Zacks Investment Research



| Anthem, Inc. |(ANTM – NYSE) | $238.84 |

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated. .

Reason for Report: Flash Update: 1Q18 Earnings Update

Prev. Ed.: 4Q17 Earnings Update; Apr 5, 2018

Flash Update

On Apr 25, 2018, Anthem’s first-quarter 2018 adjusted net income per share of $5.41 surpassed the Zacks Consensus Estimate by 12%. The bottom line also rose 15.6% year over year.

Operating revenues of $22.3 billion missed the Zacks Consensus Estimate of $22.5 billion. The top line, however, remained flat year over year.

Quarterly Operational Update

Medical enrollment declined 2.5% year over year to 39.6 million members. This downside was primarily caused by a reduced footprint in the Individual ACA (Affordable Care Act)-compliant marketplace.

Anthem’s benefit expense ratio of 81.5% improved 220 basis points (bps) from the prior-year quarter, driven by the return of the health insurance tax in 2018 and an improved medical cost performance across all its business segments.

SG&A expense ratio of 15.3% deteriorated 100 bps from the year-ago quarter due to return of the health insurance tax in 2018 and the impact of an increased investment spend this year to support growth initiatives.

Segment Update

Commercial & Specialty Business

Operating revenues were $9 billion in the first quarter, down 12% year over year.

Operating gain totaled $1.4 billion, up 8.1% year over year owing to Penn Treaty assessments recorded in the first quarter of 2017 and an improved medical cost performance.

Operating margin was 15.5%, down 280 bps year over year.

Government Business

Operating revenues were $13.3 billion in the first quarter, up 10.3% from the prior-year quarter.

Operating gain was $490.9 million, up 54.1% year over year. The upside reflects the impact of the HealthSun and America's 1st Choice acquisitions as well as organic membership growth in the Medicare business plus retroactive revenue adjustments in the Medicaid business.

Operating margin was 3.7%, contracting 110 bps year over year.

Other

Operating revenues were $13.5 million in the first quarter, up 221.4% from the prior-year period.

The segment reported an operating loss of $31.4 million, narrower than the same of $35.6 million in the prior-year quarter.

Financial Update

As of Mar 31, 2018, Anthem had cash and cash equivalents of $4.6 billion, up 28% from year-end 2017.

As of Mar 31, 2018, its long-term debt increased 4.2% to $18.1 billion from year-end 2017.

Operating cash outflow was $2.2 billion in the quarter under review, down 18% year over year.

Share Repurchase and Dividend Update

During the reported quarter, Anthem repurchased 1.7 million shares of its common stock for $395 million.

As of Mar 31, 2018, it had approximately $6.8 billion of share repurchase authorization remaining.

During the first quarter, Anthem paid a quarterly dividend of 75 cents per share.

On Apr 24, 2018, the board approved a dividend of 75 cents per share payable Jun 25 to shareholders of record on Jun 8.

Guidance for 2018

Anthem expects adjusted net income to be greater than $15.30 per share, up from the previous projection of more than $15.

Medical membership is now expected in the range of 40.1-40.3 million, up from the previous projection of 40-40.2 million.

Operating revenues are anticipated in the range of $91-$92 billion, more than the earlier forecast of $90.5-$91.5 billion.

Anthem estimates operating cash flow to be more than $4 billion.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON ANTM

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Anthem, Inc. (ANTM), through its subsidiaries, provides a range of medical products in the United States. It is an independent licensee of the Blue Cross and Blue Shield Association, or BCBSA.

The company was founded as WellPoint, Inc. but changed its name to Anthem, Inc. in December 2014.

66.7% of the firms in the Digest group covering the stock had a positive outlook on Anthem while the rest 33.3% had a cautious rating. None of the firms rated the stock negatively. Of the 12 firms covering the stock, 11 provided target prices ranging from $183 (19.7% downside from the current price) to $325 (42% upside from the current price).

Positive or equivalent outlook – (8/12 firms or 66.7%) – The bullish firms favor Anthem owing to its unique BCBSA license. This license gives the company significant advantages in terms of brand name, network and medical costs compared with its peers.

These firms view favorably the company’s profitable growth continuing with increasing membership . These firms are also optimistic about the company’s strong balance, offering the potential for accretive deals.

Neutral or equivalent outlook – (4/12 firms or 33.3%) – Per these firms, Anthem should likely see strong growth from the government, commercial national and large self-funded markets. However, individual enrollment due to competitive pressures and increased investments in technology for reducing cost of care are headwinds.

While firms believe that Anthem has market leading positions in most of its markets, but these positives could be marred by the risks associated with health reform, the low growth in the commercial market.

Apr 5, 2018

Overview [Note: Only highlighted material has been changed.]

Anthem, Inc., through its subsidiaries, operates as a commercial health benefits company in the United States. It offers various network-based managed care plans to large and small employers, individual, Medicaid, and senior markets. Its managed care plans include preferred provider organizations; health maintenance organizations; point-of-service plans; traditional indemnity plans and other hybrid plans, such as consumer-driven health plans; and hospital-only and limited benefit products.

Anthem also provides various managed care services comprising claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs, and other administrative services. Additionally, it offers specialty and other products and services, including life, disability, dental and vision insurance benefits; behavioral health benefits; radiology benefit management; analytics-driven personal healthcare guidance; and long-term care insurance.

Further, Anthem serves as an intermediary providing administrative service for the Medicare program.. The company also offers its services to the government through the Federal Employee Program (FEP) and various medicare programs; and operates as a licensee of the Blue Cross and Blue Shield Association. The company was founded as WellPoint, Inc. but changed its name to Anthem, Inc. in December 2014.

Further information on the company is available on its website: .

The firms identified the following issues when considering the investment merits of Anthem:

|Key Positive Arguments |Key Negative Arguments |

|Anthem has unique competitive advantage is its local market dominance and |The greatest risk to Anthem is price competition. Although it enjoys a |

|ability to drive enterprise-wide innovation, efficiency and service excellence.|leading position in most markets, other competitors are cutting prices |

|As the largest of the BCBS plan providers in the U.S. and widespread brand |in an effort to bolster enrollment rates. |

|recognition amongst the senior population, Anthem remains well positioned to |Acceleration in the medical cost trend is a big risk to managed care |

|benefit from its Medicare initiatives. |stocks and is expected to hurt Commercial, Medicare and Medicaid |

|Anthem is enhancing its medical management by launching ACOs (Accountable Care |businesses. |

|Organizations) and innovative payment arrangements. |Anthem is significantly exposed to the California commercial market, |

|The acquisition of Amerigroup should boost Anthem’s Medicaid and dual-eligible |which is among the most difficult markets in terms of managed care |

|businesses. |regulations. |

Note: Anthem’s fiscal year coincides with the calendar year.

Apr 5, 2018

Long-Term Growth [Note: Only highlighted material has been changed.]

The firms are of the opinion that Anthem’s brand and considerable scale provides it with a competitive advantage over many others in the industry. With a huge medical membership base nationwide, Anthem is one of the major health insurers in terms of enrollment. This support from the Blues brand benefits the company by reducing competition from Not-for-Profit Blues, the most aggressive competitor in the state.

Exchanges and a higher tax rate resulting from non-deductibility of insurer fee are expected to weigh on Commercial margins in the long run. However, solid opportunities in the government business, continued expense leverage and efficiency efforts across the business are expected to help the company counter the downside risks.

Anthem has a broad offering of Medicare Advantage, Medicare Part D and Medicare supplement products, including SmartChoice, PrimeChoice and SmartChoice Preferred Medicare supplement products. Some of the higher deductible products include generic drug benefit and some limited additional health benefits. Anthem continues to develop new small group and individual products, increasing its long-term opportunities for expansion within this high growth corner of the market.

The company offers access to the largest provider network in the industry, with competitive pricing, distinctive care management and wellness programs as well as innovative medical cost transparency tools. Anthem expects to continue enhancing this superior value proposition with new product offerings in order to drive memberships and long-term earnings.

For the long term, management remains upbeat about mergers and acquisitions for inorganic growth. Along with acquisitions, Anthem is also seeking to collaborate with other Blues to develop Medicaid plans.

Per a cautious firm, Anthem will continue to tread carefully in planning 2018 market participation in the public exchange markets?? in the light of continued uncertainty around cost-sharing reduction (CSR) payments. Currently, Anthem is largely exiting three states (less than 10% of current ACA-compliant enrollment) and is fully prepared to exit more if assurances from the federal government are not received soon.

According to a bullish firm, the new CEO Boudreaux prioritizes accelerating membership and revenue

growth. Anthem is underpenetrated in MA and sees high Star ratings facilitating strong growth in both the Individual and Group books. In Medicaid, Anthem can leverage strong capabilities via the Amerigroup asset to form more partnerships with Blue and non-Blue plans while pursing new RFPs. Also, Commercial revenues and margins can be improved on the back of increased specialty penetration and an improved pharmacy cost structure.

Apr 5, 2018

Target Price/Valuation [Note: Only highlighted material has been changed.]

|Rating Distribution |

|Positive |66.7%↑ |

|Neutral |33.3%↓ |

|Negative |0.0% |

|Avg. Target Price |$271.55↑ |

|Digest High |$325.0↑ |

|Digest Low |$183.0 |

|No. of Firms with Target Price/Total |11/12 |

Risks to valuation include Medicare cuts, a prolonged recession, increased medical cost trend, unemployment, investment portfolio losses, regulatory risk, margin contraction and uncertainty from potential healthcare reform.

Recent Events [Note: Only highlighted material has been changed.]

On Feb 15, 2018, Anthem completed the acquisition of America’s 1st Choice, a privately‐held for‐profit Medicare Advantage organization, offering HMO products including Chronic Special Needs Plans and Dual-Eligible Special Needs Plans under its Freedom Health and Optimum brands in Florida.

On Jan 31, 2018, Anthem Inc.’s fourth-quarter 2017 adjusted net income per share of $1.29 surpassed the Zacks Consensus Estimate of $1.25 by 3.2%. The bottom line however, declined 27% year over year.

For 2017, the company’s adjusted net income came in at $12.04 per share, up 9.5% from last year.

Financial Update

As of Dec 31, 2017, Anthem had cash and cash equivalents of $3.6 billion, down 11% from year-end 2016.

As of Dec 31, 2017, its long-term debt increased 21% to $17.4 billion from year-end 2016.

As of Dec 31, 2017, shareholder equity was $26.5 billion, up 5.5% from year-end 2016.

Operating cash outflow was $1.3 billion in the fourth quarter, bringing 2017 operating cash flow to $4.2 billion or 1.1 times net income. This also reflects 28% year-over-year growth over 2016’s tally.

During the fourth quarter, Anthem recorded a one-time, non-cash deferred tax benefit from corporate tax reform of $1.1 billion. This reduces total income tax expenses in 2017 to $121 million.

Share Repurchase and Dividend Update

During the quarter, Anthem repurchased 1.8 million shares of its common stock for $362 million.

During 2017, it repurchased 10.5 million shares of its common stock for $2 billion.

As of Dec 31, 2017, it had approximately $7.2 billion of share repurchase authorization remaining.

During the fourth quarter, Anthem paid a quarterly dividend of 70 cents per share.

On Jan 30, 2017, the board announced a dividend of 75 cents per share for the first quarter of 2018, reflecting a hike of 7.1%. The payout will be made on Mar 23 to shareholders of record on Mar 9.

2018 Guidance

Anthem expects operating cash flow to be more than $4 billion.

Revenues [Note: Only highlighted material has been changed.]

Operating revenues of $22.4 billion surpassed the Zacks Consensus Estimate by 1.3%. The top line also grew 4.5% year over year due to premium rate increases as well as higher enrollment in the Medicaid, Medicare and Local Group insured and self-funded businesses. The upside was partially offset by the impact of the one-year waiver of the health insurance tax in 2017.

For 2017, operating revenues came in at $89 billion, up 5.8% year over year.

2018 Guidance

Operating revenues are projected in the range of $90.5-$91.5 billion.

Medical membership is now expected in the range of 40-40.2 million

Provided below is a summary of operating revenues as compiled by the Zacks Digest:

|Total Operating Revenue | | | |

| | |3Q17A |4Q17A |

| |4Q16A | | |

|Life and Disability Members |4,700 |4,732 |(0.7)% |

|Dental Members |5,864 |5,486 |6.9 % |

|Dental Administration Members |5,342 |5,294 |(0.9)% |

|Vision Members |6,867 |6,388 |7.5 % |

|Medicare Advantage Part D Members |702 |629 |11.6 % |

|Medicare Part D Standalone Members |318 |350 |(9.1)% |

Membership Details by Customer Type and Funding Arrangements

|Medical Membership (‘000) |2017 |2016 |Y/Y (%) |

|Customer Type | | | |

|Local Group |15,870 |15,429 |2.9% |

|Individual |1,588 |1,664 |(4.6)% |

|National: | | | |

|National Accounts |7,683 |7,741 |(0.7)% |

|BlueCard® |5,521 |5,550 |(0.5)% |

|Total National |13,204 |13,291 |(0.7)% |

|Medicare |1,545 |1,438 |7.4 % |

|FEP |1,562 |1,570 |(0.5)% |

|Total Medical Membership |40,244 |39,919 |0.8 % | |

|Funding Arrangement | | | |

|Self-Funded |24,966 |24,688 |1.1 % |

|Fully-Insured |15,278 |15,231 |0.3 % |

|Total Medical Membership |40,244 |39,919 |0.8% |

|Reportable Segment | | | |

|Commercial and Specialty Business |30,662 |30,384 |0.9% |

|Government Business |9,582 |9,535 |0.5 % |

|Total Medical Membership |40,244 |39,919 |0.8% |

Please refer to the Zacks Research Digest spreadsheet for more details on extensive estimates.

Margins [Note: Only highlighted material has been changed.]

The operating margin in 4Q17 was 2.8%, a deterioration of 140 basis points (bps) from the prior-year quarter.

The net margin in 4Q17 was 1.5%, a deterioration of 70 bps from the prior-year quarter.

Provided below is a summary of margins as compiled by the Zacks Digest:

| | |

|Margins | |

| |4Q16A |

|Copy Editor | |

|Content Ed. | |

|Lead Analyst |Sapna Bagaria |

|QCA |Tanuka De |

|No. of brokers reported/Total brokers | |

|Reason for Update |1Q18 FLASH |

-----------------------

[pic]

Zacks Investment Research Page 3

April 25, 2018

© Copyright 2018 Zacks Investment Research. All Rights Reserved.

[pic]±@[pic]²@[pic]³@[pic]·@[pic]¸@[pic]¹@[pic]¿@[pic]À@[pic]Á@[pic]Ç@[pic]È@[pic]Î@[pic]Ï@[pic]Õ@[pic]Ö@[pic]Ü@[pic]Ý@[pic]ã@[pic]ä@[pic]ê@[pic]ë@[pic]ñ@[pic]ò@[pic]þ@[pic]óçÞçççççç Zacks Investment Research Page 2

© Copyright 2003, Zacks Investment Research. All Rights Reserved.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download