Elevance Health, Inc. annual report, FY2009

Full document

WellPoint, Inc. — FY 2009 Form 10-K

Filing identity: The supplied filing is WellPoint, Inc.’s annual report for the year ended December 31, 2009, filed February 18, 2010. It is not a 10-K filed under the name Elevance Health, Inc.; the filing identifies the registrant as WellPoint. The requested “2009 Q4” period is covered within this full fiscal-year report.

Business context and reporting period

WellPoint reported 33.7 million medical members at year-end, down 4% from 35.0 million. It operated Commercial, Consumer and Other segments, selling health plans and related services, primarily in its Blue Cross and Blue Shield licensed markets. About 93% of 2009 operating revenue came from premiums.

Financial results and material changes

  • Revenue: Operating revenue was $60.8 billion, down 1% from $61.6 billion. Total revenue was $65.0 billion, up 6%, largely reflecting the $3.8 billion pretax gain on the PBM business sale.
  • Profit and EPS: Net income was $4.75 billion, up 91%; diluted EPS was $9.88, up 108%. The after-tax PBM sale gain was $2.36 billion, or $4.91 per diluted share. Excluding that gain arithmetically, net income was approximately $2.38 billion; reported results also included investment impairments and other unusual items.
  • Margins: Benefit expense ratio improved to 82.6% from 83.6%; SG&A ratio rose to 15.9% from 14.6%. Net income margin was 7.3%, versus 4.1%; excluding the PBM gain, WellPoint reported a 3.9% net income margin.
  • Segments: Commercial operating gain fell 28% to $2.43 billion, with margin declining to 6.5% from 8.9%. Consumer operating gain rose 119% to $1.28 billion; Other rose 27% to $469 million. Segment operating gain is a company-defined measure and excludes several corporate items.
  • Membership: Fully insured membership declined 7% and self-funded membership 2%. Local Group fell 6%, State-Sponsored 13%, and Senior 7%; National Accounts grew 1%. Management attributed much of the decline to unemployment and economic conditions, alongside selected program withdrawals.
  • Cash flow: Operating cash flow was $3.04 billion, versus $2.54 billion in 2008. Investing cash flow was $3.00 billion, including proceeds from the PBM sale; financing used $3.40 billion. Year-end cash and cash equivalents were $4.82 billion.
  • Debt and liquidity: Total debt was approximately $8.4 billion; debt-to-total capital was 25.3%, down from 29.2%. Consolidated cash, cash equivalents and investments, including long-term investments, totaled $22.6 billion. The company had $2.4 billion available under its revolving facility and reported compliance with debt covenants.

Outlook, commentary, risks and unusual items

  • WellPoint expected unemployment to remain high through 2010, potentially pressuring membership and results. It provided no specific 2010 earnings or revenue guidance in the supplied text.
  • Local Group fully insured cost-of-care trend was 8.9%; management cited hospital and outpatient unit-cost increases, utilization, higher COBRA enrollment and specialty-drug costs. It described ongoing pricing, contracting and care-management initiatives.
  • The December 2009 PBM sale to Express Scripts generated $4.7 billion in cash and a $3.8 billion pretax gain. Express Scripts became the PBM service provider under a 10-year agreement. WellPoint expected to pay about $1.2 billion in related taxes in Q1 2010.
  • Fourth-quarter restructuring charges were $171.6 million pretax. Goodwill and intangible-asset impairment charges totaled $262.5 million for 2009; 2008 investment impairment losses recognized in income were $1.21 billion, compared with $450 million in 2009.
  • CMS lifted its Medicare Advantage and Part D marketing and enrollment sanctions in September 2009. However, WellPoint remained ineligible for Medicare Part D Low Income Subsidy auto-enrollment and reassignment, and continued working with CMS on remediation.
  • Key risks include health reform and regulatory changes, medical-cost forecasting and reserve adequacy, further membership losses, government-program funding and compliance, investment impairments, litigation, vendor dependence, and restrictions on subsidiary dividends. The filing describes multiple unresolved class actions, including out-of-network reimbursement and demutualization matters; outcomes were uncertain.

Important facts for investors to verify

  • How much of reported earnings growth reflects the one-time PBM sale gain, and how do ongoing results compare after adjusting for it?
  • Whether membership declines, elevated medical cost trends and the Commercial segment margin pressure continued into 2010.
  • Whether claim-reserve releases recur: 2009 included $807 million of favorable prior-year development, including about $262 million described as higher than anticipated.
  • The cash-tax impact of the PBM sale, transition execution under the Express Scripts agreement, and future earnings following the divestiture.
  • Progress on CMS compliance and eligibility for Part D Low Income Subsidy auto-assignment, and any material developments in pending litigation or health-reform rules.