WellPoint Beats, but Revenue Dips

WellPoint, Inc. (WLP - Analyst Report) reported third quarter earnings of $1.78 per share, which was above the Zacks Consensus Estimate of $1.39, and the year-ago earnings of $1.58.

Total operating revenues declined 0.7% to $15.2 billion. The decline was primarily attributable to the lower fully insured enrollment in 2009, including WellPoint‘s withdrawal from certain State Sponsored programs.

Operating gains for the Commercial Business segment decreased 30.9% to $628 million in the reported quarter. The decline was due to higher overall administrative costs, a reduction in fully insured enrollment and an increase in the benefit expense ratio for the Local Group business. Operating gains for the Consumer Business segment increased 115.2% $520.0 million in the quarter.

Operating improvements in the senior business helped drive growth in this segment. The Other segment reported a 68.8% year-over-year increase in operating gains, which was driven by growth in the company’s NextRx pharmacy benefit management operation.

We were disappointed to see a significant decline in medical enrollment in the reported quarter. Medical membership for the quarter came in at 33.9 million, which represented a decrease of 4.2% from the year-ago quarter.

The membership decline was most significant in the Local Group business, which saw a 966,000 member decline from the prior-year period. The decrease in membership in this segment was primarily attributable to lapses and in-group enrollment losses resulting from the recession and the consequent rise in unemployment.

Enrollment in State Sponsored business decreased by 323,000 members, as WellPoint withdrew from certain State Sponsored programs. Membership declines were also experienced in the Individual and Senior businesses, while enrollment in the National business grew by 43,000 members. Medical enrollment declined by 1.1 million members to 34.2 million members. Rising unemployment led to the decline in enrollment.

Medical enrollment is expected to decline further because of the continuous rise in unemployment. Consequently, the company cut down its year-end membership expectations to 33.6 million.

The company provided guidance for 2009. It expects earnings in the range of $5.06 - $5.12 per share for the year which is inclusive of net investment losses of 52 cents and an impairment charge of 28 cents. The company raised its fiscal 2009 operating revenue outlook by $0.3 billion to about $60.9 billion.

Currently, we are Neutral on WellPoint shares.

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