WellPoint, Inc. (NYSE: WLP) today announced that third quarter 2010 net income was $739.1 million, or $1.84 per share, including net investment gains of $37.9 million after-tax, or approximately $0.10 per share. Net income in the third quarter of 2009 was $730.2 million, or $1.53 per share, which included net investment gains of $14.1 million after-tax, or $0.03 per share, and an impairment charge totaling $134.4 million after-tax, or $0.28 per share.
Excluding the items noted above for each period, adjusted net income was $1.74 per share in the third quarter of 2010, compared with adjusted net income of $1.78 per share in the prior-year quarter (refer to page 14 for a reconciliation to the most directly comparable measures calculated in accordance with U.S. generally accepted accounting principles, or "GAAP").
"We are pleased with our third quarter performance, which exceeded our forecast primarily due to higher than anticipated favorable reserve development and disciplined administrative expense control. Membership was stable in the quarter, and we continued to grow our Blue-branded businesses. Blue-branded Commercial and Individual enrollment increased by 53,000 in the quarter and is up 208,000 on a year-to-date basis, indicating that we continue to provide excellent value for our customers in this difficult economy," said Angela F. Braly, chair, president and chief executive officer.
"As we prepare for 2011, we are projecting another year of strong growth in the National Accounts business. We are also taking actions to further improve our administrative efficiency and effectiveness, while delivering excellent service and a superior customer experience, which is becoming increasingly important as we continue to position our company for success in the changing marketplace," added Braly.
"Based on our overall performance, we have increased our year-end 2010 enrollment expectation by 200,000 members, and also raised full-year 2010 guidance for earnings per share to at least $6.60, or at least $6.45 on an adjusted basis," said Wayne S. DeVeydt, executive vice president and chief financial officer. "We also expect to complete more than $4 billion of share repurchases during 2010, representing a significant return of capital to our shareholders following the sale of NextRx at the end of last year."
Membership: Medical enrollment was 33.5 million members at September 30, 2010, a decrease of 382,000 members, or 1.1 percent, from approximately 33.9 million at September 30, 2009. The decline occurred in the Company's non-Blue business, which experienced a reduction of 590,000 members, primarily due to the strategic transfer of UniCare Individual and Group business in Texas and Illinois to another Blue Cross & Blue Shield plan. The decline in non-Blue enrollment was partially offset by growth of 76,000 members in Blue-branded Commercial and Individual products, an increase of 66,000 members in the Federal Employee Program ("FEP"), and growth of 35,000 and 31,000 members, respectively, in the State Sponsored and Senior businesses.
Medical enrollment was stable in the third quarter of 2010, with membership in Blue-branded Commercial and Individual businesses increasing by 53,000 sequentially, offset by continued attrition in non-Blue business. In total, enrollment declined by 19,000 members, or 0.1 percent, from June 30, 2010. Enrollment in both fully insured and self-funded products at September 30, 2010, was higher than expected, and the Company has raised its year-end 2010 membership expectation to 33.3 million members, primarily due to the stabilizing membership trends in its Commercial Business segment.
Operating Revenue: Operating revenue totaled approximately $14.3 billion in the third quarter of 2010, a decrease of $872.6 million, or 5.7 percent, from $15.2 billion in the third quarter of 2009. The conversion of a large municipal group to a self-funded arrangement during the second quarter of 2010 accounted for more than 40 percent of the decline. The remaining reduction was partially attributable to lower fully insured membership resulting from economic conditions and the transfer of UniCare business in Texas and Illinois. Operating revenue was also lower due to the sale of the NextRx pharmacy benefit management subsidiaries ("NextRx") in the fourth quarter of 2009.
Benefit Expense Ratio:The benefit expense ratio was 83.8 percent in the third quarter of 2010, an increase of 170 basis points from 82.1 percent in the third quarter of 2009, driven by the Senior and Individual businesses. The Senior benefit expense ratio increased primarily due to the reduction in federal reimbursement rates for the Medicare Advantage program in 2010. The Individual benefit expense ratio increased primarily due to the delay in implementing rate increases in California. The increases in Senior and Individual were partially offset by an improvement in the benefit expense ratio for Local Group business.
During the third quarter of 2010, the Company recognized an estimated $110 million of higher than anticipated favorable reserve development, as compared to $112 million of higher than expected favorable development that was recognized in the same period of 2009.
Medical Cost Trends: Trends represent Local Group fully insured business.
For the full year of 2010, the Company now projects that underlying medical cost trend will be in the range of 7.0 percent, plus or minus 50 basis points. Unit cost increases continue to be the primary driver of overall medical cost trend, while underlying utilization has been lower than expected in 2010.
Days in Claims Payable:Days in Claims Payable ("DCP") as of September 30, 2010, was 40.7 days, a decrease of 1.4 from 42.1 days as of June 30, 2010. Approximately 0.9 days of the reduction related to the higher-than-anticipated favorable reserve development recognized during the third quarter. The remaining decline was driven by the conversion of large group accounts to self-funding arrangements.
SG&A Expense Ratio: The SG&A expense ratio was 14.6 percent in the third quarter of 2010, a decrease of 30 basis points from 14.9 percent in the third quarter of 2009. The decrease was driven by lower administrative costs, reflecting the fourth quarter 2009 sale of NextRx and the Company's ongoing efficiency initiatives, partially offset by implementation costs related to health care reform and the decline in operating revenue. Total SG&A expense declined by $170.3 million, or 7.5 percent, relative to the third quarter of 2009.
Operating Cash Flow:Operating cash flow for the first nine months of 2010 totaled $829.7 million, and included $1.2 billion of tax payments related to the fourth quarter 2009 sale of NextRx. Operating cash flow totaled $896.5 million in the third quarter of 2010, or 1.2 times net income.
Share Repurchase Program: During the first nine months of 2010, the Company repurchased 58.9 million shares of its common stock, or 13.1 percent of the shares outstanding at December 31, 2009, for approximately $3.3 billion, following the sale of NextRx. As of September 30, 2010, the Company's remaining Board-approved share repurchase authorization totaled $538.6 million. The Company expects to utilize this authorization in the fourth quarter of 2010, subject to market and industry conditions.
Investment Portfolio & Capital Position: During the third quarter of 2010, the Company recorded net investment gains of $58.4 million pre-tax, consisting of net realized gains from the sales of securities totaling $61.6 million, partially offset by other than temporary impairments totaling $3.2 million. In the third quarter of 2009, the Company experienced net investment gains of $21.5 million pre-tax, consisting of net realized gains from the sales of securities totaling $52.2 million pre-tax, partially offset by other-than-temporary impairments totaling $30.7 million. As of September 30, 2010, the Company's net unrealized gain position in the investment portfolio was $1.2 billion, consisting of net unrealized gains on fixed maturity and equity securities totaling $916.6 million and $250.9 million, respectively.
As of September 30, 2010, cash and investments at the parent company totaled approximately $2.9 billion.
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 NextRx for the three and nine months ended September 30, 2009), 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.
Commercial Business: Operating gain for the Commercial Business segment was $760.9 million in the third quarter of 2010, an increase of $132.9 million, or 21.2 percent, from $628.0 million in the third quarter of 2009. The increase was driven by operating improvements in the Local Group business and included an estimated $75 million of higher than anticipated favorable reserve development recognized in the current year quarter. Approximately $64.0 million of higher-than-anticipated favorable development was recognized in the Commercial segment during the third quarter of 2009.
Consumer Business: Operating gain for the Consumer Business segment was $261.7 million in the third quarter of 2010, a decrease of $258.3 million, or 49.7 percent, compared with $520.0 million in the third quarter of 2009. The decline in operating gain was driven by lower performance in the Senior and Individual businesses. Results for the Company's Medicare Advantage products declined as a result of the reduction in federal reimbursement rates and lower risk score settlement revenue in 2010. Individual business performance decreased due to the delay in implementing rate increases in California and the recognition of a premium credit to be issued to certain policyholders in Colorado during the fourth quarter of 2010.
During the third quarter of 2010, the Company recognized an estimated $35 million of higher-than-anticipated reserve development in the Consumer segment, compared with approximately $48.0 million of higher-than-anticipated favorable development that was recognized in the prior year quarter.
Other: Operating gain in the Other segment declined by $116.1 million, or 87.2 percent, compared with the third quarter of 2009, due to the sale of NextRx in the fourth quarter of 2009.
Full Year 2010:
- Net income is now expected to be at least $6.60 per share, including net investment gains of approximately $0.18 per share recorded during the first three quarters of 2010, partially offset by the first quarter intangible asset impairment charge of $0.03 per share. This outlook includes no net investment gains or losses or asset impairment charges beyond those recorded during the first three quarters of 2010.
- Year-end medical enrollment is now expected to be 33.3 million, consisting of 19.6 million self-funded members and 13.7 million fully insured members.
- Operating revenue is expected to total approximately $58.0 billion.
- The benefit expense ratio is now expected to be approximately 83.7 percent.
- The SG&A expense ratio is now expected to be approximately 14.9 percent.
- Operating cash flowis expected to exceed $1.2 billion, including the unfavorable impact of the $1.2 billion of first quarter tax payments related to the prior year sale of the NextRx subsidiaries.