WellPoint Earnings Tick Downward

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Indianapolis-based WellPoint Inc. (NYSE: WLP) is reporting third quarter net income of $656 million, compared to $691 million during the same period a year ago. Chief Executive Officer Joseph Swedish says the company is raising its guidance and is encouraged by results in commercial and government segments. October 23, 2013

News Release

INDIANAPOLIS - WellPoint, Inc. (NYSE: WLP) today announced that third quarter 2013 net income was $656.2 million, or $2.16 per share. These results included net income of $0.06 per share, reflecting a favorable tax election and net investment gains, which were partially offset by expenses related to the early retirement of debt. Net income in the third quarter of 2012 was $691.2 million, or $2.15 per share, and included net income of $0.06 per share, reflecting net investment gains partially offset by acquisition-related costs.

Excluding the items noted in each period, adjusted net income was $2.10 per share in the third quarter of 2013, an increase of 0.5 percent compared with adjusted net income of $2.09 per share in the prior year quarter (refer to GAAP reconciliation table for a reconciliation to the most directly comparable measure calculated in accordance with U.S. generally accepted accounting principles, or “GAAP”).

"I am pleased to report another solid quarter for WellPoint, and a continuation of the positive business momentum we've developed across the organization. I am encouraged by the results in both our Commercial and Government segments in this dynamic marketplace. Today we are raising our 2013 membership and EPS guidance, reflecting our strong performance, our continued preparation and the outlook for coming market changes under the Affordable Care Act," said Joseph Swedish, chief executive officer.

"Our third quarter results were driven primarily by lower than anticipated medical cost experience as well as favorable membership and revenue. Our results were also supported by strong operating cash flow generation," said Wayne DeVeydt, executive vice president and chief financial officer. "Year-to-date through September 30, 2013, we have repurchased five percent of the shares outstanding at year-end 2012 for $1.2 billion. The Board of Directors increased our share repurchase authorization by $3.5 billion during the third quarter, signaling their confidence in our ability to continue deploying capital appropriately while pursuing growth opportunities across our business segments."

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled 35.5 million members at September 30, 2013, an increase of 2.0 million members, or 6.0 percent, from 33.5 million at September 30, 2012. Medicaid membership increased by more than 2.4 million members due to the acquisition of Amerigroup in the fourth quarter of 2012. The increase in Medicaid enrollment was partially offset by declines of 365,000 and 61,000 members in the Commercial and Medicare businesses, respectively.

Medical enrollment decreased sequentially by 158,000 members, or 0.4 percent, during the third quarter of 2013, primarily in the Medicaid business. This was due to the transition of the Healthy Families program to Medi-Cal in California and the expiration of the Company’s Medicaid contract in Ohio.

Operating Revenue: Operating revenue totaled $17.7 billion in the third quarter of 2013, an increase of $2.6 billion, or 17.2 percent, compared with approximately $15.1 billion in the prior year quarter. The increase was driven by the inclusion of Amerigroup business in the third quarter of 2013. The increase from Amerigroup was partially offset by lower Medicare revenue due to the decline in membership. Operating revenue in the Commercial segment increased slightly compared with the prior year quarter.

Benefit Expense Ratio: The benefit expense ratio was 84.9 percent in the third quarter of 2013, a decrease of 50 basis points from 85.4 percent in the prior year quarter, primarily due to improvements in the Medicare business. The Company also experienced modest declines in the ratios for its Commercial business and its California Medicaid operations. These improvements were partially offset by the inclusion of Amerigroup business in the current year quarter, as this business carries a higher average benefit expense ratio than the consolidated Company average, and increased benefit expense in the cost-plus Federal Employee Program (“FEP”).

Medical claims reserves established at December 31, 2012, developed in-line with the Company’s expectation during the first nine months of 2013.

Medical Cost Trend: The Company now expects that underlying Local Group medical cost trend will be in the range of 6.0 percent, plus or minus 50 basis points, for the full year 2013. Unit cost increases and utilization have been lower than anticipated through the first nine months of 2013.

Days in Claims Payable: Days in Claims Payable (“DCP”) was 40.0 days as of September 30, 2013, a decrease of 0.5 days from 40.5 days as of June 30, 2013. The decline was due primarily to changes in the timing of claims payments between periods.

SG&A Expense Ratio: The SG&A expense ratio was 14.5 percent in the third quarter of 2013, an increase of 80 basis points from 13.7 percent in the third quarter of 2012. The increase reflected higher investment spending during the current year quarter in preparation for coming growth opportunities, and increased incentive compensation expense. These impacts were partially offset by the inclusion of Amerigroup business in the current period, as this business carries a lower average SG&A expense ratio than the consolidated Company average.

Operating Cash Flow: Operating cash flow totaled approximately $1.4 billion, or 2.1 times net income in the third quarter of 2013, and approximately $2.8 billion, or 1.2 times net income, for the first nine months of 2013.

Share Repurchase Program: During the third quarter of 2013, the Company repurchased nearly 6.5 million shares of its common stock for $554.9 million. Through the first nine months of 2013, the Company repurchased 15.6 million shares of stock, or 5.1 percent of the shares outstanding as of December 31, 2012, for approximately $1.2 billion, or a weighted-average price of $74.86. As of September 30, 2013, the Company had approximately $4.2 billion of Board-approved share repurchase authorization remaining.

Cash Dividend: During the third quarter of 2013, the Company paid a quarterly dividend of $0.375 per share, representing a distribution of cash totaling $111.4 million. On October 22, 2013, the Board of Directors declared a quarterly dividend to shareholders for the fourth quarter of 2013 of $0.375 per share. The fourth quarter dividend is payable on December 23, 2013, to shareholders of record at the close of business on December 9, 2013.

Investment Portfolio & Capital Position: During the third quarter of 2013, the Company recorded net investment gains of $69.2 million pre-tax, consisting of net realized gains from the sale of securities totaling $95.4 million, partially offset by other-than-temporary impairments totaling $26.2 million. During the third quarter of 2012, the Company recorded net investment gains of $50.8 million pre-tax, consisting of net realized gains from the sale of securities totaling $54.6 million, partially offset by other-than-temporary impairments totaling $3.8 million.

As of September 30, 2013, the Company’s net unrealized gain position in the investment portfolio was $726.3 million, consisting of net unrealized gains on equity and fixed maturity securities totaling $464.7 million and $261.6 million, respectively. As of September 30, 2013, cash and investments at the parent company totaled approximately $1.7 billion.

Loss on extinguishment of debt: During the third quarter of 2013, the Company repurchased $1.1 billion aggregate principal amount of outstanding notes. The early retirement of t