Anthem (ANTM) Q2 Earnings Beat On Solid Premium Growth

Anthem Inc. (NYSE:ANTM) reported second-quarter 2016 adjusted income of $3.33 per share that beat the Zacks Consensus Estimate of $3.24 by 2.8%. The bottom line also increased 7.4% year over year as solid membership growth drove premiums higher.

Operating revenues of $21.27 billion surpassed the Zacks Consensus Estimate of $20.45 billion and also increased 7.7% year over year on higher premiums and increased enrollment in the Medicaid and Commercial self-funded businesses.

Anthem’s premium revenues were up 7.7% to $19.9 billion and administrative fees rose 7% to $1.3 billion, both on a year-over-year basis. Other revenues, however, plunged 14.4% year over year to $10.7 million.

Total expenses increased 8.4% year over year to $20 billion in the reported quarter. Higher interest expenses and benefit costs resulted in the overall rise in expenses.

Medical enrollment at Anthem grew 3.2% year over year to 39.8 million as of Jun 30, 2016. The upside was primarily driven by enrollment gainsin Commercial & Specialty Business and Medicaid business. .

Anthem posted a benefit expense ratio (benefit expenses as a percentage of premium revenues) of 84.2% in the reported quarter. This reflects an increase of 210 basis points year over year.

Segment Results

Commercial & Specialty Business

This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues incresead 5.4% year over year to $9.9 billion in the reported quarter.

Operating gains in the segment increased 17.8% year over year to $1.1 billion, mainly due to changes in the prior and current year risk adjustment estimates in ACA compliant products. Also, a lower SG&A (Selling, General and Administrative) ratio due to reduced administrative costs as a result of expense efficiency initiatives undertaken by the company contributed to the improvement.

Government Business

This segment consists of the Medicaid and Medicare business lines, and National Government Services. Operating revenues grew 9.6% year over year to $11.4 billion in the quarter under review.

Operating gains in the segment decreased 26.1% year over year to $450.5 million on increases in medical cost experience, which exceeded the net impact of annual premium rate adjustments in the Medicaid business. However, the downside was partially offset by a lower SG&A ratio supported by reduced administrative costs as a result of expense efficiency initiatives undertaken by Anthem.

Financial Update

As of Jun 30, 2016, Anthem had cash and cash equivalents of $1.5 billion, lower than $2.1 billion as of Dec 31, 2015.

Long-term debt of Anthem decreased to $14.2 billion as of Jun 30, 2016 from $15.3 billion as of Dec 31, 2015. Shareholder equity was $24.2 billion as of Jun 30, 2016, higher than $23.0 billion at year-end 2015.

Operating cash flow was $662 million. The reported figure was 0.8 times the net income in the second quarter.

Dividend Update

In the reported quarter, Anthem declared and paid a quarterly dividend of 65 cents per share. This resulted in payout of $170.9 million. The Audit Committee also declared a third quarter dividend of 65 cents per share payable on Sep26, 2016, to shareholders of record on Sep 9, 2016.

Guidance for 2016

Anthem expects adjusted net income of greater than $10.80 per share. Including more than $1.46 per share of net unfavorable items, net income is now expected to be higher than $9.34 per share.

Medical membership is expected in the range of 39.6–39.8 million. Fully insured membership is anticipated between 14.9 million and 15 million, while self-funded membership is estimated to be in the range of 24.6–24.7 million.

Operating revenues are projected in the $82.5–$83.5 billion range as against $81–$82 billion guided previously.

Benefit expense ratio is expected to be around 84.9%, while SG&A ratio is expected to be around 14.5%.

Anthem continues to expect operating cash flow in excess of $3 billion in 2016.

Zacks Rank and Other HMOs

Anthem currently carries a Zacks Rank #3 (Hold). Another player, UnitedHealth Group Inc.’s (NYSE:UNH) second-quarter earnings surpassed the Zacks Consensus Estimate. Other health, maintenance organization like Aetna Inc (NYSE:AET) and Humana Inc. (NYSE:HUM) are scheduled to report second-quarter results on Aug 2 and Aug 3, respectively.