WellPoint, Inc. (now Elevance Health, Inc.) — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 20, 2014. This is an annual report, not a quarterly filing. The company reported under the WellPoint name at the time. Amounts are in U.S. dollars unless noted.
Business context
WellPoint was a large U.S. health benefits company, serving 35.7 million medical members and approximately 67.8 million individuals across its subsidiaries at year-end. Its principal segments were Commercial and Specialty Business, Government Business, and Other. The 2012 Amerigroup acquisition expanded its government-program business; the company agreed to divest 1-800 CONTACTS and glasses.com-related assets in December 2013, completing the sales on January 31, 2014.
Financial results and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $70.191 billion | $60.514 billion | +16.0% |
| Total revenue | $71.024 billion | $61.497 billion | +15.5% |
| Income from continuing operations | $2.634 billion | $2.651 billion | -0.6% |
| Net income | $2.490 billion | $2.656 billion | -6.2% |
| Diluted EPS, continuing operations | $8.67 | $8.17 | +6.1% |
| GAAP diluted EPS | $8.20 | $8.18 | +0.2% |
| Adjusted diluted EPS (non-GAAP) | $8.52 | $7.56 | +12.7% |
| Operating cash flow | $3.052 billion | $2.745 billion | +$307.7 million |
| Medical membership | 35.653 million | 36.130 million | -1.3% |
The benefit expense ratio was 85.1%, down 20 basis points; the SG&A expense ratio was 14.2%, down 10 basis points. Net income was 3.5% of total revenue, compared with 4.3% in 2012. Operating cash flow was 1.2 times net income, versus 1.0 times in 2012.
Commercial and Specialty Business revenue was $38.790 billion and operating gain was $3.093 billion, down 7.4% from 2012. Government Business revenue rose 45.0% to $31.367 billion and operating gain rose to $927.1 million from $341.8 million, principally reflecting Amerigroup. These segment operating-gain measures are company-defined and exclude several corporate-level items.
At December 31, cash and investments, including long-term investments, were $22.396 billion; cash and cash equivalents were $1.582 billion. Total assets were $59.575 billion and shareholders’ equity was $24.765 billion. Long-term debt, including commercial paper, was $14.092 billion, with an additional $400 million of short-term borrowings. The debt-to-capital ratio was 36.9%, above the company’s stated 30%–35% target range. The company reported $379.2 million outstanding under its $2.5 billion commercial-paper program, no borrowings under its $2.0 billion revolving credit facility, and estimated approximately $2.1 billion of subsidiary dividends for 2014. Regulated subsidiaries exceeded applicable risk-based-capital thresholds.
Material changes versus the prior year
- Revenue growth was driven chiefly by the Government Business segment, including the full-year contribution from Amerigroup, and by rate increases and growth in FEP and CareMore. Commercial and Specialty Business revenue was nearly flat, while that segment’s operating gain declined.
- Total medical membership fell 1.3%; fully insured membership declined 3.7%, while self-funded membership increased 0.6%. The company cited competitive pressure, affordability, product changes, and declines in individual, Medicare, and Medicaid membership.
- Net income declined despite higher operating revenue. Factors included lower Commercial and Specialty results, Health Care Reform implementation costs, higher interest expense, debt-extinguishment losses, and the 1-800 CONTACTS disposal loss. Share repurchases reduced diluted shares 6.5%, supporting reported EPS.
- Operating cash flow improved from 2012, while investing cash outflow decreased as there were no subsidiary acquisitions in 2013. Financing cash flow shifted to a net outflow, including debt repayments, share repurchases, and dividends.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific full-year 2014 earnings or EPS guidance. Management estimated Local Group fully insured cost-of-care trend at approximately 6.0% for 2013 and expected medical cost trends to increase by about 50 basis points in 2014. It said early exchange applicant risk characteristics appeared broadly consistent with pricing assumptions, while emphasizing significant uncertainty.
- ACA transition: Exchange implementation issues, delayed or incomplete enrollment information and subsidy payments, adverse selection, uncertain enrollment and acuity, rate restrictions, minimum medical-loss-ratio rules, and new taxes and assessments could affect results. The company estimated its 2014 share of the annual health-insurer fee at at least $900 million; the fee is nondeductible for income-tax purposes.
- Claims and pricing: Profitability depends on estimating claims and setting adequate premiums. Medical claims payable were $6.127 billion at year-end. Management disclosed that alternative moderately adverse assumptions could change the incurred-but-not-paid claims estimate by approximately $146 million for completion factors or $279 million for trend factors.
- Divestiture and other items: The 1-800 CONTACTS discontinued operation recorded a $164.5 million after-tax disposal loss in 2013; discontinued operations overall were a $144.6 million net loss. Debt extinguishment losses were $145.3 million. Investment impairment losses recognized in income were $98.9 million. The company also recorded a $65.0 million tax benefit from a favorable tax election. Adjusted earnings exclude specified items and are non-GAAP.
- Contingencies: For specified legal proceedings where loss was considered probable or reasonably possible and estimable, the company reported an aggregate range of possible losses, in excess of established reserves, of $0–$250 million. Potential Penn Treaty guaranty-association assessments could not be estimated and could be material. The company contested the described litigation; outcomes remained uncertain.
- Other risks: Government reimbursement and contract risks, provider pricing and network access, membership and product mix, investment-market losses, debt and subsidiary-dividend restrictions, cybersecurity and information-system dependence, and compliance with Blue Cross and Blue Shield Association licensing requirements could materially affect results. The company reported effective disclosure controls and internal control over financial reporting; the independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2014 exchange enrollment, member acuity, risk-adjustment and reinsurance recoveries, and premium rates ultimately matched the assumptions used in pricing.
- The realized impact of the estimated $900 million or greater 2014 health-insurer fee and other ACA-related costs, including the extent to which these could be reflected in premiums.
- Subsequent claims development against the $6.127 billion claims payable estimate, including the effect of prior-year reserve redundancies.
- Whether Government Business growth and operating gains can be sustained, and whether Commercial and Specialty membership and margins stabilize.
- Debt reduction, capital returns, regulated-subsidiary dividend capacity, and progress toward the 30%–35% debt-to-capital target.
- Developments in the disclosed litigation and Penn Treaty contingency, and any resulting changes in reserves, assessments, or cash flows.