The healthcare industry has been going through a lot of changes, with healthcare reform leading to a wave of consolidation within several different industry groups in the sector. For Anthem (NYSE:ANTM), the health insurance company's definitive agreement in July to acquire Cigna (NYSE:CI) in a $48 billion deal had game-changing implications for the entire industry, and coming into Wednesday morning's third-quarter financial report, Anthem investors wanted to make sure that the company's own financial ducks were in a row before turning their attention toward a December special-meeting vote to approve the deal. For its part, Anthem continued to demonstrate its ability to grow, with rising revenue and net income reflecting its growing enrollment of policyholders.
Let's look more closely at Anthem's latest results and what investors should expect going forward.
Anthem stays fit as a fiddle
Anthem's third-quarter financial results continued its impressive growth run. Operating revenue jumped almost 8% to $19.77 billion, which was about a percentage point higher than the already fast growth rate that investors had expected to see. Net income grew at a slower pace of around 4% to $654.8 million, but that included considerable negative adjustments, and adjusted earnings of $2.73 per share were up 9% from year-ago levels and topped the consensus forecast by about $0.40 per share.
Looking more closely at the numbers, Anthem continued to consolidate its membership growth, with a year-over-year increase of 1.2 million members to 38.7 million. Enrollment was strongest in the Medicaid arena, where the company gained 786,000 members, but the commercial and specialty business also showed solid additions of 314,000 members. Individual coverage saw a drop in outstanding policies, but group coverage more than made up for that shortfall, and its Medicare and federal-employee business also posted modest but significant gains. Compared to the second quarter, growth in medical enrollment came in at 174,000.
Anthem's benefit expense ratio rose substantially, climbing more than a percentage point to 83.6%. The insurer blamed the individual business for the increase, with 2014's third quarter having had unusually favorable claims experience and with this year's results being more in line with typical reserve development. Higher Medicaid enrollment once again cut Anthem's overhead expense ratio, although the push to add members offset some of those savings.
CEO Joseph Swedish was generally pleased with how Anthem did during the quarter. "Our solid third-quarter 2015 results reflect continued enrollment growth in both commercial and government business segments," Swedish said, "and our emphasis on driving greater affordability and choice for members." CFO Wayne DeVeydt added that execution across Anthem's business lines has been strong and should support better future results as well.
What's ahead for Anthem?
As we saw last quarter, Anthem did well enough to boost its guidance, now expecting adjusted earnings to come in between $10.10 and $10.20 per share. The company also made another incremental increase in its estimates for membership at year-end, making a 50,000 member boost to a range of 38.3 million to 38.5 million.
With its fundamental performance intact, Anthem can now turn toward planning for its Cigna acquisition. The deal would pay Cigna $103.40 per share in cash and 51.52 shares of Anthem stock for every 100 Cigna shares, combining for a value of $188 per share based on Anthem's share price prior to when news of a potential combination came out. Taking Cigna's debt into consideration, the total value of the merger will be about $54 billion.
If the merger goes through, Anthem would become an industry leader, with Cigna's strengths complementing Anthem's own business, and the company expects that a combination would add to earnings in the first year after completion. Anthem doesn't expect a deal to be completed until the second half of 2016, but it seems excited about its prospects once Cigna comes on board.
Anthem's solid performance was exactly what long-term investors needed to see in considering whether to approve the merger. With waves of consolidation occurring throughout the healthcare industry, Anthem's move makes a lot of sense and should position the company to take maximum advantage of opportunities in 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.