WellPoint Posts Profit Drop

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Indianapolis-based WellPoint Inc. (NYSE: WLP) is reporting fourth quarter net income of $148.2 million, compared to $464.2 million during the same period a year ago. The company attributes much of the decrease to charges related to its pending sale of 1-800 CONTACTS. January 29, 2014

News Release

INDIANAPOLIS, Ind. - WellPoint, Inc. (NYSE: WLP) today announced that fourth quarter 2013 net income was $148.2 million, or $0.49 per share. These results included net costs of approximately $0.38 per share, reflecting an impairment charge related to the pending 1-800 CONTACTS transaction, partially offset by net investment gains. Net income in the fourth quarter of 2012 was $464.2 million, or $1.51 per share, and included net income of $0.48 per share, reflecting a favorable income tax settlement and net investment gains, partially offset by acquisition-related costs.

Excluding the items noted in each period, adjusted net income was $0.87 per share in the fourth quarter of 2013, a decrease of 15.5 percent compared with adjusted net income of $1.03 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”).

Full year 2013 net income totaled approximately $2.5 billion, or $8.20 per share, including net costs of $0.32 per share from certain items. Full year 2012 net income was approximately $2.7 billion, or $8.18 per share, including net income of $0.62 per share from certain items. Excluding the items noted in each period, adjusted net income was $8.52 per share for the full year of 2013, an increase of 12.7 percent from $7.56 per share in 2012 (refer to GAAP Reconciliation table).

"We are pleased with our performance in 2013, which came in stronger than we expected even as we prepared for the implementation of the Affordable Care Act. We are encouraged by the trajectory of our membership, as we grew sequentially during the fourth quarter and expect to add over a million new customers in 2014. Our associates continue to work diligently to assist members during this dynamic period, and we are optimistic about the opportunity we have to serve a growing part of the marketplace," said Joseph Swedish, chief executive officer.

"As previously disclosed, our 2013 earnings per share grew by nearly 13 percent on an adjusted basis to $8.52. Our results were also supported by strong operating cash flow of approximately $3.1 billion, or 1.2 times net income," said Wayne DeVeydt, executive vice president and chief financial officer. "Looking ahead, we currently project EPS above $8.00 for 2014. We also plan to continue investing in our businesses and deploying capital through our share repurchase and dividend programs."

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled approximately 35.7 million members at December 31, 2013, a decrease of 477,000 members, or 1.3 percent, from 36.1 million at December 31, 2012. Commercial enrollment decreased by 234,000, as attrition in the National and Individual markets was partially offset by growth in Local Group business. Membership in the Medicaid and Medicare businesses declined by 142,000 and 108,000, respectively.

Medical enrollment grew sequentially during the fourth quarter of 2013, by 145,000, or 0.4 percent. The increase reflected membership gains in the Local Group business and California Medicaid programs, partially offset by declines in the Individual and National businesses.

Operating Revenue: Operating revenue exceeded $17.6 billion in the fourth quarter of 2013, an increase of approximately $2.5 billion, or 16.3 percent, compared with approximately $15.2 billion in the prior year quarter. The increase was driven by the inclusion of Amerigroup business for the entire fourth quarter in 2013. Operating revenue in the Commercial & Specialty segment also increased from the prior year quarter. The increases in Amerigroup and Commercial revenue were partially offset by lower Medicare revenue due to the decline in membership.

Benefit Expense Ratio: The benefit expense ratio was 87.8 percent in the fourth quarter of 2013, an increase of 50 basis points from 87.3 percent in the prior year quarter. The increase occurred in the Commercial & Specialty segment and was partially offset by an improvement in the Government segment. The increase in the Commercial & Specialty segment ratio reflected higher utilization in Individual products in advance of Affordable Care Act (“ACA”) implementation. The ratio for Local Group business also increased, as expected, since medical cost experience was lower than anticipated during the fourth quarter of 2012. The improvement in the Government segment ratio was driven by the Company’s Medicare Advantage product repositioning initiatives and improvements in the California Medicaid business.

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

Medical Cost Trend: For the full year 2013, underlying Local Group medical cost trend was approximately 6 percent. The Company anticipates that medical cost trends will increase by approximately 50 basis points in 2014.

Days in Claims Payable: Days in Claims Payable (“DCP”) was 38.7 days as of December 31, 2013, a decrease of 1.3 days from 40.0 days as of September 30, 2013. The decline was due primarily to a seasonal increase in benefit expense, partially offset by a sequential rise in medical claims payable.

SG&A Expense Ratio: The SG&A expense ratio was 15.0 percent in the fourth quarter of 2013, a decrease of 70 basis points from 15.7 percent in the fourth quarter of 2012. The decrease was driven by the inclusion of Amerigroup business for the entire fourth quarter in 2013, as this business carries a lower average SG&A expense ratio than the consolidated Company average. The decrease from Amerigroup was partially offset by higher investment spending during the current year quarter in preparation for ACA implementation and other growth opportunities.

Operating Cash Flow: Operating cash flow was $272.8 million, or 1.8 times net income, in the fourth quarter of 2013. For the full year 2013, operating cash flow totaled approximately $3.1 billion, or 1.2 times net income.

Share Repurchase Program: During the fourth quarter of 2013, the Company repurchased 5.1 million shares of its common stock for $449.8 million. For the full year 2013, the Company repurchased 20.7 million shares of stock, or 6.8 percent of the shares outstanding as of December 31, 2012, for approximately $1.6 billion, or a weighted-average price of $78.08. As of December 31, 2013, the Company had approximately $3.7 billion of Board-approved share repurchase authorization remaining.

Cash Dividend: During the fourth quarter of 2013, the Company paid a quarterly dividend of $0.375 per share, representing a distribution of cash totaling $110.5 million. For the full year 2013, cash dividend payments totaled $448.0 million.

On January 28, 2014, the Board of Directors increased the Company’s dividend by 16.7 percent and declared a first quarter 2014 dividend to shareholders of $0.4375 per share. On an annualized basis, this equates to a dividend of $1.75 per share, or a yield of approximately 2 percent. The first quarter dividend is payable on March 25, 2014, to shareholders of record at the close of business on March 10, 2014.

Investment Portfolio & Capital Position: During the fourth quarter of 2013, the Company recorded net realized gains on investments totaling $105.5 million, partially offset by other-than-temporary impairments totaling $25.8 million. During the fourth quarter of 2012, the Company recorded net realized gains on investments totaling $102.9 million, partially offset by other-than-temporary impairments totaling $17.2 million.

As of December 31, 2013, the Company’s net unrealiz