WellPoint, Inc. (now Elevance Health, Inc.) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparison is with Q1 2010 unless otherwise noted. The filing registrant is WellPoint, Inc. All dollar amounts below are in millions, except per-share data and membership.
Business context and reporting period
WellPoint provided health benefits and related services through Commercial, Consumer and Other segments. At March 31, it reported 34.2 million medical members, up 1% year over year. Self-funded membership increased 9% to 20.5 million, while fully insured membership declined 9% to 13.7 million. The company attributed much of the shift to two large accounts converting from fully insured to self-funded arrangements.
Financial and operating results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $14,654.8 | $14,843.1 | Down 1% |
| Total revenue | $14,894.3 | $15,072.9 | Down 1% |
| Benefit expense | $11,228.0 | $11,382.3 | Down 1% |
| Benefit expense ratio | 82.1% | 81.8% | Up 30 bps |
| SG&A expense / ratio | $2,076.5 / 14.2% | $2,174.1 / 14.6% | Expense down 4%; ratio down 40 bps |
| Income before tax | $1,427.1 | $1,335.3 | Up 7% |
| Net income | $926.6 | $876.8 | Up 6% |
| Diluted EPS | $2.44 | $1.96 | Up 24% |
| Net margin on total revenue | 6.2% | 5.8% | Up 40 bps |
- Adjusted net income, a non-GAAP measure, was $891.0, up 2%; adjusted diluted EPS was $2.35, up 21%. The filing’s adjustments principally exclude investment gains and impairments and, in 2010, an intangible-asset impairment.
- Commercial operating gain rose 15% to $1,125.1 and its operating margin increased to 13.1% from 10.8%. Consumer operating gain fell 37% to $205.8 and margin declined to 4.9% from 8.1%. Other moved to a $19.4 operating gain from a $17.7 loss.
- Operating cash flow was $1,114.9, compared with cash used of $322.9 in Q1 2010; the prior-year figure included a $1,208.0 tax payment related to the 2009 sale of the prescription management business. Investing activities provided $282.1 and financing activities used $785.8. Cash and cash equivalents ended the quarter at $2,402.0.
- Cash, cash equivalents and investments, including long-term investments, totaled $20,708.7 at quarter-end. Parent-company cash and investments available for general corporate use were $2,367.9. The reported debt-to-capital ratio was 27.3%, within the stated target range of 25%–35%.
- Debt included $1,099.3 of commercial paper outstanding and $100.0 of short-term borrowings. A $2,000.0 revolving credit facility had no amounts outstanding; it matures in September 2013. The company reported $8,542.0 of long-term debt, less current portion, on its balance sheet.
Material changes versus the prior comparable period
- Lower Commercial premiums—primarily from the two large account conversions and insured-membership declines—were partly offset by rate increases and higher administrative fees. Total operating revenue fell despite modest growth in Consumer and Other revenue.
- Benefit expense declined with lower fully insured membership, but the overall benefit expense ratio rose. Management cited higher medical costs in Senior, State-Sponsored and Individual businesses; Commercial results benefited from lower-than-anticipated medical costs and efficiency initiatives.
- SG&A decreased, which management attributed primarily to lower compensation costs from efficiency initiatives. The effective tax rate increased to 35.1% from 34.3%.
- Diluted weighted-average shares declined 15% to 379.3 million, supporting EPS growth alongside higher net income. The company repurchased 11.4 million shares for $741.6 and paid a $0.25-per-share dividend.
Outlook, commentary, risks and unusual items
- Management estimated 2011 Local Group fully insured cost-of-care trend at 7.5%, plus or minus 50 basis points. It said trends were driven more by unit costs than utilization; inpatient hospital costs were in the very high single digits, while outpatient costs were in the mid-to-high single digits.
- No full-year earnings guidance is stated in the provided filing text. Management cautioned that Q1 results and trends are not necessarily indicative of full-year results.
- Management discussed provider contracting, utilization management, pharmacy programs, accountable-care pilots and patient-centered medical homes as efforts to manage costs. It noted that healthcare reform’s minimum medical loss ratio rules affected certain business results and accounting classifications.
- Risks highlighted include healthcare reform and regulation, medical-cost trends and utilization, obtaining adequate premium rates and approvals, Medicare and Medicaid funding and compliance, debt ratings and indebtedness, investment-market changes, litigation and government inquiries, and performance requirements under the Express Scripts agreement.
- Contingencies include pending class actions and other litigation whose outcomes could not be determined. The company could not estimate its net exposure, if any, to potential state guaranty-fund assessments if Penn Treaty were liquidated; a future liability and expense could be material. The filing also identifies possible penalties under the Express Scripts agreement and remaining commitments of $314.3 for print/mail services and $963.1 for IT infrastructure services.
- Investment impairment losses recognized in income were $2.4 versus $19.7 a year earlier. Management warned that further fair-value declines could result in additional material impairments. A $7.4 pension settlement loss was included in Q1 2011 pension cost.
Important facts for investors to verify
- Whether the shift from fully insured to self-funded membership continues to affect premium revenue, administrative-fee revenue and margins.
- Whether Consumer segment medical costs and margins improve, and whether the 7.5% cost-trend estimate remains appropriate.
- How medical loss ratio requirements, rate approvals and other healthcare-reform rules affect pricing and profitability.
- Whether cash generation, buybacks and dividends remain consistent with liquidity, regulatory capital needs and the company’s debt targets.
- Developments in the Penn Treaty matter, pending litigation and governmental inquiries, as well as performance and volume requirements under the Express Scripts agreement.
- Whether investment portfolio credit conditions or market movements produce additional impairments; the filing reports $74.4 of sub-prime and $232.1 of Alt-A securities at fair value.