Elevance Health, Inc. annual report, FY2011

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WellPoint, Inc. — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; the filing is an annual report, not a standalone fourth-quarter report. The company reported as WellPoint, Inc. (ticker WLP), not under the later Elevance Health name. Unless otherwise noted, dollar amounts below are in millions.

Business context

WellPoint was a large U.S. health benefits company, with 34.3 million medical members and 65.3 million individuals served across its subsidiaries at year-end. Its Commercial, Consumer, and Other segments included employer plans, individual coverage, senior and state-sponsored programs, and government services. The August 2011 CareMore acquisition expanded its senior-focused Medicare Advantage and care-delivery operations.

Financial performance and position

  • Revenue: Operating revenue was $59,865.2, up 3.7% from 2010. Total revenue was $60,710.7, up 3.4%.
  • Profit: Net income was $2,646.7, down 8.3%; diluted EPS was $7.25, up 4.5%. The EPS increase reflected a 12.2% reduction in average diluted shares, largely from repurchases. Adjusted net income was $2,554.5, down 8.8%, and adjusted EPS was $7.00, up 3.9% (both non-GAAP).
  • Margins and costs: Benefit expense rose 6.0% to $47,647.5; the benefit expense ratio increased 190 basis points to 85.1%. SG&A fell 3.4% to $8,435.6, and its ratio improved 100 basis points to 14.1%. Net income margin declined to 4.4% from 4.9%.
  • Cash flow: Operating cash flow was $3,374.4 versus $1,416.7 in 2010, or 1.3 times net income. The comparison was affected by a $1,208.0 IRS tax payment in 2010 related to the 2009 PBM sale. Investing cash outflow was $942.0; financing cash outflow was $2,019.2.
  • Liquidity and debt: Cash and investments, including long-term investments, totaled $20,596.9. Parent-company cash and investments available for general corporate use were $2,734.4. Debt was approximately $9,795.4, including short-term borrowings; debt-to-capital was 29.6%, versus 27.3% in 2010. The $2,000.0 revolving facility was undrawn, and the $2,500.0 commercial-paper program had $799.8 outstanding. Regulated subsidiaries exceeded applicable risk-based capital thresholds.
  • Membership: Medical membership rose 2.8% to 34.251 million. Self-funded membership increased 4.7%; fully insured membership was nearly flat. Senior membership rose 16.8%, while individual membership declined 3.1%.

Changes versus 2010

  • Revenue growth reflected premium increases, growth in Senior and State-Sponsored business, and higher Federal Employee Program reimbursement; it was partly offset by fully insured membership pressure and large-account conversions to self-funded plans.
  • Benefit costs grew faster than operating revenue. Management cited higher medical costs in Senior, Local Group, and State-Sponsored business, less favorable prior-year reserve development, and the effect of minimum medical-loss-ratio requirements.
  • Consumer segment operating gain fell 37.7% to $623.1, with margin declining to 3.5% from 6.2%, principally because of higher Medicare Advantage costs and adverse selection. Commercial operating gain was essentially flat at $3,090.5; Other improved to $68.5 from an $8.8 loss.
  • CareMore contributed to Senior growth after its August acquisition. WellPoint repurchased 44.5 million shares for $3,039.8 in 2011, compared with 76.7 million shares for $4,360.3 in 2010, and began paying a quarterly dividend.

Outlook, commentary, risks, and unusual items

  • Management estimated 2011 Local Group fully insured medical cost trend at approximately 7%. It expected unemployment to remain high in 2012, potentially pressuring membership, and anticipated further growth in self-funded group business. No formal 2012 earnings or revenue guidance is provided in the supplied filing text.
  • Management planned to refine Medicare Advantage products and service areas for 2012, pursue cost and operating-efficiency initiatives, and expand the CareMore model. It also described provider-payment and care-coordination programs, including accountable-care and patient-centered medical-home initiatives.
  • Health Care Reform remained a major uncertainty. Key issues included 2014 market rules and exchanges, guaranteed issue and rating restrictions, new industry fees, medical-loss-ratio requirements, and lower expected Medicare Advantage reimbursement. The filing noted pending constitutional challenges and incomplete implementing regulations.
  • Other significant risks include medical-cost forecasting and reserve adequacy, premium-rate restrictions, government-program funding and audits, intense competition, regional economic exposure, investment-market and interest-rate risk, debt and subsidiary-dividend restrictions, information-security and system implementation risks, and dependence on IBM and Express Scripts.
  • Unusual items and contingencies: 2011 included the CareMore acquisition and $93.3 of investment impairment losses recognized in income. The 2010 benefit expense included $247.0 of favorable prior-year reserve development and a $67.7 benefit from a lower reserve margin; 2011 had no comparable reserve-margin benefit. The company could not estimate its potential assessment exposure if Penn Treaty were liquidated. It disclosed an aggregate estimated range of reasonably possible legal losses, in excess of established reserves, of $0 to approximately $500.0; outcomes were uncertain.

Most important facts for investors to verify

  • Whether the Consumer segment’s Medicare Advantage cost pressure and adverse selection improved after management’s 2012 product and service-area changes.
  • How benefit expense and medical-loss ratios develop relative to premium pricing, including any rebates or regulatory limits on rate increases.
  • The assumptions and subsequent claims development behind the $5,489.0 medical-claims payable liability; management identified meaningful sensitivity to completion and trend factors.
  • Execution and returns from CareMore, alongside the effects of acquisition goodwill and the company’s substantial goodwill and intangible assets.
  • Debt maturities, commercial-paper access, subsidiary dividend capacity, and the sustainability of repurchases and dividends under regulatory capital requirements.
  • Developments in Health Care Reform implementation, Penn Treaty assessments, Medicare audits and contract awards, and material litigation.