other health maintenance organizations (HMOs), UnitedHealth Group Inc. (UNH) outperformed the Zacks Consensus Estimate in fourth-quarter 2014. Humana Inc. (HUM) and Centene Corp. (CNC) are scheduled to report fourth-quarter results shortly.
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