WellPoint, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing is under WellPoint, Inc.; a shareholder vote on a proposed name change to Anthem, Inc. was scheduled for November 5, 2014. The company reported 37.5 million medical members and offered commercial, Medicaid, Medicare, and related health and specialty products.
Financial performance
Amounts are in millions except per-share data, ratios, and membership.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $18,370.7 | $17,618.7 | $54,245.5 | $52,545.7 |
| Total revenue | $18,557.0 | $17,855.5 | $54,889.8 | $53,121.8 |
| Net income | $630.9 | $656.2 | $2,063.0 | $2,341.5 |
| Diluted EPS | $2.22 | $2.16 | $7.18 | $7.69 |
| Benefit expense ratio | 82.5% | 84.9% | 82.7% | 84.1% |
| SG&A ratio | 16.2% | 14.4% | 16.1% | 13.9% |
- Profit and margins: Q3 net income declined 3.9%, although diluted EPS rose 2.8%, aided by lower share count from repurchases. Nine-month net income fell 11.9% and diluted EPS fell 6.6%. Net income as a percentage of total revenue was 3.4% in Q3 (3.7% prior year) and 3.8% year to date (4.4% prior year).
- Drivers: Operating revenue increased 4.3% in Q3 and 3.2% year to date, mainly on premium rate increases, Medicaid and Individual membership growth, and higher administrative fees. The non-deductible Affordable Care Act health insurer fee and higher SG&A weighed on earnings. Lower investment gains also reduced Q3 net income.
- Cash flow: Nine-month operating cash flow was $3,064.2, versus $2,779.5; investing cash outflow was $1,635.0, versus $2,086.8; and financing cash outflow was $1,293.6, versus $992.0. Ending cash and cash equivalents were $1,717.9.
- Liquidity and debt: Cash, cash equivalents, and investments, including long-term investments, totaled $24,094.7 at September 30. Long-term debt carrying value was $15,163.3, including $625.0 current maturities; short-term borrowings were $100.0. The debt-to-capital ratio rose to 38.6% from 36.9% at year-end 2013. The company reported $2,091.4 of cash and investments at the parent company available for general corporate use.
- Capital returns: The company repurchased $2,655.8 of stock during the first nine months and paid $363.1 in cash dividends. The quarterly dividend was $0.4375 per share, up from $0.3750. On October 2, the board authorized a further $5,000 increase in the repurchase program.
Changes versus prior comparable period
- Medical membership increased 5.7% to 37.531 million. Medicaid membership grew 17.4%; self-funded membership grew 13.0%. Fully insured membership decreased 3.9%, partly reflecting the New York State contract conversion and affordability-related Local Group losses.
- Segment operating gain for the nine months declined 6.9% in Commercial and Specialty Business to $2,721.4, while Government Business increased 23.4% to $837.0. In Q3, Commercial and Specialty operating gain rose 28.7%; Government Business operating gain declined 3.6%.
- The benefit expense ratio improved year over year, but the SG&A ratio increased, reflecting health reform fees and related operating costs. The company sold 1-800 CONTACTS and related glasses.com assets on January 31, 2014; these results are reported as discontinued operations.
Outlook, risks, and unusual items
- Management estimated 2014 cost-of-care trend of 6.5%, plus or minus 50 basis points, for Local Group fully insured business. It cited provider rate increases and new high-cost Hepatitis C therapies as cost pressures, with utilization relatively low and not a primary driver through September. The filing provides no full-year earnings or EPS guidance and cautions that interim results are not necessarily indicative of full-year results.
- The 2014 health insurer fee allocated to WellPoint was $893.3; $670.0 was recognized as SG&A expense in the first nine months, including $210.0 in Q3. The fee is non-deductible for federal income tax purposes and contributed to higher effective tax rates. The company noted that the industry-wide fee allocation rises to $11.3 billion in 2015 and 2016.
- Debt actions included issuing $2.7 billion of long-term notes in August and redeeming higher-coupon notes in September. Losses on extinguishment of debt were $74.8 in Q3 and $80.8 for the first nine months of 2014.
- Medical claims payable was $6,794.2 at September 30. Favorable prior-year claims reserve development was $534.7 for the first nine months; claims estimates depend on completion and trend assumptions.
- Key litigation includes the Blue Cross Blue Shield antitrust action, in which most dismissal motions were denied, and out-of-network reimbursement litigation, in which class certification was denied in September, subject to plaintiffs’ appellate and other proceedings. For identified matters where losses were reasonably possible and estimable, the estimated aggregate range in excess of established reserves was $0 to approximately $250; the filing says many exposures cannot be estimated.
- Potential future assessments related to the Penn Treaty insurer rehabilitation could not be estimated and may affect cash flow and results. Other risks include health care regulation and reform, premium adequacy, medical cost trends, government-program funding and compliance, litigation, investment-market changes, and the company’s substantial indebtedness. Management said it intended to maintain investment-grade debt ratings.
- Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether medical cost trends, particularly provider pricing and specialty pharmacy costs, remain consistent with the 6.5% estimate and are covered by approved premium rates.
- How much of the favorable $534.7 million prior-year claims development recurs, and whether claims reserve assumptions or medical claims payable change materially.
- Whether the health insurer fee, related market-transition costs, and elevated SG&A continue to pressure after-tax earnings.
- Medicaid growth, self-funded membership gains, and fully insured membership losses by segment, including their impact on margins and cash receipts.
- Developments in the cited litigation and Penn Treaty proceedings, including any changes to the estimated loss range or potential assessments.
- Debt levels, refinancing costs, capital requirements at regulated subsidiaries, and the pace of share repurchases and dividends.