Anthem Shows Growth, but New Worries Over the Cigna Acquisition Overshadow Results

By Markets Fool.com

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Health insurance giantAnthem(NYSE: ANTM)released results from its second quarter on July 27. While revenue and profits came in ahead of expectations, all eyes are on new questions in the air surrounding its pending $48 billion acquisition ofCigna(NYSE: CI).

Here's a closer look at Anthem's quarterly performance and the latest updates on the Cigna merger.

Anthem Q2: the raw numbers

Metric Q2 2016 Q2 2015 Change
Revenue $21.3 billion $19.8 billion 7.7%
Adjusted earnings per share $3.33 $3.10 7.4%
Membership 39.8 million 38.5 million 3.2%

Data source: Anthem.

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What happened in the quarter

Anthem's second-quarter results show that the company continues to execute on its growth strategy. Here are a few highlights from the report:

  • Anthem saw particular strength in its commercial and specialty business, which added 654,000 new members during the quarter. Medicaid enrollment also showed growth and expanded by 572,000 members.
  • Anthem's benefit expense ratio jumped to 84.2%, up 210 basis points from the same quarter last year. This metric compares the company's expenses related to providing healthcare to the money coming in from premiums -- so smaller is better. The quarter's increase in this figure was caused by the combination of higher overall Medicaid membership -- which is a business line that tends to have a higher expense ratio -- and general cost inflation that was not fully offset by premium increases.
  • SG&A expense ratio declined to 14%, down 140 basis points versus the prior year. The lower costs were due to both cost control measures and greater Medicaid membership, which generally carriers a lower SG&A ratio.

What management had to say

John Gallina, Anthem's CFO, commented on the company's performance by stating: "Our second quarter 2016 earnings were in line with our expectations and reflected contributions from both of our business segments and an ongoing commitment to administrative expense efficiency."

Acquisition updates

A new roadblock now stands in the way of Anthem's pending Cigna acquisition. Last week, news broke that the U.S.Department of Justice has sued to block both this acquisition andAetna'spending takeover of Humana.

U.S. Attorney General Loretta E. Lynch made this statement in regards to the DOJ's decision to pursue legal actions against both proposed mergers:

These mergers would restrict competition for health insurance products sold in markets across the country and would give tremendous power over the nation's health insurance industry to just three large companies. Our actions seek to preserve competition that keeps premiums down and drives insurers to collaborate with doctors and hospitals to provide better healthcare for all Americans.

Despite the new obstacle, Anthem's CEO, Joe Swedish, said that he remains committed to the deal and will fight for as long as it takes to see the deal through, stating "Our commitment to the pendingCignaacquisition remains as strong as ever, and we believe this acquisition will further advance affordability and quality for our customers."

That's encouraging, but last week Cigna released a statement of its own in response to the lawsuit that didn't sound quite as optimistic:

Given the nature of the concerns raised by the DOJ and the overall status of the regulatory process, which under the terms of the merger agreement was led by Anthem, Cigna is currently evaluating its options consistent with its obligations under the agreement.In light of the DOJ's decision, we do not believe the transaction will close in 2016 and the earliest it could close is 2017, if at all.

The trial is expected to begin this October and last for four months.

Looking ahead

Despite the new distraction, Anthem continues to prove that it's capable of executing its growth plan. The strong quarterly results even led management to raise its guidance for 2016.

The company is now calling for full-year membership to land between 39.6 million to 39.8 million, up from its prior range of 39.3 million to 39.5 million. Guidance for operating revenue has also been increased to a new range of $82.5 billion to $83.5 billion. However, the company is standing firm on the bottom line, calling for adjusted net income to exceed $10.80per share.

Anthem's stockfell more than 2% in the wake of the earnings report, reflecting the new uncertainty surrounding the Cigna merger. It will still be a few more quarters before investors have a definitive answer either way, so this is a development that shareholders will want to watch closely.

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Brian Feroldihas no position in any stocks mentioned.Like this article? Follow him onTwitter where he goes by the handle@Longtermmindsetor connect with him onLinkedInto see more articles like this.

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