WellPoint Reports Improved Q1 Earnings

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Well Point, Inc.’s (WLP) first quarter fiscal 2010 earnings of $1.95 per share (excluding special items) surpassed the Zacks Consensus Estimate of $1.66. The company had earned $1.62 (excluding special items) in the year-ago quarter. On a reported basis, the health insurer earned $1.96 per share in the reported quarter as against $1.16 in the year-ago period.

The improved showing was attributable to lower medical costs because of the weak flu season coupled with the improvement in Well Point’s Medicaid plans for low-income Americans. The health insurer stated that it conducted more state-sponsored business and received greater reimbursement for some programs in the reported quarter.

Total operating revenues for the quarter came in at approximately $14.9 billion as opposed to $15.3 billion in the year-ago quarter, down 2.8%. The decrease was primarily attributable to a 2.1% year-over-year decline in premium revenue, which came in at $13.9 billion. The reduction was mainly attributable to lower fully insured enrollment because of the rise in unemployment during 2009.

Other revenue in the reported quarter plummeted 96.2% year-over-year on account of the sale of NextRx subsidiaries by Well Point to Express Scripts (NASDAQ:ESRX) in late 2009.

WellPoint operates through three segments: Commercial Business, Consumer Business, and Other. Operating gains for the Commercial Business segment climbed 8.4% year-over-year to $978.4 million in the reported quarter. The rise was driven by operating improvements in the Local Group business and reflected a mild flu season.

Operating gains for the Consumer Business segment climbed 49.1% year-over-year to $326 million in the quarter. The Other segment suffered an operating loss of $17.7 million as against a gain of $111.6 million in the year-ago quarter. The segment was adversely impacted by the sale of the NextRx subsidiaries in late 2009.

We were disappointed to see a significant decline in medical enrollment. Medical membership came in at approximately 33.8 million as of Mar 31, 2010, which represented a 2.1 % year-over-year decline. However, medical enrollment increased 0.5% sequentially in the first quarter of 2010.

Majority of the decline occurred in the non-Blue business. The business witnessed a reduction of 548,000 members and included the transfer of the health insurer’s UniCare individual and group business in Texas and Illinois to another Blue Cross & Blue Shield carrier at the start of the year. The benefit expense ratio (benefit expenses as a percentage of premium revenue) for the reported quarter came in at 81.8 % as opposed to 82.5 % in the year-ago quarter.

WellPoint re-affirmed its earnings guidance for 2010. The health insurer expects to earn $6.00 per share (excluding special items) in 2010.The Zacks Consensus Estimate for 2010 is $6.16.

Operating revenue for 2010 is now projected be around $58.5 billion as against the earlier projection of approximately $59 billion. The company has lowered its forecast for medical enrollment at the end of 2010. Medical membership at the end of 2010 is projected to be 33.1 million members as opposed to earlier projection of 33.3 million members.

The benefit expense ratio is expected to come in at approximately 84.3% in 2010 as against 82.6% in 2009. The selling, general, and administrative (SG&A) expense ratio (SG&A expenses as a percentage of premiums, administrative services fees and other revenue) is projected at 14.6% for fiscal 2010 as opposed to 15.9% in 2009. The company projects operating cash flow in 2010 at $1.1 billion.

Our Recommendation
Currently we are Neutral on WellPoint. Our long-term Neutral recommendation indicates that it is expected to perform in line with the broader U.S. equity market over the next six to twelve months. We advise investors to retain the stock over this time period.