WellPoint, Inc. (now Elevance Health) — Q3 2009 Form 10-Q
Filing identity: The supplied filing is for WellPoint, Inc., for the quarter ended September 30, 2009; it is not filed under the name Elevance Health. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context and reporting period
WellPoint reported 33.9 million medical members and operated Commercial, Consumer and Other segments. It offered insured and self-funded health plans, government-program coverage and related services. Comparisons are with Q3 and the first nine months of 2008.
Key financial metrics
| Metric | Q3 2009 | First nine months 2009 |
|---|---|---|
| Operating revenue | $15.2 billion, down 1% year over year | $45.8 billion, down 1% |
| Total revenue | $15.4 billion, up 3% | $46.0 billion, approximately flat |
| Net income | $730.2 million, down 11% | $2.0 billion, down 7% |
| Diluted EPS | $1.53, down 4% | $4.12, up 1% |
| Benefit expense ratio | 81.1%, down 140 basis points | 81.9%, down 180 basis points |
| SG&A ratio | 15.8%, up 130 basis points | 15.5%, up 100 basis points |
| Operating cash flow | Not separately stated for the quarter | $3.0 billion, versus $2.1 billion |
Q3 pretax income was $1.12 billion; income tax expense was $387 million, compared with a $271 million tax benefit in Q3 2008. The prior-year benefit principally reflected IRS settlements, making the tax comparison unusually significant. Nine-month effective tax rates were 34.6% in 2009 and 17.4% in 2008.
At September 30, 2009, cash and cash equivalents were $1.84 billion; total assets were $49.5 billion; shareholders’ equity was $22.9 billion. Debt was approximately $8.9 billion, including short-term borrowings. The debt-to-total-capital ratio was 27.9%, versus 29.2% at December 31, 2008. The company reported $2.39 billion available under its revolving credit facility, no outstanding balance on that facility, and $541 million of commercial paper outstanding. Management reported $19.3 billion of cash, cash equivalents and investments, including long-term investments, and approximately $1.1 billion of parent-company cash and investments available for general corporate use.
Nine-month investing cash flow was a use of $1.16 billion, and financing cash flow was a use of $2.19 billion; cash declined $342 million to $1.84 billion. The company repurchased 40.8 million shares for $1.81 billion during the nine-month period.
Material changes versus the prior comparable period
- Medical membership fell 4% to 33.855 million. Fully insured membership declined 7%; self-funded membership declined 2%. Management attributed declines principally to unemployment and economic conditions, strategic exits from some state programs, and product changes.
- Benefit expense fell 3%, and the benefit expense ratio improved, but SG&A expense rose 8% in Q3 and 6% for the nine-month period, pressuring margins.
- Commercial segment operating gain declined 31% in Q3 and 21% for the nine-month period. Consumer operating gain increased substantially, while Other segment operating gain also grew.
- Investment impairment losses recognized in income were $30.7 million in Q3 and $409.7 million for the nine months, versus $564.4 million and $762.3 million, respectively, in 2008. The company also reported improved investment values through other comprehensive income.
- Net income fell despite higher pretax income, primarily reflecting the prior-year tax benefit, higher administrative expense, lower operating revenue and a $205.5 million intangible-asset impairment. Lower benefit expense and lower investment impairment losses partly offset these effects.
Outlook, management commentary, risks and unusual items
- Management estimated 2009 Local Group fully insured cost-of-care trend at 9.0%, plus or minus 0.5 percentage points, raised from 8.0% previously. The change reflected higher expected H1N1 costs, increased COBRA membership and prescription-drug inflation.
- The company agreed to sell its NextRx pharmacy benefit management business to Express Scripts for $4.675 billion, including at least $3.275 billion in cash, subject to adjustments and closing conditions. Closing was expected in Q4 2009. A 10-year PBM services agreement was planned; proceeds were expected to support share repurchases, debt repayment and other corporate purposes.
- On October 28, 2009, WellPoint announced a member-transition agreement under which HCSC would offer replacement coverage to UniCare commercial group and individual members in Illinois and Texas, subject to regulatory approvals. Most transitions were expected by year-end 2009.
- CMS lifted sanctions on Medicare Advantage and Part D marketing on September 9, 2009. Marketing resumed October 1, with new enrollment expected from November 15, but the company remained ineligible for Part D low-income-subsidy auto-enrollment and reassignment.
- A $205.5 million pretax impairment was recorded on UniCare tradenames, primarily reflecting expected loss of Medicare Part D auto-assigned membership and planned business changes. Management noted possible further impairment if future cash flows do not support carrying values.
- Management cited risks from health reform proposals, unemployment and membership declines, medical-cost trends, rate adequacy, CMS compliance, investment-market volatility, debt ratings and execution of the Express Scripts transaction. It warned that further investment impairments or restructuring costs could arise.
- Claims reserves involved significant actuarial estimation. The company reported $751.9 million of prior-year claims redundancies for the first nine months, including approximately $212 million of higher-than-anticipated favorable releases not reestablished at September 30. Management disclosed sensitivity of the claims liability to completion and trend assumptions.
- Pending matters included putative class actions concerning out-of-network reimbursement and demutualization, as well as other litigation and regulatory proceedings. Management stated that it could not determine the ultimate outcomes of certain cases and did not expect the described matters, individually or collectively, to have a material adverse effect.
Most important facts an investor should verify
- Whether the Express Scripts sale closed on the expected terms and how cash proceeds, any stock consideration and the 10-year service agreement affected results and capital allocation.
- Subsequent medical membership, retention and pricing trends, especially in fully insured Commercial business and the transitioning UniCare markets.
- Claims-reserve development and the sustainability of favorable prior-period releases, alongside the higher cost-trend estimate and H1N1 experience.
- Whether Medicare Part D auto-assignment eligibility was restored and the resulting impact on membership, earnings and tradename impairment risk.
- Further investment impairments, particularly in mortgage-backed and other less-liquid holdings, and changes in the tax rate compared with 2008’s IRS-related benefit.
- Progress and potential exposure in the out-of-network and demutualization litigation, and any material effects from health reform or other regulatory changes.