WellPoint Reports Third Quarter 2009 Results

INDIANAPOLIS , Oct. 28 /PRNewswire-FirstCall/ --WellPoint, Inc. (NYSE: WLP) today announced that third quarter 2009 net income was $730.2 million, or $1.53 per share, including net investment gains of $21.5 million pre-tax, or $0.03 per share, and an impairment charge totaling $205.5 million pre-tax, or $0.28 per share, for certain intangible assets.

Net income in the third quarter of 2008 was $820.7 million, or $1.60 per share, and included the following items: net investment losses of $562.6 million pre-tax, or $0.71 per share; an impairment charge related to certain intangible assets in the Company's State Sponsored business, totaling $141.4 million pre-tax, or $0.17 per share; and income tax benefits of $460.8 million, or $0.90 per share, resulting from the favorable resolution of certain federal and state tax matters.

"We are performing well as an organization in a difficult economic environment. Our third quarter results were better than we expected, driven mostly by improving results in our Consumer segment. We remain confident in our outlook for the fourth quarter and have maintained our guidance for the full year of 2009, reflecting the impairment charge and continued utilization increases due to higher COBRA membership and elevated flu activity," said Angela F. Braly, president and chief executive officer. "We are pleased with our continued success in the National Accounts marketplace, which highlights our strong and compelling value proposition. We have had an outstanding sales year in this business and currently expect net growth of more than 400,000 National members in January 2010. We expect continued success as we position our company for 2010 and beyond."

"Cash flow from operations was strong at approximately $3.0 billion year-to-date through September 30, or 1.5 times net income, indicating high earnings quality. We now expect to generate more than $3.1 billion in operating cash flow during 2009," said Wayne S. DeVeydt, executive vice president and chief financial officer. "We recognized an estimated $112 million of higher-than-anticipated favorable reserve releases during the third quarter, and we continue to establish reserves in a conservative manner. We believe that our September 30, 2009, balance sheet and current guidance have an appropriate level of conservatism for items such as COBRA and the flu."

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled 33.9 million members at September 30, 2009, a decrease of 1.5 million members, or 4.2 percent, from 35.3 million at September 30, 2008. The decline in membership was most significant in the Local Group business, which experienced a 966,000-member reduction from the prior year quarter, primarily due to lapses and in-group enrollment losses resulting from the recession and rise in unemployment. Enrollment in State Sponsored business declined by 323,000 members, as the Company withdrew from certain programs for which actuarially-sound reimbursement could not be obtained. Membership declines were also experienced in the Individual and Senior businesses, while enrollment in the National business grew by 43,000 members.

Medical membership declined by 366,000, or 1.1 percent, in the third quarter of 2009. The decline in overall membership was in-line with the Company's expectation for the quarter, with fully insured membership at September 30, 2009, slightly favorable to expectations and self-funded membership slightly unfavorable. Eighty percent of the quarterly decline in enrollment occurred in the Commercial reporting segment, where the Company experienced net negative in-group change of 164,000 members, primarily due to workforce reductions among its employer-based customers.

Operating Revenue: Operating revenue was $15.2 billion in the third quarter of 2009, a decrease of 0.7 percent from $15.3 billion in the third quarter of 2008. The revenue decline resulted primarily from lower fully insured enrollment in 2009, including the Company's withdrawal from certain State Sponsored programs. This was partially offset by premium rate increases for all medical lines of business and increased reimbursement in the Federal Employees Program ("FEP").

Benefit Expense Ratio: The benefit expense ratio was 81.1 percent in the third quarter of 2009, a decrease of 140 basis points from 82.5 percent in the prior year quarter. During the third quarter of 2009, the Company recognized an estimated $112 million of higher-than-anticipated favorable reserve releases that were not reestablished, which favorably impacted the benefit expense ratio by 80 basis points. The decline from the prior year quarter was also driven by operating improvements in the Company's Senior and State Sponsored businesses. These decreases in the benefit expense ratio were partially offset by a higher ratio for Local Group business, reflecting the impact of the recession on business mix shifts and utilization patterns.

Premium and Cost Trends: Trends represent Local Group fully insured business.

The Company now expects that underlying medical cost trends will be in the range of 9.0 percent, plus or minus 50 basis points, for full year 2009. Unit cost increases continue to be the primary driver of medical cost trends, however utilization has also risen through the first nine months of the year. The Company expects utilization to remain elevated through the fourth quarter due to its assumptions for the economy, business mix shifts including increased COBRA(1) membership, and elevated flu activity.

The Company continues to price its business so that expected premium yield exceeds total cost trend, where total cost trend includes medical costs and selling, general and administrative ("SG&A") expense.

Days in Claims Payable: Days in Claims Payable ("DCP") as of September 30, 2009, was 46.4 days, an increase of 0.5 days from 45.9 days as of June 30, 2009. The increase in DCP was driven by seasonality and the timing of claims payments, partially offset by reserve releases due to the higher-than-anticipated favorable reserve development. Medical claims inventory declined by 1.6 percent during the third quarter, while fully insured enrollment decreased by 1.3 percent.

SG&A Expense Ratio: The SG&A expense ratio was 15.8 percent in the third quarter of 2009, an increase of 130 basis points from 14.5 percent in the third quarter of 2008. The increase was driven primarily by higher compensation costs and increased spending for technology and customer service initiatives.

Impairment of Intangible Assets: During the third quarter, the Company initiated an impairment review of certain intangible assets in connection with the expected sale of its NextRx PBM business to Express Scripts, Inc. and an expected decline in 2010 membership associated with its UniCare subsidiaries. This review resulted in a pre-tax impairment charge totaling $205.5 million to adjust the carrying values of certain intangible assets to their estimated fair values. The Company continues to expect the NextRx transaction to close during the fourth quarter of 2009.

Operating Cash Flow: Operating cash flow for the nine months ended September 30, 2009, was $3.0 billion, or 1.5 times net income. Operating cash flow for the nine months ended September 30, 2008, totaled $2.1 billion, or approximately 1.0 times net income. The increase in year-to-date operating cash flow was driven primarily by the net change in provider advances, decreased tax payments, lower experience-rated refunds to certain large customers and reduced incentive compensation payments.

Share Repurchase Program: During the third quarter of 2009, the Company repurchased 13.4 million shares of its common stock for $693.2 million. During the first nine months of 2009, the Company repurchased 40.8 million shares of its common stock for $1.8 billion. As of September 30, 2009, the Company's remaining Board-approved share repurchase authorization totaled $710.8 million. The Company will continue to evaluate future share repurchase activity subject to market conditions and in connection with the sale of its NextRx PBM business.

(1) COBRA is named for the Consolidated Omnibus Budget Reconciliation Act of 1986, which provides unemployed group members with coverage for up to 18 months after losing their job.

Investment Portfolio & Capital Position: During the third quarter of 2009, the Company recorded net investment gains of $21.5 million pre-tax, consisting of net realized gains of $52.2 million, partially offset by other-than-temporary impairments totaling $30.7 million. As of September 30, 2009, the Company's net unrealized gain position was $744.6 million, consisting of net unrealized gains on fixed maturity and equity securities totaling $551.1 million and $193.5 million, respectively.

As of September 30, 2009, statutory capital levels in the Company's insurance subsidiaries exceeded state regulatory levels by approximately $6.5 billion and Blue Cross and Blue Shield Association requirements by approximately $3.3 billion. Cash and investments at the parent company totaled approximately $1.1 billion.

Member Transition Agreement for UniCare Business: The Company's UniCare subsidiaries have made the strategic decision to exit commercial health insurance markets in Illinois and Texas. UniCare has entered into an agreement with Health Care Service Corporation ("HCSC"), which operates as the Blue Cross and Blue Shield licensee in Illinois and Texas, under which HCSC will, upon completion of receipt of regulatory approvals, offer guaranteed replacement coverage to these commercial group and individual members. The Company believes that this agreement provides the impacted UniCare members with an opportunity for a smooth transition of benefits and coverage. The Company expects that most of this membership will transition to HCSC on December 31, 2009. For those members who elect not to accept HCSC's offer of replacement coverage, UniCare will continue to provide coverage until their current policies terminate according to their terms. Other UniCare and HealthLink members, including those enrolled in standalone specialty products, Senior or State Sponsored products, are not impacted by this member transition agreement.

REPORTABLE SEGMENTS

WellPoint, Inc. has the following reportable segments: Commercial Business, which includes the Local Group, National, UniCare, and Specialty Products lines of business; Consumer Business, which includes the Individual, Senior, and State Sponsored lines of business; and Other, which includes Comprehensive Health Solutions (including the Company's NextRx PBM business), FEP business, National Government Services, inter-segment sales and expense eliminations, and corporate expenses not allocated to the other reportable segments.

Operating revenue and operating gain are the key measures used by management to evaluate performance in each segment.

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