WellPoint Inc. (WLP) reported second-quarter 2014 adjusted income of $2.44 per share, beating the Zacks Consensus Estimate of $2.28. However, the figure declined 6.2% from $2.60 per share earned in the year-ago quarter.
Higher expenses, along with deterioration in the Commercial & Specialty Business and Other segment, mainly led to the year-over-year fall.
Including net realized gains on investments, other than temporary impairment losses on investments and loss on extinguishment of debt of 12 cents, WellPoint posted net income of $2.56 per share in the reported quarter against $2.64 per share in the second quarter of 2013. The year-ago quarter included net investment gains of nearly 4 cents per share.
Operating revenues of WellPoint in the reported quarter was $18.2 billion, in line with the Zacks Consensus Estimate. However, revenues rose 4.2% from the year-ago quarter. The improvement resulted from higher membership in the Medicaid, Individual and Commercial self-funded lines of businesses and growth in premiums. However, these were partly offset by lower revenues associated with the State of New York contract conversion to a self-funded arrangement and lower enrollment in the Small Group and Medicare business.
WellPoint’s premium revenues increased 3.5% year over year to $17.1 billion, administrative fees rose 16.5% to $1.2 billion while other revenues declined 8.7% to $9.5 million. Meanwhile, total expenses increased 4.4% to $17.2 billion.
Medical enrollment of WellPoint increased 4.5% to 37.3 million as of Jun 30, 2014, from 35.7 million as of Jun 30, 2013 on higher enrolment in the Commercial and Specialty Business segment. The upside resulted from an improvement in the National, Local Group, and Individual markets. Increased enrollment in the Medicaid and FEP business also contributed to the improvement. However, a decline in membership in the Medicare business partially offset the positives.
WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenues) of 82.7% in the reported quarter, declining 120 basis points from 83.9% in the second quarter of 2013. Additional premium revenues led to an improvement in the Commercial and Specialty Business, which in turn improved the benefit expense ratio.
Segment Results
Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues increased 1.7% year over year to $9.97 billion in the reported quarter.
Operating gains in the segment, however, declined 3% year over year to $919.6 million in the quarter, mainly due to higher expenses to accommodate changes related to the ACA implementation.
Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program (FEP). Operating revenues climbed 7.4% year over year to $8.3 billion in the quarter under review.
Operating gains in the segment came in at $313.5 million in the reported quarter, comparing favorably with $281.3 million in the year-ago quarter. Growth in operating cost efficiency and better Medicaid business results mainly led to the upside.
Other: This segment comprises the unallocated corporate expenses as well as some businesses which are not covered by the other two segments. Operating revenues in the reported quarter were $5.7 million, up 9.6% year over year.
Operating loss in this segment amounted to $10.2 million, wider than $6.1 million loss posted in the year-ago quarter.
Financial Update
As of Jun 30, 2014, WellPoint had cash and cash equivalents of $1.8 billion, compared with $1.6 billion as of Dec 31, 2013. Operating cash flow in the first six months of 2014 amounted to $2.5 billion, as against $1.4 billion in the first six months of 2013.
Long-term debt of WellPoint increased to $14 billion as of Jun 30, 2014, from $13.6 billion as of Dec 31, 2013. Shareholder equity was $24.4 billion as of Jun 30, 2014, down from $24.8 billion as of Dec 31, 2013, while total assets increased to $62.3 billion from $59.6 billion at the end of 2013.
Share Repurchase
WellPoint repurchased more than 8.2 million shares for $814 million in the reported quarter, bringing the year-to-date share repurchase to $2.1 billion. As of Jun 30, 2014, the company had approximately $1.6 billion worth of authorization remaining under its share repurchase program.
Dividend Update
During the reported quarter, WellPoint paid a quarterly cash dividend of 43.75 cents per share. This resulted in a cash distribution of $120.5 million.
On Jul 29, 2014, the Audit Committee of WellPoint declared third-quarter dividend of 43.75 cents per share that will be paid on Sep 25, 2014 to shareholders of record as of Sep 10, 2014.
Outlook for 2014
WellPoint expects adjusted net income in 2014 to exceed $8.60, higher than $8.40 per share guided earlier. The Zacks Consensus Estimate of $8.58 is lower than the company’s guided figure. Including net favorable items worth 21 cents per share in the first six months, net income for 2014 is now expected to exceed $8.81 per share, higher than the previous guidance of over $8.50 per share.
The company reiterated its operating revenue guidance of over $73.5 billion.
WellPoint expects Medical enrollment to be in the range of 37.05–37.15 million, higher than the earlier guidance of 36.95–37.05 million. Fully-insured membership is estimated to be 14.55–14.60 million, higher than the previous guided range of 14.50–14.55 million while self-funded membership forecast is raised to 22.50–22.55 million from 22.45–22.50 million range.
WellPoint expects benefit expense ratio to be in the range of 83.2–83.8%, lower than the previously guided range of 83.4–90.0% while SG&A ratio outlook is in the 15.5–16.1% band.
The company expects operating cash flow to exceed $2.7 billion, higher than over $2.4 billion guided earlier. However, this is lower than $3.1 billion reported in 2013.
Zacks Rank and Other HMOs
WellPoint currently carries a Zacks Rank #3 (Hold). Among other health maintenance organizations (HMOs), Aetna Inc. (AET) outperformed the Zacks Consensus Estimate in second-quarter 2014 while Humana Inc. (HUM) posted second-quarter earnings that were in line with the Zacks Consensus Estimate. Another company in the same sector, Molina Healthcare Inc. (MOH), is scheduled to release second-quarter 2014 earnings today after the market closes. While Molina Healthcare sports a Zacks Rank #1 (Strong Buy), Aetna has a Zacks Rank #2 (Buy).
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