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WellPoint shares sink after disappointing earnings report

January 25, 2012

WellPoint Inc.'s stock price dropped Wednesday after the insurer's fourth-quarter earnings failed to meet analyst expectations.

The insurer said its earnings sank 39 percent as medical claims soared thanks to a $50 million hit from the health insurer's Medicare Advantage business. The company did forecast earnings growth in 2012.

The performance led to a rare miss of Wall Street expectations, and WellPoint's full-year earnings outlook also fell short of analyst forecasts. The Indianapolis company's stock, which had mostly climbed so far in 2012, fell faster than broader trading indexes in Wednesday trading.

Shares fell $3.29, or 4.7 percent, to close at $66.11 each. They fell as much as 6 percent in the morning but rebounded slightly along with an overall market surge in the afternoon.

Investors are used to managed-care companies beating expectations handily, so WellPoint's performance doesn't sit well, Jefferies analyst David Windley said in a research note.

WellPoint, which operates Blue Cross Blue Shield plans in 14 states, said medical claims climbed nearly 10 percent in the quarter to $12.43 billion. In contrast, that expense fell 5 percent in the 2010 quarter. Medical claims are the insurer's largest expense.

WellPoint said the change was driven largely by expenses tied to its Medicare Advantage coverage.

Medicare Advantage plans are privately run, government-subsidized versions of the government's Medicare program for the elderly. WellPoint said it lost $50 million in the quarter and $150 million in 2011 due to a Northern California plan that attracted more customers with a higher risk profile than the insurer expected because a competitor left the market. Those customers generated more in claims than they provided in premiums.

WellPoint discontinued that plan as of Jan. 1.

"This actually should not repeat at all in 2012," Chief Financial Officer Wayne DeVeydt said.

Overall, WellPoint earned $335.3 million, or 96 cents per share, in the three months that ended Dec. 31. That's down from $548.8 million, or $1.40 per share, in the final quarter of 2010. Adjusted net income, which excludes investment gains, was 99 cents per share.

Operating revenue, which also excludes investment gains, climbed 5.5 percent to $15.18 billion.

Analysts surveyed by FactSet expected, on average, earnings of $1.12 per share on $15.46 billion in revenue.

WellPoint spokeswoman Kristin Binns also said the insurer faced a tough comparison with its performance in the final quarter of 2010. In that quarter, it recorded a benefit of $315 million because claims left over from previous quarters came in lower than expected. It had no gain like that in the 2011 quarter.

Managed care companies have been buoyed the past few quarters by health care use that has grown at lower-than-expected rates. This trend, which many say is driven by a pullback on consumer spending, has helped companies consistently beat analyst expectations. Analysts have said they expect this trend to continue into 2012.

DeVeydt said utilization did rise in the fourth quarter, but it remained lower than normal, and trends were affected more by the cost of care than the number of people receiving it. In other words, the insurer saw bigger hospital bills rather than more people heading to the hospital.

WellPoint competitor UnitedHealth Group Inc. said last week it expects utilization to increase steadily throughout the new year. UnitedHealth reported a 21 percent increase in fourth-quarter earnings, to $1.26 billion, or $1.17 per share.

For 2012, WellPoint expects to earn at least $7.60 per share on about $62.1 billion in operating revenue. Analysts expect earnings of $7.76 per share on $63 billion in revenue. Windley said he expects WellPoint's initial outlook to increase during the year.

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