WellPoint, Inc. (now Elevance Health) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. The filing was submitted by WellPoint, Inc. and reports unaudited U.S. GAAP results. WellPoint provided health benefits and related services, with 33.7 million medical members and more than 62.3 million individuals served across its subsidiaries at quarter-end.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Operating revenue | $15.150 billion | $14.655 billion; up 3.4% |
| Total revenue | $15.415 billion | $14.894 billion; up 3.5% |
| Net income | $856.5 million | $926.6 million; down 7.6% |
| Diluted EPS | $2.53 | $2.44; up 3.7% |
| Adjusted net income and adjusted EPS (non-GAAP) | $794.1 million; $2.34 | $891.0 million; $2.35 |
| Benefit expense ratio | 83.3% | 82.1%; increased 120 basis points |
| SG&A ratio | 14.3% | 14.2%; increased 10 basis points |
| Operating cash flow | $1.223 billion | $1.115 billion |
| Cash and cash equivalents | $2.279 billion at March 31 | $2.202 billion at December 31 |
| Cash, cash equivalents and investments | $21.038 billion at March 31 | Up $440.6 million from December 31 |
| Debt-to-total-capital ratio | 28.7% | 29.6% at December 31 |
Debt components included $8.5 billion of long-term debt, net of current portion, $910.8 million of current long-term debt, $837.6 million of commercial paper and $100 million of short-term borrowings. No amounts were drawn on the $2.0 billion revolving credit facility. Shareholders’ equity was $23.528 billion; total assets were $52.497 billion.
Net income as a percentage of total revenue fell to 5.6% from 6.2%; income before tax as a percentage of total revenue fell to 8.5% from 9.6%. Operating cash flow was 1.4 times net income. Cash flow benefited from early receipt of second-quarter government-contract premiums; the company received four monthly payments in Q1 and expected three in Q2.
Material changes and management commentary
- Revenue growth reflected higher Consumer premiums, particularly Medicare Advantage membership growth and CareMore, acquired in August 2011, partly offset by declining fully insured Local Group membership. Commercial membership fell 2.7% year over year; total medical membership fell 1.5% to 33.673 million. Senior membership rose 12.4%.
- Commercial operating gain declined 11.8% to $991.8 million and margin fell to 11.7% from 13.1%, reflecting higher Local Group benefit costs and lower revenue. Consumer operating gain increased 5.8% to $217.7 million, while its margin eased to 4.6% from 4.9%. Other segment operating gain declined to $3.1 million from $19.4 million.
- Consolidated benefit expense rose 4.8%, faster than operating revenue, as the benefit expense ratio increased. Management cited higher medical costs and lower Local Group premium revenue; lower-than-anticipated medical costs in Q1 2011 also affected the year-over-year comparison.
- Net investment income declined 8.5% to $169.0 million, while realized investment gains rose to $106.9 million from $57.1 million. Adjusted net income declined 10.9%; reported diluted EPS growth was supported by a 10.6% decline in average diluted shares, alongside investment gains.
- Q1 share repurchases totaled $679.8 million for 10.2 million shares; cash dividends were $95.8 million. The quarterly dividend per share was $0.2875, compared with $0.25 in Q1 2011.
Outlook, risks and contingencies
- Management estimated 2012 Local Group fully insured cost-of-care trend at 7.0%, plus or minus 50 basis points. It described unit costs as the principal driver, citing high-single-digit inpatient and outpatient trends and high-single-digit pharmacy trend, including pressure from specialty-drug costs. This is a cost-trend estimate, not full-year earnings guidance; the filing text provides no clear full-year financial forecast.
- The company cited continued provider contracting, plan design, utilization management and care-coordination initiatives to manage costs. It cautioned that Q1 results and trends are not necessarily indicative of full-year 2012 results.
- For specified legal proceedings where losses were probable or reasonably possible and estimable, the company estimated aggregate reasonably possible losses above established reserves of $0 to approximately $500 million. It said outcomes of major litigation could not be determined. Plaintiffs in the Ormond demutualization case alleged substantial compensatory and punitive damages; the company contested the claims.
- Potential future state guaranty-association assessments related to the Penn Treaty rehabilitation/liquidation proceeding could not be estimated and could be material to cash flows and results. Investment markets also presented impairment risk; Q1 impairment losses recognized in income were $10.9 million versus $2.4 million a year earlier.
- Other disclosed risks included health-care regulation and reform, medical cost and utilization trends, premium-rate adequacy, Medicare and Medicaid funding and compliance, litigation and investigations, investment-market changes, vendor and systems risks, debt-rating downgrades, and restrictions on subsidiary distributions. Management said regulated subsidiaries exceeded mandatory risk-based capital thresholds based on the latest required reporting date, December 31, 2011.
Most important facts for investors to verify
- Whether the higher benefit expense ratio and weaker Commercial operating margin persist, and whether premium increases keep pace with medical-cost trends.
- How membership trends evolve, particularly continued Commercial declines versus Senior and other Consumer growth, including CareMore’s contribution.
- How much of reported earnings and EPS reflects investment gains and share-count reduction; compare GAAP results with the company’s non-GAAP adjusted figures.
- Whether operating cash flow normalizes after the timing-related early government premium receipts, and how repurchases, dividends and debt affect liquidity.
- Updates to litigation exposure, the Penn Treaty assessment risk, investment impairments, regulatory capital requirements and the 2012 cost-trend estimate.