WellPoint Profit Beats Estimates, Shares Rise

July 25, 2008

Health insurer WellPoint Inc said on Wednesday profit fell 10 percent, as medical costs ate further into premiums, but its shares rose more than 6 percent as results beat projections, helped by strength in its pharmacy and behavioral health businesses.

Although the largest U.S. health insurer by membership tempered its full-year profit and enrollment forecasts, it appeared to avoid any major negative surprises in its report, amid a brutal year for health insurer stocks.

“Value investors that want to own these names probably have more comfort now than they did last week,” said Stifel Nicolaus analyst Thomas Carroll, noting that investors may not be expecting any more bad news from the companies regarding 2008 results.

Health insurer shares that had fallen to historically low valuations rallied for a second-straight day. On Tuesday, UnitedHealth Group Inc kicked off the group’s reporting season and also beat expectations.

“The managed care group is now 2 for 2,” said Oppenheimer & Co analyst Carl McDonald in a research note. “It’s been a long time since the group got off to such a strong start relative to expectations.”

Second-quarter net income fell to $750.5 million, or $1.44 per share, from $835.2 million, or $1.35 per share, a year earlier when there were more shares outstanding.

Results were 8 cents ahead of the average analyst estimate, according to Reuters Estimates. Revenue rose 2.9 percent to $14.3 billion.

LESS IMPRESSIVE

Stifel’s Carroll said the beat was less impressive in part because WellPoint didn’t set its own expectations for the quarter.

“Given the very low sentiment in managed care right now, I think that the expectations that were out there were most likely understated,” Carroll said.

Goldman Sachs analyst Matthew Borsch said results were boosted by strong performance in WellPoint’s segment that includes its pharmacy and behavioral health businesses. Operating gain for that segment rose 50 percent to $139.9 million.

WellPoint’s benefit expense ratio, which measures the percent of premiums spent on medical costs, worsened to 83.3 percent from 81.8 percent a year ago, on high costs in its Medicare plans for seniors and plans serving mid-size businesses.

The weakening U.S. economy has hurt WellPoint’s membership and revenue as employers pare benefit offerings or choose cheaper plans with leaner coverage. Tough competition has also led WellPoint to lose enrollment.

Enrollment at the end of the quarter stood at 35.3 million, up 1.5 percent from a year ago, but down 0.3 percent from the first quarter. The decline stemmed mainly from WellPoint’s withdrawal from the Ohio Medicaid program for low-income Americans, the company said.

Its membership for which it assumes full insurance risk fell 3.3 percent to about 16.8 million from a year ago. That type of membership is particularly lucrative for health insurers.

The company expects total year-end enrollment of about 35.1 million, down from its prior forecast of 35.3 million.

WellPoint projected full-year net income in the range of $5.42 to $5.57 per share, including net realized investment losses of 6 cents. Previously, the top end of the range was $5.67.

Analysts expect $5.47 for full-year profit.

WellPoint earlier this year had already twice reduced its initial expectations for 2008 profit.

Through Tuesday, WellPoint shares had slumped 44 percent this year, worse than a 39 percent drop for the Morgan Stanley Healthcare Payor index <.HMO>.

WellPoint shares rose $3.12, or 6.4 percent, to $51.87 in morning trading on the New York Stock Exchange.

(Reporting by Lewis Krauskopf; Editing by Brian Moss and Lisa Von Ahn)

Reviewed by Ramaz Mitaishvili, MD
 

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