Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for WellPoint, Inc. (now Elevance Health) for the period ended September 30, 2008. WellPoint is the largest health benefits company in the United States by medical membership, serving 35.3 million members. The company operates through three reportable segments: Commercial, Consumer, and Other. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Operating Revenue | $15,309.4 million | $46,153.0 million |
| Net Income | $820.7 million | $2,159.3 million |
| Diluted EPS | $1.60 | $4.09 |
| Benefit Expense Ratio | 82.5% | 83.7% |
| Cash and Cash Equivalents | $2,270.6 million | $2,270.6 million (as of period end) |
| Total Investments (Available-for-Sale) | $15,238.4 million | $15,238.4 million (as of period end) |
| Long-Term Debt | $8,491.3 million | $8,491.3 million (as of period end) |
| Operating Cash Flow (9 Months) | $2,038.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 2% for the quarter and 3% for the nine-month period compared to 2007, driven by premium rate increases and growth in Medicare Advantage, partially offset by membership declines in fully-insured lines and the loss of the New York State prescription drug contract.
- Net Income Decline: Net income decreased 5% for the quarter and 13% for the nine-month period. This was primarily due to higher medical costs, significant investment losses, and intangible asset impairments.
- Investment Losses: The company recorded net realized investment losses of $562.6 million for the quarter and $636.0 million for the nine months. These losses were driven by other-than-temporary impairments (OTTI) related to the financial crisis, specifically involving Freddie Mac ($127.8M), Fannie Mae ($101.7M), and Lehman Brothers ($88.5M).
- Intangible Asset Impairment: A pre-tax impairment charge of $141.4 million was recorded in the third quarter related to State-Sponsored licenses due to regulatory changes and California budgetary cuts.
- Tax Benefits: Income tax expense decreased significantly due to a settlement with the IRS, resulting in a tax benefit of approximately $0.90 per share for the quarter.
Guidance, Outlook, and Risks
- Medical Cost Trends: Management estimates the 2008 cost of care trend at 8% (plus or minus 50 basis points). Higher medical costs in Local Group and Medicare Advantage businesses are expected to continue impacting results.
- Investment Portfolio Risk: Due to market volatility, there is a continuing risk that further declines in fair value may occur, potentially leading to additional material OTTI charges in future periods.
- Liquidity and Credit Markets: The company noted increased volatility in commercial paper markets. While it maintains a $2.4 billion senior credit facility and $1.3 billion in commercial paper outstanding, it is monitoring the environment closely. It also joined the Federal Home Loan Bank of Indianapolis to access additional liquidity.
- Membership Mix: Fully-insured membership declined 3% year-over-year, while self-funded membership increased 6%. The company is addressing Medicare Advantage benefit expense through medical management initiatives and pricing changes for 2009.
Investor Verification Checklist
- Investment Impairments: Verify the extent of unrealized losses in the investment portfolio ($704.1M in fixed maturity and $221.1M in equity securities) and the potential for future OTTI charges given the credit market environment.
- Medical Claims Reserves: Review the actuarial assumptions for medical claims payable ($6.27 billion), specifically the "completion factors" and "trend factors," which showed a $263.8 million redundancy in prior year estimates for the nine-month period.
- IRS Settlement Impact: Confirm the sustainability of the effective tax rate (17.4% for nine months) given the one-time benefit from the IRS settlement ($272.9 million benefit).
- State-Sponsored Business: Assess the long-term impact of the $141.4 million impairment on the Consumer segment and the outlook for Medicaid programs in California and other states.
- Share Repurchases: Note that the company repurchased $3.0 billion of stock in the first nine months of 2008, with $1.25 billion remaining authorized, impacting share count and EPS.