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WellPoint Inc. (WLP - Analyst Report) reported third-quarter 2012 adjusted income of $2.09 per share, substantially beating the Zacks Consensus Estimate of $1.84. Adjusted income also surpassed the year-ago earnings of $1.77 per share by 18.1%.

Including expenses related to acquisitions, along with net investment gains of 6 cents per share, the company posted net income of $691.2 million or $2.15 per share in the reported quarter, compared with $683.2 million or $1.90 per share in the third quarter of 2011. The year-ago quarter included net investment gains of 13 cents per share.

Operating revenues for the reported quarter were nearly $15.1 billion, at par with the year-ago quarter level. However, revenues marginally lagged the Zacks Consensus Estimate of $15.29 billion.

Premium revenues declined 1% year over year. The dip was due to a decline in the fully-insured Local Group membership, which was partially offset by an increase in premium rate designed to cover the overall cost trends and membership growth in the Senior business. Growth in other revenues, mainly driven by the acquisition of 1-800-CONTACTS Inc., offset the decline in premium revenues.

Medical enrollment slipped 2.5% to 33.5 million as of September 30, 2012 from 34.4 million as of September 30, 2011. The decline resulted from a membership fall of 0.69 million and 0.32 million in the Local Group and National businesses, respectively, due to changes in the National Accounts’ administrative fee structure, increased competition in some Local Group markets, alterations in the product offerings in the New York small group market and in-group membership attrition due to the present economic scenario.

These declines effectively offset membership growth in the Senior and State Sponsored businesses. While Senior membership increased on the back of geographic expansion into new Medicare Advantage service areas, growth in State Sponsored enrollment was attributable to expansion of existing programs.

WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenue) of 85.4% in the reported quarter, marginally higher than 85.1% in the third quarter of 2011. The increase came on the back of higher benefit expense ratio in the Consumer business, which was somewhat offset by lower benefit expense ratio in the Commercial business. The increased ratio in the Consumer business was due to an increase in the benefit expense ratio of the Senior and State Sponsored businesses.

Segment Results

Commercial Business: Operating revenue slipped 3.4% year over year to $8.36 billion in the reported quarter. Operating gains in the segment, however, increased 15.1% year over year to $818.6 million in the quarter, primarily due to a decline in selling, general & administrative expenses and lower benefit expense ratio in the Local Group business, partially offset by a decline in the fully-insured Local Group membership.

Consumer Business: Operating revenue climbed 6.6% year over year to $4.88 billion in the quarter under review. Operating gains in the segment amounted to $184.7 million in the reported quarter, plunging 24.7% from $245.2 million in the year-ago quarter. The downfall was primarily due to lower risk score revenue in the Senior business.

Other: Operating revenue in the quarter under review came in at $1.89 billion, down 1.4% year over year. Operating gains in this segment deteriorated to $0.5 million in the reported quarter, compared with $15.9 million in the year-ago quarter. The 96.9% decline resulted from higher unallocated corporate expenses in the quarter under review.

Financial Update

WellPoint exited the quarter with cash and cash equivalents of $2.44 billion, compared with $2.20 billion as of December 31, 2011. Operating cash flow in the third quarter of 2012 stood at $240.2 million, plummeting from $1.43 billion in the prior-year period.

The plunge in operating cash flow was chiefly due to advance receipt of a $711.7 million monthly payment from Centers for Medicare & Medicaid Services (CMS) in the second quarter for the month of July. Moreover, the prior-year quarter was positively affected by a $596.5 million advance receipt of CMS payment related to the month of October 2011. Excluding the impact of these payments, operating cash flow was recorded at $951.9 million in the reported quarter, indicating a substantial improvement from $833.3 million in the year-ago quarter.

Long-term debt increased to $13.40 billion as of September 30, 2012, from $8.42 billion as of December 31, 2011. Shareholders’ equity increased marginally to $23.82 billion from $23.29 billion, while total assets increased to $55.82 billion from $52.12 billion at the end of 2011.

Share Repurchase

WellPoint repurchased 11.3 million shares for $655.3 million in the reported quarter. Another 10.4 million shares were bought back in October 2012 for $634.3 million. As of October 31, 2012, the company had approximately $1.9 billion worth of authorization remaining under its share repurchase program.

Dividend Update

On November 6, 2012, WellPoint declared a quarterly cash dividend of 28.75 cents per share, payable on December 21, 2012, to shareholders of record at the close of business on December 7, 2012.

Outlook for 2012

WellPoint expects adjusted income of $7.30–$7.40 per share in 2012 and net income in the range of $7.37–$7.47 per share.

Year-end medical enrollment guidance was affirmed at 33.4 million. The guidance encompasses 20.1 million self-funded members and 13.3 million fully insured members.

Furthermore, WellPoint expects operating revenue of approximately $60.7 billion, slightly down from the earlier guidance of $61.0 billion, while operating cash flow guidance stands at $2.7 billion.

In addition, WellPoint expects SG&A expense ratio to be approximately 14.0%, slightly up from the earlier guidance of 13.9%, while the guidance for the benefit expense ratio was affirmed at 85.5%.

Peer Take

Peer UnitedHealth Group Inc. (UNH - Analyst Report) reported its third quarter 2012 earnings of $1.50 per share, significantly ahead of the Zacks Consensus Estimate of $1.31 per share. Higher revenue across the board and strong enrollment growth, partially offset by higher operating costs, were responsible for the better-than-expected results. Also, share repurchases boosted the bottom-line earnings.

Another peer, Aetna Inc. (AET - Analyst Report) reported its third quarter 2012 earnings of $1.55 per share, way ahead of the Zacks Consensus Estimate of $1.34 per share. Earnings also increased 11% year over year. The better-than-expected earnings of the company were the result of revenue growth, higher underwriting margins, increased membership along with lower operating costs. 

Zacks Rank

Currently, WellPoint carries a Zacks #3 Rank (short-term Hold rating) and a long-term ‘Neutral’ recommendation.

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