WellPoint Inc. (WLP) reported third-quarter adjusted income of $1.77 per share, striding ahead of the Zacks Consensus estimate of $1.69 per share. Results were also 1.7% higher from $1.74 earned in the year-ago quarter. Adjusted income declined 9.2% to $636.4 million from $701.2 million in third quarter of 2010. While adjusted earnings declined from year-ago quarter, earning per share rose due to a reduction in share count.
The quarter benefited from improved membership growth and decline in selling, general and administrative (SG&A) expenses.
Including net investment gains of $46.8 million or 13 cents per share, the company reported net income was $683.2 million or $1.90 per share, compared with $739.1 million or $1.84 per share in the third quarter of 2010. The year ago quarter included net investment gains of $37.9 million or 10 cents per share.
Operational Update
Total operating revenues for the reported quarter was nearly $15.2 billion, reflecting a 5.9% increase from the year-ago quarter. Increase in premium designed to cover overall cost trends and membership growth in the Senior and Federal Employee Program (FEP) businesses, partially offset by a decline in fully insured Commercial membership, fueled the overall improvement. Revenue was almost in line with the Zacks Consensus estimate.
WellPoint witnessed a significant jump in medical enrollment, particularly in the national accounts, during the reported quarter, with enrollment of 34.4 million members as on September 30, 2011, an increase of 2.6% from September 30, 2010. Growth of members in the National business, Senior business, Local Group, State Sponsored and FEP membership contributed to the increase in medical enrollment.
WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenue) of 85.1% in the reported quarter as against 83.8% in the third quarter of 2011, driven by higher prior period reserve development and membership growth in the Senior businesses.
Segment Results
Commercial Business: Operating revenue improved 2.0% year over year to $8.7 billion in the quarter.
Operating gains in the segment declined 6.5% year over year to $711.5 million in the third quarter of 2011 due to lower prior period reserve development.
Consumer Business: Operating revenue increased 13.3% year over year to $4.6 billion in the quarter under review.
Operating gains in the segment decreased 6.3% year over year to $245 million in the reported quarter, due to changes in prior period reserve development and higher medical costs in the Senior business.
Other: Operating revenue increased 7.7% year over year to $1.9 billion in the quarter under review.
Operating gains in this segment declined 7.0% year over year to $15.9 million.
Financial Update
WellPoint exited the quarter with cash and cash equivalents of $2.5 billion, compared with $1.8 billion as of 2010 end.
Long term debt increased to $8.6 billion as of third quarter end, form $8.1 billion as of 2010 end.
Operating cash flows in the third quarter was $833.3 million, down from $896.5 million in the year ago period.
Share Repurchase
WellPoint spent $ $897.9 million to buy back 13.4 million shares in the third quarter. As of September 30, 2011, the company had approximately $5 billion worth shares remaining under its repurchase authorization.
Dividend Update
The company, in the third quarter, paid a quarterly dividend of 25 cents per share, representing a distribution of cash totaling $88.2 million.
Also, the company’s board declared a fourth quieter dividend of 25 cents per share to be paid on December 23, 2011, to shareholders of record at the close on December 9, 2011.
Outlook for Fiscal 2011
WellPoint projects operating revenue of approximately $60.1 billion for fiscal 2011, while operating cash flow is expected to be at least $2.9 billion.
Besides, reported earnings are expected to be in the band of $7.18–$7.28 per share, including net investment gains of 28 cents per share. This is an increase from the previous estimate of $6.90–$7.10 per share.
In addition, WellPoint also anticipates year-end 2011 medical enrollment to be approximately 34.2 million members. Besides, benefit expense ratio is expected to be approximately 85.0–85.2% with SG&A expense ratio to be approximately 14.1% including an estimated $50 million of fourth quarter 2011 restructuring costs.
Peer Comparison
Unitedhealth Group Inc. (UNH), which competes with WellPoint, reported third quarter earnings of $1.17 per share, higher than the Zacks Consensus estimate of $1.12. Earnings also compared favorably with $1.14 reported in the prior-year quarter. The out-performance was driven by strong revenue growth from UnitedHealthcare, as well as from the Optum businesses, partially offset by higher medical cost.
The quantitative Zacks # 2 Rank (short-term Buy rating) for WellPoint indicates upward pressure on the stock over the near term.
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