EUR 850.00 For Business Accounts Only

Morningstar | Anthem Delivers an Excellent 3Q as Management Executes Its Strategic Plan at a High Level

Narrow-moat Anthem reported solid execution during its third quarter, and we would highlight CEO Gail Boudreaux’s leadership as a major positive for the firm. We believe her strategy and focus on improving the firm’s core insurance business has produced results, including exiting the public exchange market and building other parts of its membership book. We think this was the correct move given the uncertainty of the individual market and political environment. This quarter’s profit results were slightly ahead of our expectations, and management raised its guidance for the rest of the year given its strong execution. We believe this trend will continue well into the next several quarters and have increased our fair value estimate to $234 from $202 as a result. We have moderately lowered our forecast medical loss ratio to reflect better member cost management and underwriting execution. While we expect this metric to increase over the long term, we have tempered the rate of increase as management has shown the ability to solidly manage its membership book.

While the near term may be spotty as management continues to implement its plan, we believe its efforts will pay off solidly over the long term. The primary asset driving this strategy will be Anthem’s highly recognizable Blue Cross Blue Shield brand it is able to use across 14 states. From our perspective, this brand is one of the most powerful in the U.S. healthcare market and should give Anthem’s products an advantage when businesses and individuals shop for health insurance. In addition, the extensive provider network also provides a key differentiator that most other health insurers do not possess. We believe the combination of these factors and management's recognition of its opportunity is a key long-term positive.

For the quarter, Anthem reported its MLR decreased by an impressive 220 basis points to 84.80%. While we would note that the reinstitution of the insurer tax was a major contributor to this positive development, we believe Anthem’s improving underwriting and prudent membership strategy played a key role. Nevertheless, we would caution investors that as Anthem looks to grow its membership, we expect its MLR to increase. We expect growth to emanate from three higher-cost cohorts--public exchange, Medicare, and Medicaid. These members are lower profit on a per-plan basis, and we believe the MCO will need to continue its improved underwriting execution and expand its value-based provider reimbursement plans.