WellPoint Inc. (WLP) reported first-quarter 2012 adjusted income of $2.34 per share, surpassing the Zacks Consensus Estimate of $2.28 per share but a penny lower than the year-ago earnings. Adjusted income declined 11% to $794.1 million from $891.0 million in the first quarter of 2011.
Including net investment gains of $62.4 million or 19 cents per share, the company reported net income of $856.5 million or $2.53 per share in the reported quarter, compared with $926.6 million or $2.44 per share in the first quarter of 2011. The year-ago quarter, however, included net investment gains of $35.6 million or 9 cents per share.
Operating revenues for the reported quarter were nearly $15.2 billion, reflecting a 3.4% increase from $14.7 billion in the year-ago quarter. However, revenues marginally lagged the Zacks Consensus Estimate of $15.4 billion.
The CareMore acquisition contributed $266 million to the quarterly revenue, while an increase in premium designed to cover overall cost trends and membership growth in the Senior business fueled the overall improvement, partially offset by a decline in Local Group membership.
Medical enrollment slipped 1.5% to 33.7 million as of March 31, 2012 from 34.2 million as of March 31, 2011. The decline resulted from membership fall of 0.46 million and 0.28 million in the Local Group and National businesses, respectively, due to changes in the National Accounts’ administrative fee structure, increased competition in some Local Group markets and alterations in the product offerings in the New York small group market.
These declines managed to offset the membership growth in the Senior and State Sponsored businesses. While Senior membership increased on the back of the CareMore acquisition and geographic expansion, growth in State Sponsored enrollment was attributable to expansion of existing programs.
WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenue) of 83.3% in the reported quarter, marginally higher than 82.1% in the first quarter of 2011, driven by higher benefit expense ratio in the State Sponsored segment and lower-than-anticipated Local Group medical cost in the prior-year quarter, which were partially offset by a decline in the benefit expense ratio of the Senior business.
Segment Results
Commercial Business: Operating revenue inched down 0.7% year over year to $8.5 billion in the reported quarter. Operating gains in the segment also declined 11.8% year over year to $991.8 million in the quarter, primarily due to lower medical costs in the Local Group business in the first quarter of 2011.
Consumer Business: Operating revenue increased 12.2% year over year to $4.8 billion in the quarter under review. Operating gains in the segment amounted to $217.7 million in the reported quarter, up 5.8% from $205.8 million in the year-ago quarter.
The improvement was primarily due to lower benefit expense ratio in the Senior business and improved results from the Medicare Advantage products, which were partially offset by higher medical costs in the State Sponsored business and adverse impact from the provisions of the state budget.
Other: Operating revenue in the quarter under review came in at $1.9 billion, up 2.0% year over year. Operating gains in this segment were $3.1 million in the reported quarter, compared with $19.4 million in the year-ago quarter. The 84% decline resulted from higher unallocated corporate expenses in the reported quarter.
Financial Update
WellPoint exited the quarter with cash and cash equivalents of $2.3 billion, compared with $2.2 billion as of March 31, 2011. Cash at the parent company amounted to $1.8 billion as of March 31, 2012. Long-term debt increased to $8.5 billion as of March 31, 2012, from $8.4 billion as of March 31, 2011. Shareholders’ equity increased marginally to $23.5 billion from $23.3 billion, while total assets also increased to $52.5 billion from $52.0 billion at the end of March 2011.
Operating cash flow in the reported quarter stood at $1.2 billion, marginally higher than $1.1 billion in the prior-year quarter. Postponement of receipts worth $160 million from Medi-Cal and Healthy Families programs to the second quarter negatively impacted the cash flow, while an advance receipt of $520 million from the Centers for Medicare and Medicaid Services (CMS) boosted cash flow in the reported quarter.
Share Repurchase
WellPoint repurchased 10.2 million shares for $679.8 million in the first quarter of 2012. As of March 31, 2012, the company had approximately $3.7 billion worth authorization remaining under its repurchase program.
Dividend Update
On March 23, 2012, WellPoint paid an increased cash dividend of 28.75 cents per share to the shareholders of record at the close of business on March 9, 2012. The company’s Board had increased the dividend by 15% on January 24, 2012.
Outlook for Fiscal 2012
WellPoint increased its adjusted earnings per share guidance to $7.65 from the earlier projection of $7.60 per share. Including the net investment gains of 19 cents per share in the reported quarter, net income is expected to be about $7.84 per share.
Year-end medical enrollment guidance was lowered marginally to 33.6 million from the previous projection of 33.7 million members. The guidance encompasses 20.2 million self-funded members and 13.4 million fully insured members.
Besides, WellPoint expects operating revenue of approximately $61.2 billion, down slightly from earlier guidance of $62.1 billion, while operating cash flow guidance was affirmed at $2.9 billion.
In addition, WellPoint also expects benefit expense ratio to be approximately 85.1%, down marginally from the earlier guidance of 85.3%, while SG&A expense ratio is anticipated to be approximately 13.9%, up slightly from the earlier projection of 13.6%.
Peer Take
UnitedHealth Group Inc. (UNH), a rival of WellPoint, declared first-quarter 2012 earnings of $1.31 per share, substantially higher than the Zacks Consensus Estimate of $1.16.
Another competitor, Aetna Inc. (AET), will report its first-quarter 2012 results before the market opens on April 26, 2012.
WellPoint carries a Zacks #4 Rank (short-term Sell rating) and a long-term Neutral recommendation.
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