WellPoint, Inc. — Form 10-Q for the quarter ended June 30, 2011
The supplied filing is for WellPoint, Inc. (the company identified in the request as Elevance Health), for the three and six months ended June 30, 2011. WellPoint operated health plans and related services and reported 34.2 million medical members at quarter-end.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $14.88 billion | $14.20 billion | $29.53 billion | $29.04 billion |
| Net income | $701.6 million | $722.4 million | $1.63 billion | $1.60 billion |
| Diluted EPS | $1.89 | $1.71 | $4.34 | $3.68 |
| Benefit expense ratio | 85.7% | 82.9% | 83.9% | 82.3% |
| SG&A expense ratio | 13.5% | 15.2% | 13.8% | 14.9% |
- Q2 total revenue was $15.10 billion, up 5%; net income declined 3%. Diluted EPS rose 11%, helped by a 12% reduction in average diluted shares from repurchases. Adjusted EPS, a non-GAAP measure, was $1.83 versus $1.67.
- For the first half, total revenue increased 2% to $30.00 billion and net income increased 2%. Diluted EPS rose 18%; adjusted EPS was $4.19 versus $3.63.
- Higher medical costs and less favorable prior-period claims reserve development increased benefit ratios. Lower SG&A expense, reflecting efficiency initiatives and lower incentive compensation, improved expense ratios. Net margin on total revenue was 4.6% in Q2 versus 5.0%; first-half margin was 5.4% in both years.
- Operating cash flow was $1.89 billion in the first half, compared with an outflow of $66.8 million in 2010. The prior-year period included a $1.21 billion tax payment related to the 2009 sale of the pharmacy benefit management business; 2011 cash flow also benefited from higher policy liabilities.
- Cash and cash equivalents were $1.70 billion at June 30, down from $1.79 billion at year-end 2010. Cash, cash equivalents and investments, including long-term investments, totaled $20.76 billion. Total debt was approximately $8.85 billion based on balance-sheet debt categories; the reported debt-to-capital ratio was 26.8%, within the company’s 25%–35% target range. The $2.0 billion revolving credit facility had no borrowings outstanding.
- First-half share repurchases were $1.46 billion and cash dividends were $183.9 million; dividends declared were $0.50 per share. The company reported $2.28 billion of cash and investments at the parent available for general corporate use.
- Medical membership increased 2% year over year to 34.19 million. Self-funded membership rose 5%, while fully insured membership fell 2%.
Changes, outlook and notable matters
- Revenue growth reflected Commercial rate increases, growth in Senior and State-Sponsored businesses, and higher Federal Employee Program reimbursement. Fully insured membership declines and two large accounts moving to self-funded arrangements partly offset growth.
- Consumer segment operating gain fell 41% in Q2 and 39% in the first half, principally due to higher Medicare Advantage medical costs and adverse selection in certain products. Management said it expected to refine its Medicare Advantage product strategy for 2012. Commercial first-half operating gain increased 9%; Other returned to an operating gain from a prior-year loss.
- Management estimated 2011 Local Group fully insured cost-of-care trend at 7.5%, plus or minus 50 basis points. It attributed trends mainly to unit costs, including hospital prices and case acuity; pharmacy costs also faced pressure from specialty drugs and drug-price inflation.
- The filing provides no clear full-year earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results. WellPoint announced a pending agreement to acquire CareMore Health Group, expected to close in the second half of 2011 subject to regulatory approvals and other closing conditions.
- Prior-year favorable claims reserve development was substantially higher: $222.3 million in the first half of 2011 versus $667.8 million in the comparable 2010 period. Management identified medical claims payable as a key estimate requiring judgment.
- Legal matters include ongoing demutualization and out-of-network reimbursement litigation. For proceedings where losses are reasonably possible and estimable, the company placed aggregate possible losses above established reserves in a range of $0 to approximately $500 million. It could not estimate potential assessments related to a possible Penn Treaty insolvency.
- The company cited risks from healthcare reform and regulation, medical-cost trends, rate approvals, Medicare and Medicaid funding and compliance, litigation, investment markets, debt ratings, and restrictions on subsidiary distributions. It warned that investment-market conditions could lead to additional impairment losses. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the deterioration in benefit ratios and Medicare Advantage results persists, and how the planned 2012 product-strategy changes affect profitability.
- Medical claims reserve development and the assumptions behind the $5.34 billion medical claims payable balance.
- Current debt, commercial paper usage, parent-company liquidity and regulated-subsidiary capital and dividend constraints.
- Developments in the CareMore acquisition, including closing timing, regulatory approvals and financial impact.
- Updates to the quantified litigation exposure, Penn Treaty assessment risk, and potential investment impairments.
- How healthcare reform’s minimum medical loss ratio requirements and the company’s estimated cost trends affect pricing, rebates and margins.