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WellPoint Inc. (WLP - Analyst Report) reported third-quarter 2013 adjusted income of $2.10 per share, beating the Zacks Consensus Estimate of $1.83 per share. Adjusted income was a penny higher than the year-ago earnings of $2.09 per share.

The improvement in the results came on the back of a lower-than-expected medical cost experience and growth in membership and revenues. Further, both the Commercial and Government segments showed improvements to add to the improving performance of WellPoint.

Including net investment gains and cost for early retirement of debt of 6 cents per share, WellPoint posted net income of $656.2 million or $2.16 per share in the reported quarter compared with $691.2 million or $2.15 per share in the third quarter of 2012. The year-ago quarter included some non-recurring items of 6 cents per share.

Operating revenues of WellPoint for the reported quarter were $17.7 billion, in line with the Zacks Consensus Estimate. However, revenues rose 17.2% from the year-ago quarter level. 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 18.1% year over year, administrative fees improved 7.6% while other revenues declined 11.8%. Meanwhile, total expenses increased 19.3% to $17.1 billion.

Medical enrollment of WellPoint improved 6% to 35.5 million as of Sep 30, 2013 from 33.5 million as of Sep 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 84.9% in the reported quarter, improving 50 basis points from 85.4% in the third quarter of 2012. The improvement was mainly due to growth in Medicare business, partly offset by the high benefit expense ratio of the Amerigroup business.

Segment Results

Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues improved 0.4% year over year to $9.79 billion in the reported quarter.

Operating gains in the segment, however, declined 19.3% year over year to $688.2 million in the quarter, primarily due to higher SG&A expense that resulted from investment spending in preparation for health insurance exchanges, and higher compensation expense. However, these were partially offset by slight decline in the Commercial segment benefit expense ratio.

Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program (FEP). Operating revenues climbed 47.6% year over year to $7.93 billion in the quarter under review.

Operating gains in the segment increased 93.2% to $326.5 million in the reported quarter from $169.0 million in the year-ago quarter. The increase was due to the inclusion of the Amerigroup business, favorable reserve development and higher revenues in the Medicare 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 $12.8 million, up 52.4% year over year.

Operating loss in this segment amounted to $5.3 million, narrowing from $17.5 million loss 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 $2.2 billion, compared to $2.5 billion as of Dec 31, 2012. Operating cash flow in the first nine months of 2013 amounted to $2.8 billion, compared to $1.98 billion at year end 2012.

Long-term debt of WellPoint increased to $14.51 billion as of Sep 30, 2013, from $14.17 billion as of Dec 31, 2012. Shareholder equity inched up to $24.8 billion from $23.8 billion, while total assets increased to $60.3 billion from $58.96 billion at the end of 2012.

Share Repurchase

WellPoint repurchased approximately 6.5 million shares for $554.9 million in the reported quarter. This amounted to an aggregate repurchase of 15.6 million shares for $1.2 billion or $74.86 per share over the first nine months of 2013. As of Sep 30, 2013, WellPoint had approximately $4.2 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 $111.4 million.

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

Outlook for 2013

Including net investment gains of 20 cents per share, cost for early termination of Amerigroup’s PBM contract of 5 cents per share, tax benefits of 21 cents per share and expenses associated with the early retirement of debt worth 31 cents per share, net income is expected to be greater than or equal to $8.45 per share in 2013. Adjusting for these items, adjusted net income is projected to be at least $8.40 per share for full year 2013.

Furthermore, the guidance for operating revenues was reaffirmed at $70–$72 billion. Year-end medical enrollment guidance was raised to 35.6 million from 35.3–35.5 million.

Meanwhile, operating cash flow is projected at approximately $3 billion, higher than the previous guidance of $2.8 billion. In addition, WellPoint expects SG&A expense ratio to be roughly 14%–14.5%, higher than the previously guided range of 13.5%–14%, while the guidance for benefit expense ratio was reduced to 85.0%, plus or minus 0.5% from 85.5%, plus or minus 0.5%.

Our Take

WellPoint exceeded our earnings expectation, as well as beat the year-ago numbers by a penny. Top line also fared well, being in line with the Zacks Consensus Estimate and beating the year-ago numbers. However, a higher than increase in expenses as compared to revenues led to a decline in operating margin during the reported quarter.

Nevertheless the acquisition of Amerigroup has been beneficial to WellPoint on account of an improvement in Medicaid membership during the quarter. Moreover, improved performance across all its operating segments remained impressive.

Furthermore, the repurchase of the outstanding notes led to an early retirement of debt during the quarter that is expected to generate interest savings going forward. WellPoint currently carries a Zacks Rank #1 (Strong Buy).

Results at Other Healthcare Providers

UnitedHealth Group Inc. (UNH - Analyst Report) reported its third-quarter 2013 earnings of $1.53 per share, missing the Zacks Consensus Estimate by a penny. Earnings, however, grew 2.0% year over year.

Other players such as Health Net Inc. (HNT - Analyst Report) and Humana Inc. (HUM - Analyst Report) are expected to release their third-quarter earnings shortly.

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