It wasn't so long ago that health insurance companies feared the dramatic impact that they believed healthcare reform would have on their businesses. Yet as things have turned out, providers like Anthem (NYSE:ANTM), formerly known as WellPoint, have taken the opportunities from the Affordable Care Act and other reform efforts and used them to add to their customer bases and boost their revenues. Coming into Wednesday morning's first-quarter financial report, Anthem investors hoped that the company would continue to see higher sales and earnings from rising member counts -- and Anthem largely gave its shareholders the positive news they sought, with outpaced earnings growth that points to further gains ahead. Let's look more closely at Anthem's latest results to find out whether the health-insurance industry can continue to be profitable for investors.
Anthem looks healthier than ever
Anthem's report showed just how good a job the health insurer has done in capturing new business from healthcare reform. Revenue grew almost 7% to $18.85 billion, although that actually represented a slower growth rate than most of those following the stock had expected to see. Where Anthem really performed well, though, was on its bottom line, where net income soared 23% to $865.2 million. That translated to adjusted earnings of $3.14 per share, while investors had only expected around $2.67 per share in earnings.
Looking more closely at Anthem's numbers shows pockets of relative strength and weakness in what was otherwise a solid report. Membership counts rose by 1 million members to 38.5 million during the first quarter, with commercial and specialty business accounting for more than half of those gains. Government programs like Medicare and Medicaid also contributed. Overhead costs rose by about half a percentage point as a result of healthcare reform and higher administrative costs, while benefit expenses dropped 2.5 percentage points due to timing and amounts of medical-claims costs.
Anthem's commercial business continues to play a much more important role in profit generation than its government business. Despite their bringing in roughly the same amount of revenue during the quarter, operating margins on the commercial side are almost four times as high as what Anthem makes on government business, reflecting the efforts that the government has made to control costs. Unfortunately, the government segment is the one pushing overall revenue upward, with a 19% rise in contrast to the 3% drop in sales on the commercial side. Nevertheless, both businesses saw huge operating gains during the quarter that helped to drive outpaced profit growth.
How will Anthem fare in the rest of 2015?
CEO Joseph Swedish was pleased with the results, noting that they "reflect our growing membership base as we continue to focus on improving affordability for our members." Swedish also added, "We are encouraged with how our strategy is playing out and believe it positions us to capitalize on multiple growth opportunities across our businesses," and he sees further gains ahead for Anthem in the near future.
Anthem's guidance for the remainder of 2015 shows its confidence in the staying power of the health insurance business even in the face of healthcare reform. The company said it now believes that adjusted net income will come in at $9.90 per share or more for the full 2015 year, with revenue of $78.5 billion and a favorable benefit-expense ratio of just under 83%. Medical membership should rise to between 38.2 million and 38.4 million members, with fully insured customers making up about two-fifths of that total and members covered by corporate self-insurance programs administered by Anthem rounding out the total.
Anthem shareholders responded favorably to the news, with the stock rising almost 2% in pre-market trading following the announcement after a healthy gain yesterday. After initial qualms about the potential impact of reform, investors have gotten comfortable with the positives involved in getting more members onto Anthem's rolls. As long as the company can keep squeezing growing profits from a bigger customer base, Anthem has the potential to keep seeing further share-price gains well into the future.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Anthem. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.