Elevance Health, Inc. quarterly report, Q1 FY2013

Full document

WellPoint, Inc. (now Elevance Health) — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013. The filing was submitted under the name WellPoint, Inc.; its unaudited interim financial statements are prepared under U.S. GAAP. Unless otherwise noted, amounts are in millions of dollars.

Business context and results

WellPoint was a large U.S. health benefits company, with 35.8 million medical members and approximately 68.0 million individuals served across its subsidiaries at quarter-end. Results include the December 2012 acquisition of Amerigroup and the 1-800 CONTACTS business.

  • Operating revenue: $17,546.3, up 15.8% year over year. Growth primarily reflected Amerigroup; commercial revenue declined amid membership losses, partly offset by premium rate increases.
  • Total revenue: $17,687.2, up 14.7%. Lower investment gains and higher investment impairment losses partly offset operating revenue growth.
  • Net income: $885.2, up 3.4%; diluted EPS was $2.89, up 14.2%. Adjusted net income, a non-GAAP measure, was $898.9, up 13.2%; adjusted EPS was $2.94, up 25.6%.
  • Operating gain: $1,367.6 versus $1,212.6. Commercial operating gain rose to $1,107.5, Consumer to $247.5, and Other to $12.6. Commercial operating margin rose to 13.2% from 11.7%; Consumer margin declined to 3.4% from 4.6%.
  • Benefit costs and expenses: Benefit expense increased 16.8% to $13,748.7. The benefit expense ratio rose 40 basis points to 83.7%. SG&A increased 9.2% to $2,365.0, but its ratio improved 80 basis points to 13.5%.
  • Profitability margins: Income before tax was $1,287.1, down 1.7%; net income as a percentage of total revenue fell to 5.0% from 5.6%.
  • Cash flow: Operating cash flow was $956.9, down from $1,223.1; the filing attributes the decline mainly to government premium payment timing. Investing activities used $1,195.6 and financing activities used $579.1. Cash and cash equivalents ended at $1,665.3, down $819.3 from year-end.
  • Balance sheet and debt: Total assets were $59,408.6 and shareholders’ equity was $24,318.0. Long-term debt was $14,030.0, with $399.4 current; short-term borrowings were $350.0 and commercial paper outstanding was $831.1. The reported debt-to-capital ratio was 37.8%, above the company’s 25%–35% target range, primarily due to Amerigroup acquisition financing.
  • Liquidity: Cash, cash equivalents and investments, including long-term investments, totaled $22,838.0. Parent-company cash and investments available for general corporate use were $1,396.8. A $2,000.0 revolving credit facility had no borrowings outstanding.
  • Capital returns: The company repurchased 5.5 million shares for $340.2 and paid $113.4 in cash dividends. Quarterly dividends per share were $0.375, compared with $0.2875 a year earlier.

Material changes versus Q1 2012

  • Medical membership increased 6.3% to 35.8 million, principally from Amerigroup’s State-Sponsored membership. Commercial membership decreased 1.6%; Consumer membership increased 48.7%.
  • Consumer revenue increased 51.5%, mainly reflecting Amerigroup. Commercial revenue decreased 1.3%, reflecting Local Group membership declines.
  • Lower share count helped lift diluted EPS faster than net income: weighted-average diluted shares fell 9.8% to 305.9 million.
  • Net realized investment gains fell to $16.8 from $106.9, while impairment losses recognized in income rose to $37.9 from $10.9. Net investment income declined 4.1% to $162.0.
  • The effective tax rate declined to 31.2% from 34.6%, mainly because Amerigroup’s inclusion in state apportionment factors lowered the effective state tax rate.

Outlook, commentary, risks and unusual items

  • Management estimated 2013 cost-of-care trend for Local Group fully insured business at 7.0%, plus or minus 50 basis points. The filing does not provide a clear full-year EPS or revenue guidance figure; management cautioned that first-quarter results are not necessarily indicative of full-year results.
  • Management cited provider unit-cost increases, higher outpatient utilization, specialty-drug costs, affordability pressures and competition. It described provider contracting, utilization management, care coordination and plan-design changes as ways to manage costs.
  • Amerigroup-related acquisition financing and integration, higher interest expense, and amortization of acquired intangibles affected results. On January 25, 2013, the company redeemed Amerigroup’s $475.0 of 7.5% notes for $555.6, including the early-redemption premium.
  • Investment impairment losses were $37.9; management warned that further fair-value declines could result in additional material impairments. The investment portfolio included sub-prime and Alt-A securities with fair values of $38.6 and $127.1, respectively.
  • For specified legal proceedings, the company estimated reasonably possible losses in excess of established reserves at $0 to approximately $350.0, while noting that outcomes and estimates remain uncertain. It also could not estimate potential assessments related to the possible Penn Treaty insolvency.
  • Other disclosed exposures include government regulation and health reform, Medicare and Medicaid funding and compliance, litigation and investigations, provider cost trends, acquisition integration, debt ratings, and restrictions on subsidiary dividends. Management said regulated subsidiaries exceeded mandatory risk-based capital thresholds based on the latest required reporting date, December 31, 2012.
  • The 2013 quarter included a $65.0 cost of products associated with 1-800 CONTACTS. No material changes to market risks or risk factors were reported; disclosure controls were deemed effective.

Important facts for investors to verify

  • How much of revenue and membership growth is attributable to Amerigroup, and how the acquired business performs as integration proceeds.
  • Whether the 7.0% cost-of-care trend estimate and Local Group pricing are sufficient to protect benefit margins.
  • Progress toward the 25%–35% debt-to-capital target, including debt repayment, cash generation and credit ratings.
  • Whether investment impairment losses, litigation exposures (including the disclosed $0–$350.0 range), or Penn Treaty assessments change materially.
  • The durability of cash flow given government premium payment timing and the company’s investment purchases, debt service, dividends and repurchases.