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WellPoint Posts Strong Q3 Earnings on High Membership

Zacks Equity Research

WellPoint Inc. (WLP) reported third-quarter 2014 adjusted income of $2.36 per share, beating the Zacks Consensus Estimate of $2.28. The figure also increased 12.4% from $2.10 per share earned in the year-ago quarter.

This improvement came on the back of increased membership across the Commercial and Government segments. Higher membership is attributable to favorable investments in initiatives that support healthcare affordability and enhance access for customers across the segments. Additionally, WellPoint remains adept in capitalizing on market opportunities and is taking up initiatives to enhance its membership base going forward.

Including net realized gains on investments, other than temporary impairment losses on investments and loss on extinguishment of debt totaling 14 cents in the third quarter of 2014, WellPoint posted net income of $2.22 per share against $2.16 in the third quarter of 2013.

Operating revenues of WellPoint in the reported quarter was $18.4 billion, down from the Zacks Consensus Estimate of $18.7 billion. However, revenues rose 4.3% from the year-ago quarter. The year-over-year improvement resulted from higher membership in the Medicaid, Individual and Commercial self-funded lines of businesses and growth in premiums. However, these were partly offset by lower revenues associated with the State of New York contract conversion to a self-funded arrangement and lower enrollment in the Small Group and Medicare business.

WellPoint’s premium revenues increased 3.9% to $17.2 billion, administrative fees surged 10.4% to $1.1 billion and other revenues rose 3% to $10.3 million, all on a year-over-year basis. Meanwhile, total expenses increased 2.9% to $17.5 billion.

Medical enrollment of WellPoint increased 5.7% to 37.5 million as of Sep 30, 2014, from 35.5 million as of Sep 30, 2013 on higher enrolment in the Commercial & Specialty Business segment. The upside resulted from an improvement in the National, Local Group, and Individual markets. Increased enrollment in the Medicaid and Federal Employee Program (FEP) business also contributed to the improvement. However, a decline in membership in the Medicare business partially offset the positives.

WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenues) of 82.5% in the reported quarter, declining 240 basis points from 84.9% in the third quarter of 2013. Additional premium revenues that help cover new Health Care Reform fees led to an improvement in the Commercial and Specialty Business, which in turn improved the benefit expense ratio.

Segment Results

Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues dropped 0.2% year over year to $9.8 billion in the reported quarter.
Operating gains in the segment, however, increased 28.7% year over year to $915.7 million in the quarter, mainly due to a change in the product portfolio mix that stemmed from implementation of the Health Care Reform.

Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the FEP. Operating revenues increased 10.1% year over year to $8.6 billion in the quarter under review.

Operating gains in the segment, however, decreased 3.6% to $283.9 million in the reported quarter. This decrease was owing to decline in margins at the Medicare segment and an increase in Hepatitis C costs.

Other: This segment comprises the unallocated corporate expenses as well as some businesses which are not covered by the other two segments. Operating revenues in the reported quarter were $6.2 million, down 51.6% year over year.

Operating loss in this segment amounted to $8.3 million, wider than a loss of $5.3 million  in the year-ago quarter.

Financial Update

As of Sep 30, 2014, WellPoint had cash and cash equivalents of $1.7 billion, compared with $1.6 billion as of Dec 31, 2013. Operating cash flow in the first nine months of 2014 amounted to $3.1 billion against $2.8 billion in the first nine months of 2013.

Long-term debt of WellPoint increased to $14.5 billion as of Sep 30, 2014, from $13.6 billion as of Dec 31, 2013. Shareholder equity was $24.3 billion as of Sep 30, 2014, down from $24.8 billion as of Dec 31, 2013, while total assets increased to $62.1 billion from $59.6 billion at the end of 2013.

Share Repurchase

WellPoint repurchased approximately 5.1 million shares for $579 million in the reported quarter, bringing the total share repurchase to $2.7 billion in the first nine months of 2014. As of Sep 30, 2014, the company had approximately $1.0 billion worth of authorization remaining under its share repurchase program.

On Oct 2, 2014, management approved an increase in the share repurchase program by $5 billion, thereby taking the authorization to nearly $6 billion.

Dividend Update

In the reported quarter, WellPoint paid a quarterly cash dividend of 43.75 cents per share. This resulted in a cash distribution of $119.2 million.

On Oct 28, 2014, the Audit Committee of WellPoint declared fourth-quarter dividend of 43.75 cents per share that will be paid on Dec 22, 2014 to shareholders of record as of Dec 5, 2014.

Outlook for 2014

WellPoint expects adjusted net income in 2014 in the range of $8.75–$8.85 per share, consistent with the higher than $8.60 per share guidance provided earlier. The Zacks Consensus Estimate of $8.75 is consistent with the lower end of the guided range.  Including net favorable items worth 8 cents per share in the first nine months, net income for 2014 is now expected between $8.83 and $$8.93 per share, on par with the earlier expectation of net income exceeding $8.81 per share.

The company’s operating revenue guidance stands at $73.25–$73.5 billion, compared with the previous projection of over $73.5 billion.

WellPoint expects Medical enrollment in the range of 37.2–37.3 million, higher than the prior guidance of 37.05–37.15 million. Fully-insured membership is estimated to be 14.60–14.65 million, higher than 14.55–14.60 million guided earlier. Self-funded membership forecast is raised to 22.60–22.65 million from the 22.50–22.55 million range.

WellPoint expects benefit expense ratio in the range of 83.1–83.5%, lower than the previously guidance of 83.2–83.8%, while SG&A ratio outlook is projected in the 15.7–16.1% band, tighter than the 15.5–16.1% guided earlier.
The company expects operating cash flow to exceed $3.3 billion, higher than over $2.7 billion guided earlier. This also represents a year-over-year increase of 6.5%.

Zacks Rank and Other HMOs

WellPoint currently carries a Zacks Rank #3 (Hold). Among other health maintenance organizations (HMOs), UnitedHealth Group Incorporated (UNH) and Aetna Inc. (AET) outperformed the Zacks Consensus Estimate in third-quarter 2014. Meanwhile, Humana Inc. (HUM) is scheduled to report third-quarter results shortly.
 

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