Business context and reporting period
WellPoint, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provided health benefits and related services, with 37.3 million medical members at quarter-end. Results are presented for continuing operations unless noted. The filing reports the registrant as WellPoint, Inc.; it does not use the Elevance Health name.
Key financial metrics
Amounts are in millions of dollars, except per-share data, percentages, and membership.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $18,230.0 | $17,491.9 | $35,874.8 | $34,927.0 |
| Total revenue | $18,473.4 | $17,690.3 | $36,332.8 | $35,266.3 |
| Net income | $731.1 | $800.1 | $1,432.1 | $1,685.3 |
| Diluted EPS | $2.56 | $2.64 | $4.95 | $5.53 |
| Benefit expense ratio | 82.7% | 83.9% | 82.7% | 83.8% |
| SG&A expense ratio | 15.8% | 13.9% | 16.0% | 13.6% |
| Operating cash flow | Not separately stated for Q2 | $2,458.5 | $1,382.1 |
For the six months, income from continuing operations before tax was $2,393.8 million, versus $2,490.6 million; income tax expense was $971.3 million versus $819.0 million. Effective tax rates were 40.6% and 32.9%, respectively. Q2 continuing-operations pretax income was $1,263.7 million versus $1,208.1 million.
Financial position and liquidity
- At June 30, 2014, cash and cash equivalents were $1,784.6 million; total assets were $62,303.6 million; shareholders’ equity was $24,376.9 million.
- Cash, cash equivalents, and investments, including long-term investments, totaled $24,240.9 million. The company reported $2,070.9 million of cash and investments at the parent company available for general corporate use.
- Balance-sheet debt included $14,547.2 million of long-term debt, including its current portion, and $250.0 million of short-term borrowings. The company separately disclosed $867.1 million outstanding under its commercial paper program; consult the debt note for classification and reconciliation.
- Debt-to-capital was 37.8%, compared with 36.9% at December 31, 2013. The $2.0 billion revolving credit facility had no borrowings at June 30; the commercial paper program authorized up to $2.5 billion.
- Six-month investing cash outflow was $1,527.3 million and financing cash outflow was $732.7 million. Cash increased $197.7 million, ending at $1,784.6 million.
Changes versus the prior comparable period
- Q2 operating revenue rose 4.2%, while net income fell 8.6% and diluted EPS fell 3.0%. For the first half, operating revenue rose 2.7%, while net income fell 15.0% and diluted EPS fell 10.5%.
- Benefit expense ratios improved by 120 basis points in Q2 and 110 basis points for the first half. SG&A ratios worsened by 190 and 240 basis points, respectively, reflecting health reform fees, labor costs, and implementation-related costs.
- Commercial and Specialty operating gain declined 3.0% in Q2 and 18.3% in the first half. Government Business operating gain increased 11.4% and 44.1%, respectively; Medicaid growth and improved medical cost performance supported the segment.
- Medical membership increased 4.5% year over year to 37.272 million. Self-funded membership rose 12.2%; fully insured membership fell 5.4%. Medicaid membership rose 8.4%, while Medicare membership fell 3.6%.
- Operating cash flow increased $1,076.4 million year over year, principally due to claims-processing and premium-receipt timing, including Medicaid receipts. The company cautioned that a significant portion of health reform fees would be paid in Q3.
Outlook, commentary, risks, and unusual items
- No full-year earnings or revenue guidance is stated. Management estimated 2014 cost-of-care trend for its Local Group fully insured business at 6.5%, plus or minus 50 basis points.
- The 2014 non-deductible federal Health Insurance Provider Fee was estimated at approximately $920 million; $460 million was recorded as SG&A expense in the first half, with final calculation and payment expected in Q3. Management cited the fee and continued costs tied to health reform market changes as pressures on earnings and expenses.
- The company completed the sale of 1-800 CONTACTS and related glasses.com assets on January 31, 2014. Discontinued operations contributed $9.6 million net income for the first half of 2014, compared with $13.7 million in the prior-year period.
- First-half share repurchases totaled $2,077.2 million; cash dividends were $243.9 million. The quarterly dividend was $0.4375 per share, up from $0.3750 a year earlier.
- Debt-note repurchases resulted in a $6.0 million first-half loss on extinguishment. The investment portfolio recorded $21.7 million of other-than-temporary impairment losses in first-half earnings, down from $46.9 million a year earlier. Management warned further investment fair-value declines could lead to additional impairment charges.
- Legal matters included the Gold demutualization class action, out-of-network reimbursement litigation, and Blue Cross Blue Shield antitrust litigation. For proceedings where a loss was probable or reasonably possible and estimable, the company reported an aggregate possible-loss range of $0–$250 million in excess of established reserves; it could not estimate potential losses for many matters. Potential assessments related to the Penn Treaty rehabilitation were also unquantified.
- Key risks identified include health reform and exchange-market enrollment or pricing uncertainty, medical cost trends and utilization, government-program regulation and funding, provider contracting, litigation and investigations, investment-market changes, subsidiary dividend restrictions, and substantial indebtedness. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- How much of the sharp first-half operating cash flow increase reflects timing and whether the Q3 health reform fee payment affects cash generation.
- Whether Medicaid growth and improved segment performance continue, and whether Commercial and Specialty margins stabilize amid health reform-related costs and product-mix changes.
- The final 2014 Health Insurance Provider Fee amount and the effect of its non-deductibility on the effective tax rate and earnings.
- Medical-claims reserve development: the first half included $524.7 million of favorable prior-year claims development; assess its effect on reported benefit costs and the reserve estimate.
- Developments in the cited legal matters and any change in reasonably possible losses beyond recorded reserves, as well as potential Penn Treaty assessments.
- Debt and commercial paper classification and maturities, regulatory capital and dividend restrictions, and the continued scale of share repurchases relative to cash generation.