Elevance Health, Inc. quarterly report, Q1 FY2010

Business context and reporting period

This is WellPoint, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2010, filed April 28, 2010. The request identifies Elevance Health, Inc.; the filing itself names WellPoint, so confirm the issuer and historical filing match the intended company. WellPoint reported 33.8 million medical members and operated commercial, consumer, and other health-benefit businesses.

Financial and operating performance

Unless noted otherwise, amounts are in millions of dollars.

Metric	Q1 2010	Q1 2009	Change
Operating revenue	$14,868.7	$15,298.7	Down 3%
Total revenue	$15,098.5	$15,143.3	Down $44.8
Income before tax	$1,335.3	$893.6	Up 49%
Net income	$876.8	$580.4	Up 51%
Diluted EPS	$1.96	$1.16	Up 69%
Adjusted net income, non-GAAP	$871.9	$808.8	Up 8%
Adjusted diluted EPS, non-GAAP	$1.95	$1.62	Up 20%

• Benefit expense was $11,381.4, down 3%; the benefit expense ratio improved 70 basis points to 81.8%. SG&A was $2,200.6, down 1%, while its ratio rose 20 basis points to 14.8%. Net income was 5.8% of total revenue versus 3.8%.
• Reported earnings benefited from lower investment impairment losses and a swing to realized investment gains: impairment losses recognized in income were $19.7 versus $305.0, and realized gains were $48.4 versus losses of $47.5. The filing’s adjusted measures exclude these investment items and intangible impairment.
• Commercial segment operating gain increased 8% to $978.4, with a 10.7% margin. Consumer operating gain rose 49% to $326.0, with an 8.1% margin. Other reported an operating loss of $17.7 versus gain of $111.6, largely reflecting the PBM sale.
• Medical membership decreased 2% to 33.835 million. Fully insured membership fell 6% to 15.034 million; self-funded membership rose 1% to 18.801 million.

Cash flow, liquidity, and debt

• Operating cash flow was negative $322.9, compared with positive $1,192.0 in Q1 2009. The company attributed the decline chiefly to a $1.2 billion IRS tax payment related principally to the 2009 PBM sale, incentive compensation payments, membership changes, and claims run-out associated with the UniCare transition.
• Investing cash flow was positive $191.9; financing cash flow was negative $1,157.7, including $1,388.4 of share repurchases. Cash and cash equivalents declined $1,289.9 to $3,526.2.
• At March 31, cash, cash equivalents, and investments, including long-term investments, totaled $21.3 billion; parent-company cash and investments available for general corporate use were about $3.2 billion. Total assets were $51.2 billion and shareholders’ equity was $24.5 billion.
• Debt was approximately $8.39 billion, including $500.7 million of commercial paper; the debt-to-total-capital ratio was 25.5%, versus 25.3% at year-end. The company had $2.392 billion available under its revolving credit facility and expected about $2.3 billion of subsidiary dividends during 2010. No borrowings were outstanding under the revolver at quarter-end.
• Management said full-year 2010 operating cash flow would be adversely affected by the tax payment, UniCare transition, reduced Part D low-income-subsidy membership, and expected payments to Express Scripts. Excluding those items, it estimated operating cash flow of about $1.0 billion, or 1.2 times adjusted net income; this is management’s estimate, not reported guidance for total cash flow.

Changes, outlook, risks, and unusual items

• Operating revenue declined primarily because of fully insured membership losses, the UniCare membership transition to Health Care Service Corporation, sale of the PBM business to Express Scripts, and loss of Medicare Part D low-income-subsidy membership. Higher premiums, FEP reimbursement, and some membership growth partly offset declines.
• Local Group fully insured cost-of-care trend was estimated at 8.0%, plus or minus 0.5 percentage points. Management cited high inpatient and outpatient trends, elevated hospital unit costs, increased utilization, H1N1 effects, COBRA membership, and specialty-drug costs, while describing clinical management and contracting efforts to moderate costs.
• Health reform legislation enacted in 2010 was expected to affect operations materially over time. Minimum medical loss ratio provisions were scheduled to begin affecting certain businesses in 2011; other major requirements, taxes, and fees were generally scheduled for 2014 or later. Management said details and regulatory guidance remained incomplete and premium-rate restrictions could impair results.
• The company recorded a $21.1 million impairment charge for UniCare provider-network intangible assets after deciding to transfer certain membership to another network. Beginning in 2010, certain claims-related medical-management and wellness costs were reclassified from administrative expense to benefit expense; prior-year figures were conformed.
• Share repurchases totaled $1.388 billion for 20.9 million shares in the quarter. The board increased authorization by $3.5 billion; $2.495 billion remained at March 31. Repurchases are discretionary. The PBM sale also drove the $1.2 billion tax payment and the disappearance of third-party drug-sale revenue and costs.
• Risks and contingencies include unresolved litigation over policy rescissions, demutualization and out-of-network reimbursement; governmental inquiries; possible future investment impairment; and potential guaranty-association assessments if Penn Treaty is liquidated. The ultimate outcomes of identified litigation were not determinable. The company also disclosed remaining commitments of $1,222.7 million under a five-year IBM services agreement and $377.1 million under a six-year print/mail agreement.
• Management stated that disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter. It cautioned that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

1. Confirm that the WellPoint, Inc. 2010 filing is the intended issuer and period, given the Elevance Health name in the request.
2. Assess underlying earnings apart from investment gains, impairment charges, and the one-time effects of the PBM sale; reconcile GAAP results with the company’s non-GAAP adjusted measures.
3. Track membership, especially fully insured Local Group and Individual trends, UniCare transfers, and Medicare Part D low-income-subsidy losses.
4. Review medical claims reserve assumptions: the filing estimated potential variability of about $255 million from completion-factor choices and $484 million from trend-factor choices.
5. Monitor cash generation after the tax payment and other stated cash-flow headwinds, and confirm availability of subsidiary dividends, commercial paper, and credit facilities.
6. Follow health-reform implementation, premium-rate approvals, medical-cost trends, investment impairment exposure, and material litigation or Penn Treaty assessments.