WellPoint, Inc. (now Elevance Health) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The filing was submitted under the name WellPoint, Inc. Unless noted otherwise, dollar amounts are in millions; membership figures are in thousands.
Business context
WellPoint operated health benefits and related businesses through its Commercial and Specialty Business, Government Business, and Other segments. It reported 36.9 million medical members and approximately 66.8 million individuals served across its subsidiaries. The company completed the sale of 1-800 CONTACTS and related glasses.com assets on January 31, 2014; those results are reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $17,644.8 | $17,435.1 | Up 1.2% |
| Total revenue | $17,859.4 | $17,576.0 | Up 1.6% |
| Benefit expense | $13,664.6 | $13,748.7 | Down 0.6% |
| Selling, general and administrative expense | $2,861.5 | $2,329.1 | Up 22.9% |
| Income from continuing operations | $691.4 | $872.3 | Down 20.7% |
| Net income | $701.0 | $885.2 | Down 20.8% |
| Diluted EPS | $2.40 | $2.89 | Down 17.0% |
| Operating cash flow | $1,387.5 | $956.9 | Up $430.6 |
- The benefit expense ratio improved to 82.7% from 83.7%; the SG&A ratio rose to 16.2% from 13.4%. Continuing-operations pretax margin was 6.3% versus 7.3%, and net margin was 3.9% versus 5.0%.
- Operating cash flow was 2.0 times net income. Investing activities used $744.3 and financing activities used $258.6. Cash and cash equivalents ended the quarter at $1,971.2.
- Cash, cash equivalents and investments, including long-term investments, totaled $24,091.8 at quarter-end. Parent-company cash and investments available for general corporate use were $2,028.8.
- Debt-to-capital was 38.2%, up from 36.9% at December 31, 2013. The company reported $590.0 of short-term borrowings and $13,932.1 of long-term debt excluding current maturities; it also had $758.6 of commercial paper outstanding. Its $2,000.0 revolving credit facility had no outstanding balance.
- Quarter-end total assets were $61,685.5 and shareholders’ equity was $24,345.3. The quarterly dividend was $0.4375 per share.
Changes and management commentary
- Commercial and Specialty Business operating gain fell 29.8% to $886.1, and operating margin declined to 9.1% from 12.8%. Management attributed the decline mainly to Health Care Reform-related costs and shifts in individual and Local Group product mix; lower utilization during severe winter weather partly offset these pressures.
- Government Business operating gain increased to $239.6 from $102.6, with operating margin rising to 3.0% from 1.4%. Medicaid expansion, rate increases, retroactive rate activity and improved medical cost performance contributed; new health-care fees were a partial offset.
- Medical membership increased 3.2% year over year to 36.944 million. Self-funded membership rose 12.2% to 22.630 million, while fully insured membership declined 8.5% to 14.314 million. Management cited contract conversion, growth in self-funded accounts, and affordability-related enrollment pressures among the factors.
- The company repurchased $1,262.8 of stock during the quarter, including shares under a $600.0 accelerated share repurchase agreement. Repurchases reduced diluted share count and partly offset the EPS decline.
- Q1 operating revenue growth reflected higher Medicaid and other government premiums and administrative fees, partly offset by lower fully insured Local Group revenue and Medicare membership-related declines. Investment income rose 13.4% to $183.7; realized investment gains were $41.7 versus $16.8.
Outlook, risks and unusual items
- Management estimated 2014 cost-of-care trend at approximately 6.5%, plus or minus 50 basis points, for its Local Group fully insured business. Provider rate increases and pharmacy costs were expected to drive trends; management said medical utilization had been lower than in prior periods. This is not a company-wide financial forecast.
- Management estimated its 2014 Health Insurance Provider Fee at approximately $920.0. The fee is nondeductible for federal tax purposes; $230.0 was recorded as Q1 SG&A expense, and final calculation and payment were expected in Q3 2014. The filing notes scheduled increases in the industry-wide fee in later years.
- The effective tax rate rose to 38.8% from 32.0%, primarily because of the nondeductible provider fee. There was also a $3.0 loss on extinguishment of debt related to repurchasing notes.
- The company reported aggregate reasonably possible losses in excess of established reserves of $0 to approximately $250.0 for certain legal proceedings where losses could be estimated; outcomes and exposure in other matters could not be estimated. Significant cases included the Gold demutualization litigation and consolidated out-of-network reimbursement litigation.
- Potential assessments related to the rehabilitation of Penn Treaty could not be estimated and might affect future cash flows and results. Other key risks cited include health-care reform and regulation, exchange enrollment and pricing uncertainty, medical cost trends, government program funding and compliance, litigation, debt ratings, and investment-market conditions.
- Management said available operating cash flow, cash and investments, and borrowing or financing sources were expected to be sufficient for operations and commitments. No full-year earnings or EPS guidance was provided in the filing text.
Important facts for investors to verify
- Whether Commercial and Specialty margins recover, given the sharp year-over-year operating-gain decline and higher SG&A costs.
- Actual 2014 provider-fee expense and payment versus the company’s approximately $920.0 estimate, and the fee’s effect on after-tax earnings.
- Enrollment, pricing adequacy and medical-cost trends, particularly in Local Group, individual, Medicaid and exchange-related business.
- Whether operating cash flow remains strong after considering claims timing, receivables and other working-capital movements.
- Debt, commercial-paper usage, capital returns and regulatory limits on subsidiary distributions; assess the effect of rising debt-to-capital.
- Developments in the legal proceedings and Penn Treaty matter, including any changes to estimated exposure or reserves.