WellPoint, Inc. — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2013. This is a historical filing by WellPoint, Inc. (the company identified in the filing), not a filing under the later Elevance Health name. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
WellPoint was a U.S. health benefits company, reporting 35.7 million medical members and approximately 68.0 million individuals served across its subsidiaries at quarter-end. Its businesses covered commercial and specialty products, government programs, and other operations. Following leadership and organizational changes announced in May 2013, it reported three segments: Commercial and Specialty Business, Government Business, and Other. Amerigroup, acquired in December 2012, materially expanded government-program membership and revenue.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $17,597.2 | $15,173.3 | $35,143.5 | $30,323.5 |
| Total revenue | $17,795.6 | $15,407.3 | $35,482.8 | $30,822.5 |
| Net income | $800.1 | $643.6 | $1,685.3 | $1,500.1 |
| Diluted EPS | $2.64 | $1.94 | $5.53 | $4.48 |
| Benefit expense ratio | 83.9% | 85.4% | 83.8% | 84.3% |
| SG&A ratio | 14.0% | 13.7% | 13.8% | 14.0% |
- Profit and margins: Q2 net income rose 24.3%; diluted EPS rose 36.1%, helped by higher earnings and fewer shares outstanding after repurchases. Six-month net income rose 12.3% and diluted EPS rose 23.4%. Net income was 4.5% of total revenue in Q2 (4.2% prior year) and 4.7% for the half year (4.9% prior year).
- Segment operating gain: Q2 Commercial and Specialty gain was $939.4, up 8.1%, with a 9.6% margin; Government gain was $298.4, up 124.9%, with a 3.8% margin. For the first half, segment gains were $2,181.7 and $431.1, respectively. Government results primarily reflected Amerigroup, Medicaid rate activity, and favorable reserve development.
- Cash flow: First-half operating cash flow was $1,382.1, down from $1,744.6; investing cash outflow was $2,063.4 and financing cash outflow was $455.2. Cash and cash equivalents declined $1,137.3 to $1,347.3. Management attributed weaker operating cash flow chiefly to government premiums received earlier in Q2 2012 and delayed Medicaid receipts in 2013.
- Liquidity and debt: Cash, cash equivalents, and investments, including long-term investments, totaled $22,453.5 at June 30. Parent-company cash and investments available for general corporate use were $1,784.4. Debt-to-capital was 37.7%, down from 38.6% at year-end but above the company’s 25%–35% target range; management expected a return to target levels over time. The company had $921.9 of commercial paper outstanding and no borrowings under its $2,000 revolving facility.
- Capital returns: First-half repurchases cost $615.5; cash dividends were $226.1. The quarterly dividend per share increased to $0.375 from $0.2875.
Material changes versus the prior comparable period
- Operating revenue grew 16.0% in Q2 and 15.9% for the first half, mainly from Amerigroup Medicaid business and, for the half year, FEP growth. Commercial and Specialty revenue was slightly lower, reflecting membership declines partly offset by rate increases.
- Medical membership increased 6.3% year over year to 35.666 million, largely due to Amerigroup Medicaid membership; Commercial and Specialty membership decreased 1.4% while Government membership increased 51.5%.
- Q2 benefit expense grew 14.4%, slower than operating revenue, and the benefit ratio improved 150 basis points. SG&A increased 18.7% in Q2, including acquired-company costs, health reform implementation projects, and higher incentive compensation.
- First-half investment income fell 6.9%, realized investment gains fell 60.0%, and recognized other-than-temporary investment impairment losses increased to $46.9 from $16.8. The company also reported a $343.3 first-half other comprehensive loss, mainly from unrealized investment losses.
- Interest expense increased with debt associated with the Amerigroup acquisition. The company redeemed Amerigroup’s $475.0 senior notes in January 2013 for $555.6, including the early-redemption premium.
Outlook, commentary, risks, and unusual items
- Management estimated 2013 cost-of-care trend for its Local Group fully insured business at 6.5%, plus or minus 50 basis points. It described inpatient, outpatient, and physician trends as mid-single digit and pharmacy trend as low-single digit; these are trend estimates, not earnings guidance.
- The filing provides no clear full-year revenue, earnings, or EPS guidance. Management cautioned that interim results are not necessarily indicative of full-year results and said it expected debt-to-capital to move back toward its target range over time.
- Favorable prior-year medical claims reserve development was $532.2 for the first half, compared with $482.0 in 2012; management linked it mainly to more favorable claim trends and completion factors than previously estimated. The filing identifies claims reserving as a key judgmental estimate.
- Management warned that investment-market conditions could lead to further declines in fair value and additional material impairment losses. It also cited health care cost and utilization trends, premium-rate adequacy and approvals, health reform and government-program regulation and funding, Amerigroup integration, competition, debt and rating risks, and litigation as key uncertainties.
- For specified legal proceedings, the company estimated reasonably possible losses in excess of established reserves at $0 to approximately $350.0, while noting that many outcomes and amounts could not be estimated. Potential assessments related to Penn Treaty’s possible insolvency could not be estimated and might materially affect future cash flows and results.
- The Los Angeles City Attorney matter was settled for $6.0, with court approval entered July 10, 2013. The OON reimbursement litigation was narrowed by a July 19, 2013 court ruling; several claims remained. The Ormond class action settlement recorded in 2012 was $90.0 and was non-deductible for tax purposes.
Important facts for investors to verify
- How much of Government segment growth and earnings reflects Amerigroup acquisition effects, and whether integration delivers expected operating benefits.
- Whether favorable medical claims reserve development persists and how claims cost trends compare with the stated 6.5% estimate.
- Whether commercial membership losses, Medicare transitions, premium pricing, and 2014 health reform costs affect future revenue and margins.
- Cash-flow timing, Medicaid receivable collections, debt reduction, and progress toward the 25%–35% debt-to-capital target.
- Investment impairment exposure and developments in the disclosed litigation and Penn Treaty contingency.