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WellCare Beat Ests., Raises Outlook

Zacks Equity Research

WellCare Health Plans, Inc. (WCG) reported second quarter earnings of $1.24 per share, beating the Zacks Consensus Estimate by a penny but falling significantly from $1.77 earned in the year-ago quarter. Earnings of $54.5 million in the reported quarter plunged almost 29% from $76.7 million recorded in the second quarter of 2011.

The reported quarter experienced higher premium revenue in Medicaid and Medicare Advantage segments, lower medical benefit ratio (:MBR) in Medicare Prescription Drug Plans, and a decline in adjusted administrative expense ratio. However, favorable development of prior years' medical benefits of 95 cents in year ago earnings jeopardized the year-over-year comparison during the quarter.

Including administrative expenses related to government investigations and related litigation of $11.7 million and expenses related to resolution of litigation of $0.8 million, the company reported a net income of $46.4 million or $1.06 per share compared to $69.6 million or $1.61 per share recorded in the prior-year quarter.

Operational Update                    

During the quarter under review, total revenue of WellCare grossed $1.81 billion, surging 21.7% from $1.49 billion in the year-ago quarter on the back of higher premiums. Top line also surpassed the Zacks Consensus Estimate of $1.79 billion.  

Premium revenue during the quarter amounted to $1.8 billion increasing 22% year over year mainly contributed by its segments.

Total expenses for the second quarter amounted to $1.73 billion; swelling 26.4% from the prior-year quarter, primarily due to an increase in medical benefits, administrative expenses and interest expense.

The company’s adjusted administrative expense ratio plunged 100 basis points to 8.2% in the reported quarter, pursuing its constant efforts to have a competitive cost structure.

Total memberships for the company increased 7% to about 2.6 million, primarily due to an increase in memberships in all its segments, partially offset by a decrease in Prescription Drug Plans segment.

Segment Details

WellCare reports its earnings through its two operating segments, namely: Medicaid and Medicare Advantage.

Medicaid Segment reported total premium revenue of $1.09 billion increasing 30.1% over the prior-year quarter. However, its MBR deteriorated 930 basis points to 89.2% over the quarter ended 2011. This was primarily due to the Kentucky program.

Medicare Segment reported total premium revenue of $711.8 million increasing 10.9% over the prior-year quarter. Under this segment the MBR for Medicare Advantage slightly deteriorated by 50 basis points to 83.3% over the quarter ended 2011 and MBR for Prescription Drug Plans improved 640 basis points to 80.4% in the reported quarter.

Financial Position

WellCare exited the second quarter with cash and cash equivalents of $1.15 billion compared to $1.33 billion as on 2011-end. Total assets for the company were valued at $2.69 billion compared to $2.49 billion as on December 31, 2011.

Total debt obligation in the company’s books amounted to $127.5 million, declining from $135 million as on December 31, 2011. As of June 30, WellCare’s stockholders’ equity totaled $1.23 billion versus $1.12 billion as of 2011-end.

Outlook for 2012

WellCare revised its previous guidance. It raised adjusted net income per share expectation to $5.25 and $5.45 from $5.20 and $5.40. The company now expects its premium revenue to be $7.1 billion, increasing from its previous outlook which ranged between an approximate of $7.0 and $7.1 billion. The Prescription Drug Plans segment’s MBR is expected to reduce shifting from its previous guidance where the company expected it to increase.

The company reaffirmed the rest of the guidance wherein the administrative expense ratio is expected to be in the band of 8.7%–8.9% and the MBR of Medicaid and Medicare Advantage segments will increase relative to the respective 2011 segment MBRs.


WellCareentered into a definitive agreement with Humana Inc. (HUM) to buy some of the assets of Arcadian Health Plan, Inc.'s Desert Canyon Community Care Medicare Advantage. If approved by the regulatory bodies, the deal is expected to consummate by the end of this year. No other terms of the deal were disclosed. Per the agreement, starting January 1, next year, members of Desert Canyon in Mohave and Yavapai will become a part of WellCare in the Arizona region.

Other Highlights

Starting October this year, WllCare will be catering to 65 countries in Florida. Also, it will be outdoing any other health plan on being selected by Florida Healthy Kids, pursuant to the state’s Children’s Health Insurance Program (“CHIP”).

The company also increased its footprints in five counties to provide Medicaid managed long-term care service and entered the Florida Long-Term Care Community Diversion Pilot Project in two counties.

Peer Take

The company competes closely with Coventry Health Care Inc. (CVH) that reported second-quarter 2012 operating earnings per share of 68 cents, which surpassed the Zacks Consensus Estimate of 64 cents but was lower than the prior-year earnings of 83 cents. Operating income amounted to $99.4 million in the reported quarter.

Operating revenues in the reported quarter surged 16% year over year to $3.5 billion, at par with the Zacks Consensus Estimate.

Zacks Rank

WellCare carries a Zacks #3 Rank, implying a short-term Hold rating. Its peer, Coventry Health, also shares the same Zacks #3 Rank.

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