WellPoint Profit Tops View; Backs 2010 Forecast

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Health benefits company WellPoint Inc. (WLP) reported Wednesday a higher first-quarter profit, reflecting lower benefit expenses due mainly to a less severe flu season, even though operating revenues were dragged down by lower memberships.

On an adjusted basis, quarterly earnings surpassed market projections. Further, the Indianapolis, Indiana-based company maintained its fiscal 2010 earnings forecast, but trimmed the revenue view.

First-quarter net income was $876.8 million or $1.96 per share, compared to $580.4 million or $1.16 per share last year.

The latest quarter results included net investment gains of $18.6 million or $0.04 per share, partially offset by an intangible asset impairment charge of $13.7 million or $0.03 per share. The company's prior year's results included net investment losses of $228.4 million or $0.46 per share.

Excluding items, first-quarter 2010 net income was $871.9 million, up 7.8% from last year's $808.8 million, due in part to a less severe flu season than expected, the company said.

On a per share basis, adjusted net income grew to $1.95 from $1.62 in the prior-year quarter. On average, 19 analysts polled by Thomson Reuters expected the company to report earnings of $1.66 per share for the quarter. Analysts' estimates typically exclude special items.

Total operating revenue declined 2.8% to $14.87 billion from $15.30 billion in the same quarter a year earlier. Total revenues edged down 0.3% to $15.10 billion from $15.14 billion in the prior year quarter, yet beat sixteen Wall Street analysts' consensus estimate of $14.72 billion.

Segment-wise, Commercial Business generated revenues of $9.10 billion, down 2.8% from last year's $9.37 billion. Revenues from Consumer Business dropped 0.6% to $4.01 billion, and revenues from other businesses fell 7.6% to $1.75 billion.

Premium revenue declined 2.1% year-over-year to $13.91 billion, primarily due to the decline in fully insured membership that was mainly attributable to the rise in unemployment during 2009. Meanwhile, administrative fees grew 1.2% to $952.9 million.

In the quarter, total operating gain rose 4.4% to $1.29 billion from prior year's $1.23 billion, and operating margin improved 60 basis points to 8.7% from 8.1% last year.

Operating gain for the Commercial Business went up 8.4% to $978.4 million, driven by operating improvements in Local Group and reflected a less severe flu season than expected.

In Consumer Business, operating gain climbed 49.1% to $326.0 million. Within this business, results for the company's State Sponsored business improved due to operational changes, increased reimbursement levels for certain programs and a less severe flu season.

Total expenses in the quarter dropped 3.4% to $13.76 billion, mainly reflecting decline in benefit expense and selling, general and administrative expenses, as well as the absence of cost of drugs.

The benefit expense ratio was 81.8% in the first quarter of 2010, down 70 basis points from 82.5% in 2009.

As of March 31, 2010, WellPoint's medical enrollment was 33.84 million members, a decrease of 2.1% from prior year's 34.56 million, mainly due to decline in the non-Blue business, which experienced a reduction of 548,000 members. Medical enrollment increased by 165,000 members or 0.5% in the quarter, driven by market share gains in National Accounts and BlueCard business, as well as growth in Federal Employees Program and Senior business.

Commenting on the results, Angela Braly, chair, president and chief executive officer, said, "We are pleased with our membership growth in the first quarter, which was higher than we anticipated. We have grown significantly in the National Accounts market this year, reflecting that large customers continue to be attracted to WellPoint's broad and cost-effective provider networks, leading products and initiatives, and reliable customer service."

In its sequential fourth quarter, WellPoint reported a surge in profit to $2.742 billion or $5.95 per share from $331.4 million or $0.65 per share in the previous year, helped by about $2.2 billion, or $4.79 per share gain, mainly from the sale of its NextRx pharmacy benefit management subsidiaries to Express Scripts, Inc. (ESRX). Meanwhile, adjusted net income for the fourth quarter dropped to $536 million or $1.16 per share from $681.9 million or $1.34 per share in the prior year. Total revenues increased over 26% to $19.047 billion, while total operating revenue slipped to $15.057 billion from last year's $15.426 billion, mainly due to lower fully insured enrollment in 2009.

Among other health benefits companies, Humana Inc. (HUM) Monday reported a 25.8% rise in its first-quarter profit, driven by the strength of the Government Segment and a gain from prior-period medical claims reserves. In the first quarter, the company's net income increased to $258.77 million or $1.52 per share from $205.72 million or $1.22 per share in the previous year. Consolidated revenues rose 9.5% in the quarter to $8.44 billion from $7.71 billion a year ago.

Minnetonka, Minnesota-based UnitedHealth Group Inc. (UNH) has posted higher profit for the first quarter, reflecting a better-than-projected membership and services growth, and effective cost management across its businesses. The Minnetonka, Minnesota-based company's first-quarter net income was $1.19 billion or $1.03 per share, compared to $984 million or $0.81 per share in the year-ago quarter. Quarterly revenues totaled $23.2 billion, higher than the previous year's $22.0 billion.

Hartford, Connecticut-based Aetna Inc. (AET) is set to announce its first-quarter results on Thursday, April 29. Analysts are of the view that the company will earn $0.70 per share for the quarter, with estimates ranging between $0.52 and $0.79 per share, on revenues of $8.59 billion.

Another peer, Philadelphia, Pennsylvania-based Cigna Corp. (CI) is scheduled to announce its results for the first quarter on May 6. Wall Street analysts forecast earnings of $0.90 per share with revenue estimate of $4.92 billion.

Looking ahead, WellPoint said it sill expects fiscal 2010 net income to be at least $6.00 per share, including the first quarter net investment gains of $0.04 per share, partially offset by the first quarter intangible asset impairment charge of $0.03 per share.

Operating revenue for the full year is now expected to total approximately $58.5 billion. Earlier, the company expected fiscal 2010 operating revenue to be about $59.0 billion.

Analysts expect the company to earn $6.14 per share for the year, with estimates ranging between $5.70 and $6.30 per share, on revenues of $58.84 billion.

WellPoint said it projects the Commercial segment operating margin to decline over the balance of 2010, mainly due to the seasonality of its product designs.

The company continues to expect full year benefit expense ratio to be approximately 84.3%, and operating cash flow to be about $1.1 billion. Year-end medical enrollment is now expected to be approximately 33.1 million members.

Benefit expense ratio is expected to rise over the balance of 2010 due primarily to the seasonality of Local Group and Individual product designs as more members fulfill deductibles towards the end of the calendar year, the company noted.

WLP closed Tuesday's regular trading session at $55.92, down $0.64, on a volume of 6.2 million shares. In the past 52 weeks, shares have been trading in a broad range of $40.02 to $70.00.

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