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WellPoint Misses by a Penny

Zacks Equity Research

WellPoint Inc. (WLP) reported second-quarter 2012 adjusted income of $2.04 per share, lagging the Zacks Consensus Estimate by a penny but surpassing the year-ago earnings of $1.83 per share.

Including expenses related to the settlement of litigation and acquisition of 1-800 CONTACTS along with net investment gains, the company posted net income of $643.6 million or $1.94 per share in the reported quarter, compared with $701.6 million or $1.89 per share in the second quarter of 2011. The year-ago quarter, however, included net investment gains of 6 cents per share.

Operating revenues for the reported quarter were nearly $15.2 billion, reflecting a 2.0% increase from $14.9 billion in the year-ago quarter. However, revenues marginally lagged the Zacks Consensus Estimate of $15.3 billion. The increase in premium rate designed to cover the 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 1.9% to 33.5 million as of June 30, 2012 from 34.2 million as of June 30, 2011. The decline resulted from a membership fall of 0.59 million and 0.26 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, alterations in the product offerings in the New York small group market and in-group membership attrition due to the present economic scenario.

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 85.4% in the reported quarter, marginally lower than 85.7% in the second quarter of 2011, driven by a decline in the benefit expense ratio of the Senior and Local Group businesses, which were partially offset by higher benefit expense ratio in the State Sponsored segment.

Segment Results

Commercial Business: Operating revenue slipped 3.0% year over year to $8.4 billion in the reported quarter. Operating gains in the segment, however, increased 3.2% year over year to $771.2 million in the quarter, primarily due to lower benefit cost ratio in the Local Group business, partially offset by a decline in Commercial enrollment.

Consumer Business: Operating revenue surged 10.9% year over year to $4.8 billion in the quarter under review. Operating gains in the segment amounted to $211.1 million in the reported quarter, up 19.5% from $176.7 million in the year-ago quarter.

The improvement was primarily due to gains from the Senior business and favorable changes in reserve development, which were partially offset by lower operating gains in the State Sponsored business due to increased medical costs and negative impact from the provisions of the state budget.

Other: Operating revenue in the quarter under review came in at $2.0 billion, up 4.2% year over year. Operating gains in this segment were $9.4 million in the reported quarter, compared with $22.8 million in the year-ago quarter. The 58.8% decline resulted from higher unallocated corporate expenses in the reported quarter.

Financial Update

WellPoint exited the quarter with cash and cash equivalents of $1.95 billion, compared with $2.2 billion as of December 31, 2011. Operating cash flow in the first half of 2012 stood at $1.7 billion, marginally lower than $1.9 billion in the prior-year period. Payment of income tax negatively impacted the cash flows in the second quarter of 2012.

Long-term debt increased to $10.1 billion as of June 30, 2012, from $8.4 billion as of December 31, 2011. Shareholders’ equity increased marginally to $23.6 billion from $23.3 billion, while total assets also increased to $54.5 billion from $52.1 billion at the end of 2011.

Share Repurchase

WellPoint repurchased 7.2 million shares for $493.7 million in the second quarter of 2012. As of June 30, 2012, the company had approximately $3.2 billion worth of authorization remaining under its share repurchase program.

Dividend Update

On July 24, 2012, WellPoint declared a quarterly cash dividend of 28.75 cents per share, payable on September 25, 2012, to the shareholders of record at the close of business on September 10, 2012.

Outlook for Fiscal 2012

WellPoint lowered net income guidance to about $7.30–7.40 per share from $7.84 guided earlier.

Year-end medical enrollment guidance was lowered marginally to 33.4 million from the previous projection of 33.6 million members. The guidance encompasses 20.1 million self-funded members and 13.3 million fully insured members.

Furthermore, WellPoint expects operating revenue of approximately $61.0 billion, down slightly from earlier guidance of $61.2 billion, while operating cash flow guidance stands at $2.7 billion.

In addition, WellPoint expects benefit expense ratio to be approximately 85.5%, higher than the earlier guidance of 85.1%, while SG&A expense ratio is affirmed at 13.9%.

Full-year medical cost trend is expected to be around 7% plus or minus 50 basis points. Additionally, WellPoint intends to spend about $2.9 billion in aggregate on share repurchases and dividend payments in the current year.

Peer Take

UnitedHealth Group Inc. (UNH), a rival of WellPoint, declared second-quarter 2012 earnings of $1.27 per share, up 9% over the year-ago quarter.

Another competitor, Aetna Inc. (AET), will report its second-quarter 2012 results before the opening bell on July 31, 2012.

Zacks Rank

Currently, WellPoint carries a Zacks #4 Rank (short-term Sell rating) and a long-term Neutral recommendation.

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