WellPoint, Inc. (now Elevance Health) — Q2 2009 Form 10-Q
Business context and reporting period
The filing is for the quarter and six months ended June 30, 2009; it was filed July 29, 2009. The registrant named in the filing is WellPoint, Inc., not Elevance Health. WellPoint reported 34.2 million medical members and operated Commercial, Consumer, and Other segments.
Financial results and liquidity
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $15.27 billion | $15.48 billion | $30.56 billion | $30.84 billion |
| Total revenue | $15.41 billion | $15.67 billion | $30.56 billion | $31.22 billion |
| Net income | $693.5 million | $750.5 million | $1.274 billion | $1.339 billion |
| Diluted EPS | $1.43 | $1.44 | $2.59 | $2.50 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.570 billion | $1.159 billion |
- Q2 benefit expense ratio was 82.9%, down 40 basis points year over year; SG&A ratio rose to 15.4% from 14.3%. Net income was 4.5% of total revenue versus 4.8%.
- For the first half, the benefit expense ratio was 82.3% versus 84.2%; SG&A ratio was 15.4% versus 14.5%. Net income margin was 4.2% versus 4.3%.
- First-half operating cash flow was 1.2 times net income, versus 0.9 times a year earlier. Cash and cash equivalents were $1.725 billion at June 30, down $459.3 million since year-end.
- Cash, cash equivalents, and investments, including long-term investments, totaled $18.4 billion. Total debt was approximately $9.17 billion, including $100 million of short-term borrowings. The company had $2.392 billion available under its revolving credit facility and $648.2 million outstanding under its commercial paper program. Debt-to-total-capital was 29.2%.
Material changes versus prior comparable periods
- Q2 operating revenue fell 1% and net income fell 8%; first-half operating revenue fell 1% and net income fell 5%. First-half diluted EPS rose 4%, aided by fewer shares after repurchases despite lower net income.
- Medical membership declined 3% to 34.221 million year over year, primarily from Local Group, State-Sponsored, Individual, and Senior losses. Fully insured membership fell 6%; self-funded membership was nearly flat.
- Q2 Commercial operating gain fell 31% to $582.8 million, while Consumer operating gain rose 68% to $382.1 million. Other segment operating gain increased 13% to $123.8 million.
- First-half investment impairment losses recognized in income were $379 million, versus $197.9 million a year earlier; net realized investment results were a $31.8 million loss, compared with a $124.5 million gain.
- General and administrative expense rose 8% in both the quarter and first half, attributed mainly to compensation costs and outside services.
Outlook, management commentary, risks, and unusual items
- Management estimated 2009 cost-of-care trend for Local Group fully insured business at 8.0%, plus or minus 50 basis points. It cited low-double-digit inpatient and outpatient trends, with inpatient increases mainly from cost per admission and outpatient increases mainly from cost per visit. H1N1 activity and the potential for an elevated fall/winter flu season were noted.
- No clear full-year earnings or EPS guidance is provided in the filing text. Management cautioned that interim results and trends may not indicate full-year results.
- WellPoint agreed to sell its NextRx pharmacy benefit management business to Express Scripts for $4.675 billion, including at least $3.275 billion in cash and the balance in Express Scripts stock. Closing was expected in the second half of 2009, subject to conditions and approvals; a 10-year PBM services contract was planned. The filing highlights execution, regulatory, customer, operational, and stock-value risks.
- CMS had suspended marketing to and enrollment of new Medicare Advantage and Part D members pending remediation of compliance issues. WellPoint said remediation was underway and did not then expect a material adverse financial effect.
- Prior-year medical claims reserve releases totaled $719.7 million in the first half, including approximately $305.1 million from completion-factor development and $414.6 million from lower-than-assumed prior-year trends. Claims reserves are estimation-sensitive; management disclosed possible variability of about $220 million for completion-factor assumptions and $368 million for trend-factor assumptions.
- Unrealized investment losses and market uncertainty remain risks: gross unrealized losses recognized in accumulated other comprehensive income were approximately $541.7 million. Management warned further declines could result in additional material impairment charges. Some fair values rely on unobservable inputs; Level III investments were $322.5 million.
- Contingencies include multiple out-of-network reimbursement class actions, demutualization litigation, and disputes involving legacy reinsurance arrangements. The company said outcomes could not be determined for certain matters, while stating it did not expect the described matters to have a material adverse effect overall.
Important facts for investors to verify
- Confirm whether the Express Scripts transaction closed, its final cash and stock consideration, and any transition or service impacts.
- Track CMS remediation status and reinstatement of Medicare Advantage and Part D marketing and enrollment.
- Monitor membership trends, especially fully insured Commercial, State-Sponsored, and Senior membership, alongside premium-rate actions and medical-cost trends.
- Assess the sustainability of earnings excluding investment impairments and the unusually large favorable prior-year claims reserve development.
- Review subsequent investment impairment disclosures, liquidity and commercial-paper access, debt ratings, and the outcomes or updated reserves for significant litigation and tax examinations.