Anthem (ANTM) Earnings Report: Q2 2015 Conference Call ...

C ompany Name: Ant he m Inc C ompany Ticker: ANT M Sector: He alt h Car e Industry: He alt h Se r vic e s

Event Description: Q2 20 15 Ear nings Call Market C ap as of Event Date: 40 .0 8 B Price as of Event Date: 154.74

Anthem (ANTM) Earnings Report: Q2 2015 Conference Call Transcript

The following Anthem conference call took place on July 29, 2015, 08:00 AM ET. This is a transcript of that earnings call:

Co mpany Par t ic ipant s

Doug Simpson; Anthem Inc; VP - IR Joe Swedish; Anthem Inc; President, C EO Wayne DeVeydt; Anthem Inc; CFO

Ot he r Par t ic ipant s

Kevin Fischbeck; BofA Merrill Lynch; Analyst C hristine Arnold; C owen and C ompany; Analyst Matthew Borsch; Goldman Sachs; Analyst Josh Raskin; Barclays C apital; Analyst AJ Rice; UBS; Analyst Dave Styblo; Jefferies and C o.; Analyst C hris Rigg; Susquehanna Financial Group; Analyst Peter C osta; Wells Fargo Securities; Analyst Ana Gupte; Leerink Partners; Analyst Andy Schenker; Morgan Stanley; Analyst Sarah James; Wedbush Securities; Analyst Brian Wright; Sterne, Agee and Leach; Analyst

MANAGEMENT DISC USSIO N SEC TIO N

Ope r at o r :

Ladies and gentlemen, thank you for standing by, and welcome to the Anthem conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session. Instructions will be given at that time.

(O perator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to the C ompany's management.

Do ug Simps o n (VP - IR):

Good morning, and welcome to Anthem 's second-quarter 2015 earnings call. This is Doug Simpson, Vice President of Investor Relations. With us this morning are Joe Swedish, President and C EO ; and Wayne DeVeydt, our C FO . Joe will offer an overview of our second-quarter 2015 financial results, and Wayne will walk through the financial details and our updated 2015 outlook. Joe and Wayne are then both available for Q &A.

During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website at Anthem

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C ompany Name: Ant he m Inc C ompany Ticker: ANT M Sector: He alt h Car e Industry: He alt h Se r vic e s

Event Description: Q2 20 15 Ear nings Call Market C ap as of Event Date: 40 .0 8 B Price as of Event Date: 154.74

. We will also be making some forward-looking statements on this call.

Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Anthem .

These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC . I will now turn the call over to Joe.

Jo e Swe dis h (President, C EO ):

Thank you, Doug, and good morning. As this marks our third conference call in roughly a month, we're going to keep it as succinct as possible and then move right into Q &A. We're pleased to announce strong second-quarter 2015 adjusted earnings per share of $3.10, with solid membership and margin trends. O n a GAAP basis, earnings per share was $3.13.

O ur adjusted earnings per share increased from the second quarter of 2014, driven by revenue growth, an improved medical loss ratio, and opportunistic capital deployment. We ended the second quarter of 2015 with over 38.5 million members; over one million members more than the 37.5 million members we reported at the end of 2014.

O ur growth continues to be balanced so far in 2015, as we added 571,000 Medicaid members, 331,000 national members, 51,000 individual members, and 16,000 local group members. As a reminder, we closed on the Simply Healthcare acquisition in February of this year, which contributed 209,000 members. These results have been supported by strong operating cash flow of $2.8 billion year to date, which represents 1.6 times net income.

I would like to start by discussing our commercial business. C ommercial membership has increased by 398,000 since year-end 2014. Revenues remain relatively flat in the second quarter, but have declined by roughly 6% since the prior-year quarter to $9.4 billion, primarily due to fully ensured member declines, including the previously announced decision to discontinue our employer group Medicare offering in the state of Georgia account.

Self-funded membership trends have been encouraging, increasing by 710,000 versus year-end 2014. This was primarily driven by better-than-expected growth in our large group business. Large group and small group insured membership in the commercial business remained relatively flat in the quarter, as e xp e c te d .

Small group ended the quarter with a total membership of 1.35 million. Individual membership declined by 51,000 during the quarter, as we continued to see contraction in our legacy, nonmetal products, and metal products off of the public exchanges. O ur exchange membership declined by 5,000 lives to 893,000 members, which was due to normal attrition outside of open enrollment and was slightly better than expectations.

We have a solid pipeline for national accounts and expect solid growth in this area in 2016, with several large new accounts already closed, representing several hundred thousand lives. For the three R's, we were able to incorporate the data received by C MS in late June in our second-quarter financials.

All in, our current read is that the data received was relatively in line with our expectations. We did see some benefit from a higher-than-accrued reinsurance receivable, but that was offset by higher-thanexpected risk-adjustor payable. Risk quarter and MLR rebate estimates were then refined. It is important to note that we may need to adjust our estimates for both the 2014 and 2015 benefit years, as the data we have received is subject to appeal.

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C ompany Name: Ant he m Inc C ompany Ticker: ANT M Sector: He alt h Car e Industry: He alt h Se r vic e s

Event Description: Q2 20 15 Ear nings Call Market C ap as of Event Date: 40 .0 8 B Price as of Event Date: 154.74

So to summarize our current position, we've updated our reinsurance accrual as appropriate. We increased the net payable position for risk adjustors for both the 2014 and 2015 benefit years during the quarter. As a result of the increase, we reduced our risk-quarter expectation from 2014 and are now in a net-neutral position for the 2014 and 2015 benefit years. We believe our estimates are prudent, given the dynamic nature of available information.

I would like to now turn to the government segment and speak to the solid second-quarter results. O ur government business segment had another strong quarter, adding 147,000 members, driven by strong organic growth in Medicaid. Revenues in the quarter were $10.4 billion, up approximately 25.7% versus the prior-year quarter.

Government business year-to-date membership growth has exceeded our expectation. We've grown by approximately 630,000 members, including 571,000 in Medicaid, 31,000 in our federal employee program, and 28,000 in Medicare. Please note that these results include membership associated with Simply H e a lth c a re .

The pipeline of opportunity for our government business remains substantial. We continue to expect $65 billion of new business to be awarded by the end of 2018, split about evenly between traditional Medicaid and new populations in specialized services.

We believe our experience and footprint positions us very well to continue our growth as we help states address the challenges of rising healthcare costs and improving quality for their residents. We are pleased to have announced during the quarter that we were awarded the opportunity to geographically expand our offering of Medicaid services for the state of Kentucky.

Government operating margins improved 210 basis points quarter over quarter [to] 5.9%. This primarily reflected improved medical cost performance in certain markets in the Medicaid and Medicare business and expected retro-rate adjustments recorded during the quarter for certain Medicaid contracts.

I now want to turn the call over to Wayne to discuss the key consolidated financial highlights of the second quarter of 2015. He will also provide updated commentary on our 2015 outlook.

Wayne De Ve ydt (C FO ):

Thank you, Joe, and good morning. As Joe stated, in the second quarter, we reported earnings per share of $3.13 on a GAAP basis and $3.10 per share on an adjusted basis. Medical enrollment has increased by over one million members, or 2.7% during the year, to approximately 38.5 million medical members as of June 30.

This reflected membership increases in virtually all lines of business. O perating revenue was nearly $19.8 billion in the quarter, an increase of approximately $1.5 billion, or 8.4%, versus the second quarter of 2014, reflecting robust enrollment in the government business, additional premium revenue to cover overall cost trends, and new fees associated with healthcare reform, as well as growth in administrative fees as a result of our strong self-funded membership trends.

This was partially offset by fully insured membership losses, including the previously announced decision to discontinue our employer group Medicare offering in the state of Georgia account.

The growing diversity of our business aligns with our long-term strategy, as we believe we are well positioned to continue capitalizing on future growth opportunities. The benefit expense ratio was 82.1% in the second quarter of 2015, a decrease of 60 basis points from the prior-year quarter.

The decline reflected a lower medical cost ratio in the local group business due to the timing of medical cost experience, improved medical cost performance in the Medicaid and Medicare businesses, and the

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C ompany Name: Ant he m Inc C ompany Ticker: ANT M Sector: He alt h Car e Industry: He alt h Se r vic e s

Event Description: Q2 20 15 Ear nings Call Market C ap as of Event Date: 40 .0 8 B Price as of Event Date: 154.74

impact of retro-rate adjustments reported during the quarter in the Medicaid business.

O ur MLRs improved by 150 basis points year-to-date 2015 versus year-to-date 2014 on a consolidated basis to 81.2%, with improvements in both business segments contributing to the change. For the full-year 2015, we continue to expect underlying local group medical cost trends to be in the range of 7%, plus or minus 50 basis points.

O ur SG&A expense ratio decreased by 40 basis points from the second quarter of 2014 to 15.4% in the second quarter of 2015.

The improvement largely reflected our ongoing cost improvement initiatives, the changing mix of our membership toward government business, and lower spending related to the public exchanges' open enrollment season. Partially offsetting the decline was higher administrative costs as a result of the strong membership growth in the first six months of 2015.

O ur specialty business has shown strong growth this year, as we've added 542,000 total dental members and 398,000 vision members. We are pleased with the improvement in specialties performance, which shows that our recent efforts toward driving an increased penetration in our medical book are bearing fru it.

Moving to the balance sheet, days and claims payable was 43 days as of June 30, down 2.7 days from 45.7 days as of March 31, 2015. The expected decrease was primarily due to an acceleration of payment speed during the quarter, as the C ompany worked through the normal first-quarter peak season of new and renewal memberships.

As previously discussed, we expect days in claims payable to come back down closer to 40 over time. O ur debt to capital ratio was 41.9% at June 30, 2015, up 260 basis points to 39.3% as of March 31, which includes the impact of our recent equity issue offering and partial 2.75% convertible security repayment in early May.

We ended the second quarter with approximately $2.2 billion of cash and investments at the parent C ompany, and our investment portfolio was in an unrealized gain position of approximately $688 million as of June 30.

Moving to cash flow, we generated strong operating cash flow of more than $2.8 billion during the first six months of 2015, or 1.6 times net income. During the quarter, operating cash flow was $1.2 billion, or 1.4 times net income. C ash flow trends thus far in 2015 have been encouraging, and we remain comfortable in our outlook of greater than $3.5 billion for the full year.

As a reminder, cash flow in the third quarter is impacted by the payment of the 2015 health insurer fee and the receipt of the 2014 reinsurance reimbursement from the federal government.

We repurchased four million shares during the quarter for approximately $637 million, representing a weighted average price of $157.89. As of June 30, we had approximately $4.3 billion of share repurchase authorization remaining, which is intended to be utilized over a multi-year period, subject to market c o n d itio n s.

As a result of the recent agreement to acquire C igna, we have halted share buybacks for the remainder of 2015. We used $164 million during the quarter for our cash dividend, and yesterday the audit committee declared our third-quarter 2015 dividend of $0.625 per share to shareholders.

Turning to our full-year 2015 outlook, we continue to see 2015 as a year of continued growth across our business. We are updating our full-year 2015 adjusted earnings per share outlook from greater than $9.90 to greater than $10.

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C ompany Name: Ant he m Inc C ompany Ticker: ANT M Sector: He alt h Car e Industry: He alt h Se r vic e s

Event Description: Q2 20 15 Ear nings Call Market C ap as of Event Date: 40 .0 8 B Price as of Event Date: 154.74

O ur revised outlook is consistent with current analyst estimates and reflects the strong first-half trends. O ur outlook includes the impact of halting our share buyback program for the remainder of 2015.

Additionally, our updated revenue outlook now includes the impact of slower-than-expected growth from the dual-eligible program. We are pleased with overall results in the first half, which bode well for the fullyear 2015.

While we do not offer quarterly EPS guidance, as we said last quarter, we expect the fourth quarter to be the lowest quarterly EPS figure for the year, as a result of the diminishing impact of the three R's, timing of medical cost experience for our members, and changes to our overall business mix.

While we are encouraged by the underlying trends in the first half of 2015, our outlook continues to expect commercial business margins to be lower in the second half of the year versus the 11.6% reported year to date, which is reflected in our outlook. We continue to expect operating cash flow in 2015 to be greater than $3.5 billion. With that, operator, please open the queue for questions.

Q UESTIO NS & ANSWERS

Ope r at o r :

(O perator Instructions)

O ur first question is from Kevin Fischbeck from Bank of America . Please go ahead.

Ke vin Fis c hbe c k (Analyst - BofA Merrill Lynch):

Great, thank you. Just wanted to go into the items that you had spiked out as helping the MLR in the quarter. I was wondering if you could try and quantify a little bit more exactly how much of the benefit was from the expense timing, how much of the benefit was from the retro Medicaid, and some of the other things that you highlighted?

Wayne De Ve ydt (C FO ):

Hi, Kevin. Good morning. First, let me start with a number of the items that actually occurred, including the retro work anticipated in the second quarter.

So while we did benefit from it, in and of itself, it was not necessarily something that was not expected. And probably more importantly, I would say the MLR in total still came in better than our expectations. So first of all, underlying run rate appears to be strong across the businesses, and we continue to be encouraged by it.

Ke vin Fis c hbe c k (Analyst - BofA Merrill Lynch):

O kay, but you're not prepared to break out the -- just how much they were in the quarter?

Wayne De Ve ydt (C FO ):

No, no, these are -- again, I view these as normal run-rate expectations with puts and takes that occur every quarter. No, we wouldn't break those out separately.

Ke vin Fis c hbe c k (Analyst - BofA Merrill Lynch):

O kay, then you mentioned the trend is -- underlying trend is solid. Any additional clarity you can give there about components of trend? O r is it the midpoint of the range that you guys are reaffirming or is there any comfort in one end or the other?

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