WellPoint, Inc. (now Elevance Health) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing was submitted under the name WellPoint, Inc.; it describes a health benefits business serving 33.5 million medical members.
Financial performance
| Metric | Q2 2012 | Six months 2012 | Comparable-period change |
|---|---|---|---|
| Operating revenue | $15.17 billion | $30.32 billion | +2.0% and +2.7% |
| Net income | $643.6 million | $1.50 billion | -8.3% and -7.9% |
| Diluted EPS | $1.94 | $4.48 | +2.6% and +3.2% |
| Benefit expense ratio | 85.4% | 84.3% | -30 basis points and +40 basis points |
| SG&A expense ratio | 13.7% | 14.0% | +20 basis points in both periods |
- Total revenue was $15.41 billion in Q2 and $30.82 billion for the six months. Six-month operating gain was $2.20 billion, versus $2.30 billion a year earlier.
- Operating cash flow was $1.74 billion for the six months, down from $1.89 billion. Cash and cash equivalents were $1.95 billion at June 30, compared with $2.20 billion at year-end.
- Cash, cash equivalents and investments, including long-term investments, totaled $21.78 billion. The parent company held $2.51 billion in cash and investments available for general corporate use.
- Long-term debt, including its current portion, was $10.95 billion; short-term borrowings were $200 million and commercial paper outstanding was $789.3 million. The $2.0 billion revolving facility had no amounts drawn. Debt-to-capital was 32.0%, up from 29.6% at year-end.
Changes and drivers versus 2011
- Revenue growth reflected higher Consumer premiums, particularly Senior Medicare Advantage membership, including CareMore, acquired in 2011. Commercial revenue declined amid membership losses, competition, portfolio changes and weak economic conditions.
- Medical membership fell 1.9% to 33.55 million. Commercial membership declined 3.1%; Consumer membership increased 3.9%, with Senior membership up 12.0%.
- Net income was reduced by a $90 million non-tax-deductible litigation settlement and related higher tax expense. Six-month benefit expense rose 3.1%, faster than operating revenue; the company cited higher costs in Local Group and State-Sponsored business. Favorable prior-year claims reserve development partly offset these pressures.
- Diluted EPS rose despite lower net income, principally because share repurchases reduced average diluted shares by about 10.7% for the six-month period. The company repurchased 17.4 million shares for $1.17 billion and paid dividends of $0.575 per share during the first half.
- Investment income declined 9.2% for the six months, while realized investment gains increased to $177.4 million from $98.6 million.
Outlook, transactions and risks
- Management estimated 2012 cost-of-care trend for Local Group fully insured business at 7.0%, plus or minus 50 basis points. It described inpatient and outpatient trends as high single digits, with unit costs a significant driver; this is a trend estimate, not full-year earnings guidance.
- On June 20, WellPoint completed its acquisition of 1-800 CONTACTS for an undisclosed consideration in the provided text. The preliminary purchase accounting included $673.2 million of goodwill. Management said the deal would diversify revenue into complementary, higher-margin eyewear; results were included only after closing. The Alliance operating arrangement was scheduled to end December 31, 2012.
- On July 9, 2012, the company announced an agreement to acquire AMERIGROUP for $92 per share in cash, with an estimated transaction value of approximately $4.9 billion. Closing was expected by the end of Q1 2013, subject to regulatory, antitrust, shareholder and other approvals. Management said available funding sources should support commitments, including this acquisition.
- The Supreme Court’s June 28 decision upheld most of the Affordable Care Act but invalidated the mandatory Medicaid expansion provision. Management identified health reform, medical cost trends, premium-rate approvals, Medicare and Medicaid funding and regulation as significant uncertainties.
- Other exposures include ongoing litigation and government inquiries. The company estimated aggregate reasonably possible losses in specified proceedings, in excess of established reserves, at $0 to approximately $500 million, while noting that many cases could not be estimated. A potential Penn Treaty insolvency assessment could affect future cash flows and results, but WellPoint could not estimate its exposure.
- Investment impairment remained a risk: management warned that market conditions and valuation judgments could lead to additional material impairment losses. The company also cited acquisition integration, consumer-retail regulation, debt ratings, regulatory capital restrictions and substantial indebtedness as risks.
Most important facts for investors to verify
- Whether the $90 million Ormond settlement receives final court approval; the fairness hearing was scheduled for October 25, 2012.
- Whether medical cost trends, especially in Local Group and State-Sponsored business, are matched by premium increases and whether claims reserve development remains favorable.
- AMERIGROUP transaction approvals, financing, closing timing and integration costs, alongside the results and integration of 1-800 CONTACTS.
- Debt and liquidity after acquisition spending, including commercial paper usage, debt-to-capital and the availability of subsidiary capital for parent-company needs.
- Developments in litigation, Penn Treaty rehabilitation and investment portfolio impairment. The filing provides no full-year earnings or EPS guidance.