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Anthem shrugs off Q3 unfavorable development; individual margins to moderate

Anthem Inc. executives downplayed unfavorable development recorded in the third quarter and struck an optimistic tone for 2020.

In a conference call to discuss third-quarter earnings, CFO John Gallina said unfavorable development came in at about $50 million and was isolated in the insurer's commercial segment. He added that this included a few large groups that the managed care insurer will be terminating later this year. He stressed that the impact is immaterial and translates to about 0.05% of the company's full-year benefit expense. However, the unfavorable development did affect the company's medical loss ratio in the most recent quarter.

Anthem's medical loss ratio came in at 87.2% in the third quarter, up 240 basis points from the year-ago period. While the unfavorable development played a role in pushing that figure higher, Anthem said the increase was primarily due to the one-year waiver of the health insurance fee.

Heading into 2020, Anthem CEO Gail Boudreaux said any headwinds expected for the company would be manageable. Anthem's initial view of 2020 actually anticipates tailwinds such as the full-year impact from IngenioRx, margin improvement in Medicaid, overall membership growth, increased penetration of specialty and clinical programs in fee-based businesses, and accretion from capital deployment, she said. Partially offsetting these factors are margins in the individual business likely normalizing in 2020, dilution from government contracts and Medicaid and growth in the company's group Medicare and the return of the health insurance fee.

Gallina said margins in the individual business have moderated in 2019, though quickly as the company had initially assumed. After sharply reducing the company's footprint in the individual market, Anthem had "an extremely successful 2018" and this year has been strong as well, he said. However, because medical loss ratio rebate rules are based on a three-year rolling average, the 2017 to 2019 rebates would be based on when the company was much larger.

"Then you get to 2020 and we've had three fairly good years, assuming that we hit our target margin ranges for 2020, and so that's going to actually limit the ability to have incremental upside," Gallina said.

Anthem's third-quarter net income rose to $1.18 billion, or $4.55 per share, from $960 million, or $3.62 per share, from the prior-year period. Total operating revenue grew to $26.44 billion from $22.98 billion in the third quarter of 2018.