Anthem (ANTM +1.59%) has found itself at the middle of controversy, as several major health insurance companies have sought to merge over the past year. Antitrust concerns scuttled a deal related to two of Anthem's rivals, and now, many expect that its attempt to acquire Cigna (CI +0.00%) will meet with a similar negative fate. Yet Anthem's own financial prospects are sound, and coming into Wednesday's fourth-quarter financial report, Anthem investors were fully prepared to see growing revenue and income. The insurer delivered on that front, but many are still concerned about the uncertainty regarding the company's future. Let's look more closely at Anthem and what its results say about how it's doing.
Image source: Anthem.
Anthem gets a big boost
Anthem's fourth-quarter financial results provided some eye-popping numbers. Revenue climbed 7% to $21.48 billion, which was quite a bit more than the 4.5% growth that most investors were expecting to see. Net income more than doubled compared to the year-earlier quarter to $368.4 million, and after allowing for extraordinary items, adjusted earnings of $1.76 per share was $0.15 higher than the consensus forecast among those following the stock.
Looking more closely at what the health insurer reported, Anthem saw the biggest profit gains from its commercial and specialty business. Segment revenue was up just 2%, but operating gains more than tripled as the efforts that Anthem made to drive administrative costs lower through various efficiency-enhancing initiatives bore fruit. In addition, the segment's local group division had much more favorable medical cost experience, further enhancing profits. Anthem's government business, which makes up a larger portion of its revenue, saw much bigger sales gains of 12%. Although the government division's 27% growth in operating income was more modest than in the commercial arena, the dollar growth in the segment's bottom line contributed more to Anthem's overall profits. The company cited the same cost controls as driving growth, as well as favorable cost experience in Medicare and a change in calculations related to California's Medicaid program. Again, Iowa's Medicaid program stood out with poor loss experience that offset some of Anthem's gains in the segment.
Membership numbers showed a typical climb from year-ago figures, but growth for Anthem has stagnated in recent months. The insurer finished the year with 39.9 million members, the same as in September but up 1.3 million since the end of 2015. Gains in commercial and Medicaid were roughly the same year over year, and over the past quarter, rising enrollment in the Medicaid and local group areas has been offset by declines in the individual and national business segments.
CEO Joseph Swedish had relatively little to say about Anthem's performance. "Our fourth quarter 2016 core earnings and financial metrics tracked well versus our expectations," Swedish said, "reflecting the efforts of all of our associates to improve affordability on behalf of our members."
What's ahead for Anthem in 2017?
Anthem is still optimistic about its future prospects. In the CEO's words, "We are well positioned for a successful 2017, building off improved business momentum in the second half of 2016."
Anthem's guidance was also fairly solid and similar to what most investors had expected. The insurer believes that it will earn $11.50 per share or more in 2017 on an adjusted basis, with medical membership climbing slightly to between 40.1 million and 40.3 million members. Revenue should be between $86.5 billion and $87.5 billion for the year, although expense ratios will climb to around 87%.
These figures don't include anything that might result from the proposed Cigna merger, and the earnings release was silent about the company's difficulties in gaining approval for the deal. Anthem has sought to distinguish itself from rivals Aetna and Humana, arguing that the denial of their attempt to merge should bolster Anthem's prospects to acquire Cigna. The Justice Department has thus far disagreed, and most investors expect that Anthem will eventually lose and have to go it alone.
Anthem shares didn't move much in response to the news, climbing about 0.5% in pre-market trading following the announcement. Until we know the final resolution of the Cigna merger, Anthem will have to wait and see how its overall strategy will work going forward in 2017 and beyond.
