07/24/2008

By TOM MURPHY  / Associated Press

Rising medical costs helped knock down the second-quarter profit for health insurer WellPoint Inc., but investors lifted the company's stock Wednesday after it beat Wall Street expectations in a tough market.

The Blue Cross and Blue Shield health plan operator saw its profit fall 10 percent, as benefit expenses rose nearly 5 percent to $11.9 billion. The company also narrowed its outlook for 2008, and WellPoint executives warned that a slow economy could affect their outlook for the next year.

"People are making hard decisions now about paying their house bills, filling their car up with gas, buying insurance," Chief Financial Officer Wayne DeVeydt said.

Even so, DeVeydt noted that WellPoint's diverse product range, which includes its fast-growing national accounts, will help it weather business fluctuations.

"We can be more nimble and respond to whatever is happening in the market," he said.

The company reported a second-quarter profit of $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.

Those numbers beat estimates of analysts surveyed by Thomson Financial, who expected profit of $1.36 per share on revenue of $15.61 billion.

WellPoint shares rose more than 9 percent to $53.17 in trading Wednesday.

The company's performance should be a relief due to "lingering concerns that WellPoint might show significant earnings weakness" among other problems, Goldman Sachs analyst Matthew Borsch wrote in a research note.

But analyst Tom Carroll said WellPoint still faces a "super competitive market" and a trend toward rising medical costs.

"I don't think the world of employee health benefits is getting any easier in 2009," said Carroll, an analyst for Stifel Nicolaus & Co. Inc.

WellPoint, the nation's largest health insurer by membership, saw enrollment rise 1.5 percent year-over-year to 35.3 million members at June 30. But the company's business mix changed. Self-funded plan membership surpassed fully insured business, which decreased nearly 2 percent.

Carroll noted that self-funded business offers "significantly less" revenue because the customer pays WellPoint only to administer plans, not provide insurance.

DeVeydt said the company expects enrollment to fall to about 35.1 million by the end of the year, as the insurer leaves the Connecticut Medicaid market. But company officials noted WellPoint's national accounts business has gained more than 500,000 covered lives this year.

"We're growing gangbusters from a national account perspective," CEO Angela Braly said.

WellPoint announced 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.