WellPoint, Inc. (now Elevance Health) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing registrant was WellPoint, Inc.; the company name in the request reflects its later identity. Financial amounts below are in millions of dollars except per-share data, membership, and ratios.
Business context and key financial metrics
WellPoint operated health benefit plans and related services through Commercial, Consumer, and Other segments. At quarter-end it served 33.5 million medical members. It completed the acquisition of 1-800 CONTACTS in June 2012, adding retail vision products.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $15,133.7 | $15,155.1 | $45,457.2 | $44,689.7 |
| Total revenue | $15,353.1 | $15,398.0 | $46,175.6 | $45,393.0 |
| Net income | $691.2 | $683.2 | $2,191.3 | $2,311.4 |
| Diluted EPS | $2.15 | $1.90 | $6.63 | $6.24 |
| Benefit expense ratio | 85.4% | 85.1% | 84.7% | 84.3% |
| SG&A ratio | 13.7% | 14.0% | 13.9% | 13.9% |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,984.8 | $3,316.5 |
Q3 pretax income was $1,025.7 and net margin on total revenue was 4.5%; for the nine months, pretax income was $3,384.1 and net margin was 4.7%. Nine-month adjusted net income, a non-GAAP measure, was $2,140.4 versus $2,207.5; adjusted diluted EPS was $6.47 versus $5.96.
At September 30, 2012, cash and cash equivalents were $2,442.1; total assets were $55,817.9; total liabilities were $32,001.4; and shareholders’ equity was $23,816.5. Cash, cash equivalents, and investments, including long-term investments, totaled $23,641.5. Parent-company cash and investments available for general corporate use were $4,919.2. Debt-to-capital was 36.3%, up from 29.6% at year-end 2011 and above the company’s stated 25%–35% target range. Debt included $829.9 of commercial paper, $192.0 of short-term borrowings, and $13,395.9 of long-term debt and current portion combined.
Changes versus comparable periods
- Q3 operating revenue declined 0.1%; net income rose 1.2%. Diluted EPS rose 13.2%, primarily reflecting fewer shares after repurchases as well as higher net income.
- Nine-month operating revenue increased 1.7%, while net income fell 5.2%. Diluted EPS increased 6.2%, as the effect of share repurchases more than offset the decline in net income per share calculations.
- Nine-month operating cash flow fell $1,331.7. Management cited the timing of federal contract premium receipts (nine monthly payments in 2012 versus ten in 2011), claims run-out payments, litigation payments, medical-loss-ratio rebates, and lower net income.
- Medical membership declined 2.5% year over year to 33.493 million. Commercial membership fell 3.6%, including Local Group declines; Consumer membership increased 2.8%, led by Senior growth.
- Commercial Q3 operating gain increased 15.1% to $818.6, while Consumer operating gain declined 24.7% to $184.7. For nine months, total segment operating gain was $3,208.1 versus $3,269.6.
Outlook, management commentary, risks, and unusual items
- Management estimated 2012 Local Group fully insured cost-of-care trend at 7.0%, plus or minus 50 basis points. It described inpatient, outpatient, and pharmacy trends as high single digit and physician services as mid single digit, with unit costs a major driver.
- WellPoint agreed to acquire AMERIGROUP for $92 per share, estimated transaction value approximately $4.9 billion. Shareholders approved the transaction in October; regulatory and other approvals remained outstanding, and closing was expected in Q4 2012. September debt issuance proceeds were intended partly to fund the purchase. The filing also disclosed a subsequent October $1.5 billion convertible debenture offering.
- The June 2012 Ormond class-action settlement was $90.0, recorded in SG&A and paid into escrow in July. The filing reports an aggregate estimated range of reasonably possible losses, in excess of established reserves, of $0 to approximately $350.0 for specified legal proceedings; many matters could not be reasonably estimated.
- Open IRS tax matters remained subject to Joint Committee on Taxation approval; resolution could materially affect future results and operating cash flows. A state deferred-tax-asset valuation allowance also increased.
- Management said funds from operating cash flows, cash and investments, and available financing were expected to support operations, commitments, capital acquisitions, and strategic transactions. No full-year earnings guidance is provided in the supplied filing text; results for the interim period were cautioned not to indicate full-year results.
- Key risks include healthcare reform and regulatory changes, premium-rate restrictions, medical cost trends and utilization, Medicare and Medicaid funding and rules, acquisition approval/integration and performance, litigation and investigations, investment-market changes, substantial indebtedness and rating downgrades, and potential guaranty-fund assessments relating to Penn Treaty, for which exposure could not be estimated.
Important facts for investors to verify
- Whether AMERIGROUP closed on schedule, its final financing and purchase accounting, and any integration costs or realized benefits.
- Whether membership declines in Local Group and National Accounts continue, and whether Senior and State-Sponsored growth remains profitable.
- Medical-cost trend, benefit expense ratio, reserve development, and the sensitivity of results to the favorable $483.3 million prior-year claims reserve redundancy recorded in the first nine months.
- Cash-flow conversion and the timing effects from federal premium receipts, claims payments, and required medical-loss-ratio rebates.
- Debt-to-capital relative to the 25%–35% target, financing costs, and the effect of acquisition funding on credit ratings and liquidity.
- Developments in the legal matters, tax audits, Penn Treaty rehabilitation, and regulatory implementation of health reform.