07/23/2008

By TOM MURPHY  / Associated Press

Shares of WellPoint Inc. rose Wednesday after the health insurer reported a second-quarter profit that fell 10 percent, as medical costs and a tough economy took a toll, but results topped Wall Street expectations.

The company's shares traded for $52.13, up nearly 7 percent from Tuesday's closing price of $48.75, after beating Wall Street expectations for the quarter. The insurer's stock also rose nearly 7 percent Tuesday, after competitor UnitedHealth Group reported earnings that surpassed Street expectations.

Indianapolis-based WellPoint, a Blue Cross and Blue Shield health plan operator, said earnings totaled $750.5 million, or $1.44 per share, for the three months ending June 30. That includes investment losses of 3 cents per share. A year ago, when the company had many more shares outstanding, profit totaled $835.2 million, or $1.35 per share.

Revenue edged up 3 percent to $15.67 billion from $15.27 billion.

WellPoint's results beat estimates of analysts surveyed by Thomson Financial, who expected profit of $1.36 per share on revenue of $15.61 billion.

Benefit expenses increased nearly 5 percent to $11.9 million during the quarter, and WellPoint Chief Financial Officer Wayne DeVeydt told analysts during a Wednesday conference call he sees a "challenging economic environment" heading into 2009. He said that will pressure reimbursement levels for the company's Medicaid business.

"A tough economy also impacts commercial revenue and enrollment levels, as certain members chose to buy down their benefits or potentially forgo health insurance all together," he said.

Medical enrollment rose 1.5 percent year-over-year to 35.3 million members at June 30. But it declined sequentially as WellPoint Inc. exited the Ohio Medicaid market.

DeVeydt said the company expects enrollment to fall to about 35.1 million by the end of the year, as the insurer also leaves the Connecticut Medicaid market.

WellPoint also announced Wednesday that it narrowed its full-year outlook. It now expects net income between $5.42 and $5.57 per share, including net realized investment losses of 6 cents per share. Earlier this year, WellPoint had cut its 2008 outlook to between $5.42 to $5.67 per share from a revised range of $5.76 to $6.01.

Analysts now expect annual net income of $5.48 per share.

The company struggled to grasp medical cost trends earlier this year, but DeVeydt said Wednesday they have a better handle on that.

"We have significantly improved visibility into medical cost trends and collaboration among our business units," he said, noting that an "operations council" of company executives has helped WellPoint to price more accurately.

The company's benefit expense ratio increased to 83.3 percent, up 150 basis points from 81.8 percent the previous year. The ratio shows the percentage of medical expenses over premium revenue. The company cited higher medical costs and membership mix changes for most of the increase.

DeVeydt expects the ratio to fall between 83.3 and 83.6 for the year.