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Anthem Suffers a Profit Drop but Sees Better Times Ahead

By Dan Caplinger - Jan 27, 2016 at 9:17AM

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One-time items held back the health insurer's growth, but the company is looking forward to its merger with Cigna.

Image source: Anthem.

Health insurers have had to deal with a host of regulatory and competitive challenges, and Anthem (ELV -0.29%) has responded by joining in the trend toward consolidation in the industry. Even as the company prepares to merge with rival Cigna (CI), Anthem still has to demonstrate its ability to operate effectively, and coming into Wednesday's fourth-quarter financial report, Anthem investors were somewhat nervous about an expected drop in profitability. Anthem's earnings turned out to be slightly lower than expected, but the company still thinks that its long-term prospects are strong. Let's take a closer look at how Anthem did and whether investors can look forward to a better 2016.

Anthem's earnings catch a cold
Anthem's fourth-quarter financial results were somewhat of an aberration compared to past solid results. On the top line, Anthem looked healthy, posting revenue of $20.02 billion. That was 6.6% higher than the year-ago quarter and better than the $19.9 billion consensus forecast among investors. But a big jump in benefit expenses hit the bottom line hard, and net income fell by nearly two-thirds to $180.9 million. Even after backing out negative items, adjusted earnings of $1.14 per share was more than a nickel below what most investors had expected to see.

A closer look at Anthem's results revealed some interesting factors affecting the company. The insurer continued to post year-over-year enrollment growth, rising 1.1 million, but the total of 38.6 million members was actually down 100,000 from its Sept. 30 numbers. Medicaid enrollments played the biggest role in the year-over-year gains, but declines in the national and individual coverage businesses over the past quarter contributed to the sequential drop.

The biggest pressure on Anthem's bottom line came from a big jump in its benefit expense ratio, which climbed 2.5 percentage points to 87%. The company blamed increases in the individual and local group businesses for the rise, saying that their loss experience in the year-ago quarter was unusually favorable and that the timing of costs was less to Anthem's advantage than it had been previously. Overhead expenses also climbed slightly, as efforts to boost membership offset savings from having a greater mix of Medicaid patients.

CEO Joseph Swedish gave positive comments about the results from Anthem. In his eyes, the results "reflected a continuation of our positive operating momentum" in boosting membership roles in its commercial and government markets. At the same time, Swedish looked forward to 2016, citing how it remains "well-positioned to continue advancing affordability, quality, and choice for our members."

Can Anthem get its earnings moving higher?
In particular, Swedish thinks that this year should help Anthem perform even better. "We believe our strategy will be enhanced with the pending acquisition of Cigna," the CEO said, "which we continue to expect should close in the second half of 2016."

Anthem's outlook reflects that optimism. The company projects that its GAAP net income will be more than $10.35 per share, and adjusted earnings of $10.80 per share will be its minimum target after allowing for intangible-asset amortization. Membership should remain fairly stable at 38.8 million to 39 million members, of which about three-eighths will be fully insured members and the remainder being participants in self-funded insurance programs. Benefit expense ratios should come down to around 83.6%, and overhead expenses will fall slightly to 15.4%.

The big question for Anthem is whether its emphasis on government insurance will pay off. Anthem sells its policies on several Obamacare insurance exchanges, and rival UnitedHealth Group has suggested that the business hasn't been as lucrative as some had hoped. Yet Anthem's Blue Cross Blue Shield private-coverage unit hasn't necessarily been the company's top focus, and it still seems to give top priority to opportunities to serve those participating in government programs.

Looking forward, Anthem appears to be moving forward with efforts to grow, and Cigna and Anthem shareholders have now both voted to approve their deal. If the combination brings the savings and efficiency that both companies expect, then the post-merger behemoth could play an even more important role in the health insurance industry going forward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. 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.

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