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WellPoint Inc. (WLP - Analyst Report) reported second-quarter 2013 adjusted income of $2.60 per share, beating the Zacks Consensus Estimate of $2.08. Adjusted income also surpassed the year-ago earnings of $2.04 per share by 27.5%.

Including net investment gains of 9 cents per share and cost for early termination of a contract of 5 cents per share, WellPoint posted net income of $800.1 million or $2.64 per share in the reported quarter compared with $643.6 million or $1.94 per share in the second quarter of 2012. The year-ago quarter included some non-recurring items of 10 cents per share.

Operating revenues of WellPoint for the reported quarter were $17.6 billion, up 16% from the year-ago quarter level. Revenues, however, lagged the Zacks Consensus Estimate of $17.83 billion. The increase in revenues resulted from the acquisition of Amerigroup, partly offset by the decline in Medicare revenues due to lower membership.

WellPoint’s premium revenues increased 16.5% year over year, administrative fees improved 1.1% and other revenues surged 232.5%. Meanwhile, total expenses increased 15.5% to $16.59 billion.

Medical enrollment of WellPoint improved 6.3% to 35.7 million as of Jun 30, 2013 from 33.5 million as of Jun 30, 2012. The upside resulted from an increase in Medicaid membership attributable to the Amerigroup acquisition. The improvement was partially offset by the membership fall in the Commercial and Medicare businesses.

WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenue) of 83.9% in the reported quarter, improving from 85.4% in the second quarter of 2012. The decline was due to the lower benefit expense ratio of the Commercial businesses and the California Medicaid operations, partly offset by the high benefit expense ratio of the Amerigroup business.

Segment Results

In the reported quarter, WellPoint restructured its reporting segments to improve execution and accountability to position the organization for expansion. As a result, the company now reports in these operating segments:

Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues slipped 0.3% year over year to $9.76 billion in the reported quarter.

Operating gains in the segment, however, increased 8.1% year over year to $939.4 million in the quarter, primarily due to lower-than-expected medical costs and cost control measures, partly offset by higher compensation expense and increased investment spending.

Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program (FEP). Operating revenues climbed 45.6% year over year to $7.83 billion in the quarter under review.

Operating gains in the segment increased 124.9% to $298.4 million in the reported quarter from $132.7 million in the year-ago quarter. The increase was due to the Amerigroup acquisition, favorable reserve development and higher revenues in the California Medicaid operations.

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 quarter under review was $5.2 million, down 45.3% year over year.

Operating loss in this segment amounted to $6.1 million, narrowing from $10 million in the year-ago quarter. The improvement resulted from a decline in the unallocated corporate expenses in the quarter under review.

Financial Update

WellPoint exited the quarter with cash and cash equivalents of $1.35 billion, compared with $2.48 billion as of Dec 31, 2012. Operating cash flow in the second quarter of 2013 amounted to $425.2 million.

Long-term debt declined to $14.09 billion as of Jun 30, 2013, from $14.17 billion as of Dec 31, 2012. Shareholder equity inched up to $24.53 billion from $23.8 billion, while total assets increased to $59.61 billion from $58.96 billion at the end of 2012.

Share Repurchase

WellPoint repurchased 3.7 million shares for $275.3 million in the reported quarter. As of Jun 30, 2013, the company had approximately $1.2 billion worth of authorization remaining under its share repurchase program.

Dividend Update

During the reported quarter, WellPoint paid a quarterly cash dividend of 37.5 cents per share. This resulted in cash distribution of $112.7 million.

On Jul 23, 2013, WellPoint declared a quarterly cash dividend of 37.5 cents per share for the third quarter of 2013. The dividend will be paid on Sep 25, 2013 to shareholders of record as of Sep 10.

Outlook for 2013

Including net investment gains of 5 cents per share and cost for early termination of a contract of 5 cents per share, net income is expected to be above $8.00 per share in 2013.

Furthermore, the guidance for operating revenues was reduced to $70–$72 billion from $71–$73 billion. Year-end medical enrollment is expected between 35.3–35.5 million.

Meanwhile, operating cash flow is projected at approximately $2.8 billion. In addition, WellPoint expects SG&A expense ratio to be roughly 13.5%–14%, while the guidance for benefit expense ratio stands at 85.5%, plus or minus 0.5%.

Results at Other Healthcare Providers

UnitedHealth Group Inc. (UNH - Analyst Report) reported its second-quarter 2013 earnings of $1.40 per share, higher than the Zacks Consensus Estimate of 1.26 per share. Earnings were also up 7.4% on a year-over-year basis.

Other peers such as Molina Healthcare Inc. (MOH - Analyst Report) and Humana Inc. (HUM - Analyst Report) are expected to release their second-quarter earnings shortly.

Zacks Rank

Currently, WellPoint carries a Zacks Rank #1 (Strong Buy).

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