WellPoint Profit Slips

Posted: Updated:

Indianapolis-based WellPoint Inc. (NYSE: WLP) is reporting second quarter net income of $731 million, compared to $800 million during the same period a year ago. Chief Executive Officer Joseph Swedish says, despite the decrease, he is optimistic about future growth in the health benefits company's commercial and government segments. July 30, 2014

News Release

INDIANAPOLIS, Ind. - WellPoint, Inc. (NYSE: WLP) today announced that second quarter 2014 net income was $731.1 million, or $2.56 per share. These results included net gains of approximately $0.12 per share. Net income in the second quarter of 2013 was $800.1 million, or $2.64 per share, which included net gains of approximately $0.04 per share.

Excluding the items noted in each period, adjusted net income was $2.44 per share in the second quarter of 2014, a decrease of 6.2 percent compared with adjusted net income of $2.60 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”).

"Our strong second quarter results and growing customer base demonstrate the value of our focus on improving healthcare affordability, access, and quality in an evolving market. We are encouraged by our progress in 2014 and optimistic about our future growth opportunities across our Commercial and Government segments." said Joseph Swedish, president and chief executive officer.

“Second quarter adjusted earnings per share of $2.44 reflected strong contributions from both of our business segments and we are pleased with 2014 results year to date,” said Wayne DeVeydt, executive vice president and chief financial officer. “Looking ahead, we now project adjusted earnings per share to be greater than $8.60 for 2014, reflecting stronger enrollment and continued cost controls underlying our ability to offer attractive products to consumers and their families.”

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled approximately 37.3 million members at June 30, 2014, an increase of approximately 1.6 million members, or 4.5 percent, from 35.7 million at June 30, 2013. Commercial and Specialty enrollment increased by 1.3 million members as the company experienced growth in the Local Group, National, and Individual markets. Enrollment also grew in the Medicaid and FEP business by 373,000 and 5,000, respectively, partially offset by a decline in the Medicare business of 51,000.

Medical enrollment increased by 328,000 members, or 0.9 percent, sequentially during the second quarter of 2014, primarily due to enrollment gains in the Medicaid and Individual businesses, partially offset by a decline in enrollment in the Local Group and National businesses.

Operating Revenue: Operating revenue exceeded $18.2 billion in the second quarter of 2014, an increase of approximately $738 million, or 4.2 percent, compared with approximately $17.5 billion in the prior year quarter. The growth in revenue reflected premium increases to cover overall cost trends and new fees associated with Health Care Reform, as well as higher enrollment in the Medicaid, Individual and Commercial self-funded businesses. These increases were partially offset by a decline in revenues due to the State of New York contract conversion to a self-funded arrangement, as previously disclosed, and a decline in Small Group and Medicare enrollment.

Benefit Expense Ratio: The benefit expense ratio was 82.7 percent in the second quarter of 2014, a decrease of 120 basis points from 83.9 percent in the prior year quarter. The decline was largely driven by an improvement in the Commercial and Specialty Business predominantly due to the impact of additional premium revenue which helps cover new Health Care Reform fees, partially offset by the change in the mix of the product portfolio, predominantly due to the implementation of Health Care Reform product offerings.

Medical claims reserves established at December 31, 2013, developed modestly better than the Company’s expectation during the first six months of 2014.

Medical Cost Trend: For the full year 2014, the Company continues to expect that underlying Local Group medical cost trend will be in the range of 6.5 percent plus or minus 50 basis points.

Days in Claims Payable: Days in Claims Payable (“DCP”) was 44.8 days as of June 30, 2014, an increase of 0.6 days from 44.2 days as of March 31, 2014 and 6.1 days from 38.7 days as of December 31, 2013. The increase was due primarily to an increase in medical claim reserves associated with our Individual business.

SG&A Expense Ratio: The SG&A expense ratio was 15.8 percent in the second quarter of 2014, an increase of 190 basis points from 13.9 percent in the second quarter of 2013. The increase was driven by new fees related to Health Care Reform effective January 1, 2014 and continued spending in connection with the Health Care Reform driven market changes.

Operating Cash Flow: Second quarter 2014 operating cash flow totaled $1.1 billion, or 1.5 times net income, partially reflecting the timing of payments related to various health care reform fees and better than expected operating results.

Operating cash flow was $2.5 billion, or 1.7 times net income, in the first six months of 2014, and the company has increased its full year 2014 operating cash flow expectation to greater than $2.7 billion.

Share Repurchase Program: During the second quarter of 2014, the Company repurchased more than 8.2 million shares of its common stock for $814 million, or a weighted-average price of $98.99. During the first six months of 2014, the company repurchased almost 22.6 million shares of its common stock, or 7.7 percent of the shares outstanding as of December 31, 2013, for nearly $2.1 billion, or a weighted-average price of $92.10. As of June 30, 2014, the Company had approximately $1.6 billion of Board-approved share repurchase authorization remaining.

Cash Dividend: During the second quarter of 2014, the Company paid a quarterly dividend of $0.4375 per share, representing a distribution of cash totaling $120.5 million.

On July 29, 2014, the Audit Committee declared a third quarter 2014 dividend to shareholders of $0.4375 per share. On an annualized basis, this equates to a dividend of $1.75 per share. The third quarter dividend is payable on September 25, 2014, to shareholders of record at the close of business on September 10, 2014.

Investment Portfolio & Capital Position: During the second quarter of 2014, the Company recorded net realized gains on investments totaling $65.8 million, partially offset by other-than-temporary impairment losses totaling $10.9 million. During the second quarter of 2013, the Company recorded net realized gains of $54.2 million, partially offset by other-than-temporary impairment losses totaling $9.0 million.

As of June 30, 2014, the Company’s net unrealized gain position in the investment portfolio was $1,219.8 million, consisting of net unrealized gains on equity and fixed maturity securities totaling $623.7 million and $596.1 million, respectively. As of June 30, 2014, cash and investments at the parent company totaled approximately $2.1 billion.

Discontinued Operations: In late December 2013, the Company entered into agreements to divest its 1-800 CONTACTS subsidiary and related assets. The sales were completed on January 31, 2014. As a result, the current and prior period operating results of 1-800 CONTACTS have been classified as discontinued operations, net of the related tax effects.

REPORTABLE SEGMENTS

WellPoint, Inc. has three reportable segments: Commercial & Specialty Business (comprised of the Local Group, National Accounts, Individual and Specialty businesses); Government Business (comprised of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program); and Other (co