Health-insurance company Anthem (NYSE:ANTM) has aggressively taken on healthcare reform, seeking the best ways to profit in a new environment for insurance providers in the space. One key aspect of Anthem's overall strategy has been its acquisition bid for Cigna (NYSE:CI), which it sees as a huge potential future growth driver. Coming into Wednesday's first-quarter financial report, Anthem investors were focused on whether the company would be able to thrive even before a Cigna deal became final, and Anthem's results were encouraging on that score.
Let's look more closely at Anthem's latest performance and see how it will affect the insurer in the future.
Anthem heals itself with growth remedies
Anthem's first-quarter financial results gave investors a nice rebound from a sluggish performance last quarter. Revenue jumped 8% to $20.31 billion, topping the consensus forecast by about $450 million. Excluding some adjustment items, adjusted net income rose 5% to $925.1 million, and that produced adjusted earnings of $3.46 per share. That was $0.14 better than most investors had expected to see from Anthem.
Looking more closely at Anthem's results, the first fact to pop out is that the insurer saw immense enrollment growth. In just the past three months, enrollment figures rose by 1 million to 39.6 million. Anthem cited gains in the National, Individual, and Medicaid business segments for the overall rise, with declining enrollment in the Local Group business weighing the growth down slightly. The quarter was responsible for nearly all of the 1.1 million growth in enrollment over the past 12 months. From a revenue standpoint, nearly all of the growth came from the government side of Anthem's business, which produced 14% gains compared to just a 1.5% rise in the commercial and specialty segment.
Anthem continued to see pressure in its benefit expense ratio, which measures the amount of money the insurer pays out in medical-related benefits as a percentage of its overall premium revenue. The ratio rose more than a percentage point and a half to 81.8%, but that was substantially better than the 87% figure from the fourth quarter. Higher ratios and membership in the Medicaid business resulted in more payouts, but improved medical cost performance in the Medicare arena helped hold down the increase. Timing issues involved with an extra day due to the leap year also had an impact on the metric, but Anthem said claims reserves developed better than expected during the first quarter. However, lower administrative costs helped Anthem sustain its profitability.
CEO Joseph Swedish was generally pleased with Anthem's results. "Our solid first quarter results represent a strong start to 2016," Swedish said, "with higher than expected enrollment growth in both Commercial and Government business segments." CFO Wayne DeVeydt added that "continued execution across our business segments as the industry continues to evolve" helped lift Anthem's financials.
What's ahead for Anthem?
Swedish also believes Anthem is well-positioned for future growth: "We remain firmly focused on advancing affordability and quality on behalf of our members, which will be enhanced by the pending Cigna acquisition," said the CEO.
Anthem did make some revisions to its guidance for the year. GAAP net income expectations got downgraded to $9.65 per share because the company now believes net unfavorable extraordinary items will amount to at least $1.15 per share. Anthem left unchanged its adjusted earnings projections for $10.80 per share at minimum, and it upgraded its membership estimates by about half a million to between 39.3 million and 39.5 million members. Expectations on benefit expense ratios remained the same, with a slight 0.1 percentage point rise in overhead expenses to 15.5%.
Anthem shares inched higher in pre-market trading following the announcement, but the bigger question investors face is whether the Cigna merger will get all of the approvals it needs. With the company looking to capitalize on the economies of scale and other competitive advantages from a merger, anything that holds Anthem back from combining forces with Cigna could be a shock to shareholders of both companies.
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.