WellPoint Reports Third Quarter 2014 Results

WellPoint, Inc. (NYSE: WLP) today announced that third quarter 2014 net income was $630.9 million, or $2.22 per share. These results included net losses of approximately $0.14 per share. Net income in the third quarter of 2013 was $656.2 million, or $2.16 per share, which included net gains of approximately $0.06 per share.

Excluding the items noted in each period, adjusted net income was $2.36 per share in the third quarter of 2014, an increase of 12.4 percent compared with adjusted net income of $2.10 per share in the prior year quarter (refer to GAAP reconciliation table for a reconciliation to the most directly comparable measure calculated in accordance with U.S. generally accepted accounting principles, or “GAAP”).

"I am encouraged by the strength of our third quarter results and believe we are making the needed investments to support improvements in healthcare affordability and access for all of our customers, across both our Commercial and Government segments. The substantial groundwork we have laid positions us well to capitalize on market opportunities in the future and to serve a growing number of members and their families,” said Joseph Swedish, president and chief executive officer.

“Third quarter adjusted earnings per share of $2.36 reflected contributions from a growing membership base across both of our segments. We now project adjusted earnings per share to be within the range of $8.75 - $8.85, and operating cash flow to be greater than $3.3 billion, reflecting a stronger enrollment outlook and a continued focus on controlling healthcare costs for our members,” said Wayne DeVeydt, executive vice president and chief financial officer.

CONSOLIDATED HIGHLIGHTS

Membership: Medical enrollment totaled approximately 37.5 million members at September 30, 2014, an increase of approximately 2.0 million members, or 5.7 percent, from 35.5 million at September 30, 2013. Commercial & Specialty Business enrollment increased by 1.3 million medical members as the company experienced growth in the Local Group, National and Individual markets. Enrollment also grew in the Medicaid and Federal Employee Program business by 754,000 and 10,000, respectively, partially offset by a decline in the Medicare business of 39,000.

Medical enrollment increased by 259,000 members, or 0.7 percent, sequentially during the third quarter of 2014, primarily due to enrollment gains in the Medicaid, Local Group and National businesses, partially offset by a decline in enrollment in the Individual business.

Operating Revenue: Operating revenue was nearly $18.4 billion in the third quarter of 2014, an increase of approximately $752 million, or 4.3 percent, compared with approximately $17.6 billion in the prior year quarter. The growth in revenue reflected premium increases to cover overall cost trends and new fees associated with Health Care Reform, as well as higher enrollment in the Medicaid, Individual and Commercial self-funded businesses. These increases were partially offset by a decline in revenues due to the State of New York contract conversion to a self-funded arrangement, as previously disclosed, and a decline in Small Group and Medicare enrollment.

Benefit Expense Ratio: The benefit expense ratio was 82.5 percent in the third quarter of 2014, a decrease of 240 basis points from 84.9 percent in the prior year quarter. The decline was largely driven by an improvement in the Commercial & Specialty Business predominantly due to the impact of additional premium revenue which helps cover new Health Care Reform fees.

Medical claims reserves established at December 31, 2013, developed modestly better than the Company’s expectation during the first nine months of 2014.

Medical Cost Trend: For the full year 2014, the Company continues to expect that underlying Local Group medical cost trend will be in the range of 6.5 percent plus or minus 50 basis points.

Days in Claims Payable: Days in Claims Payable (“DCP”) was 44.0 days as of September 30, 2014, a decrease of 0.8 days from 44.8 days as of June 30, 2014. The decline was due primarily to changes in the timing of claims payments between periods.

SG&A Expense Ratio: The SG&A expense ratio was 16.2 percent in the third quarter of 2014, an increase of 180 basis points from 14.4 percent in the third quarter of 2013. The increase was driven by new fees related to Health Care Reform effective January 1, 2014.

Operating Cash Flow: Third quarter 2014 operating cash flow totaled $606 million, or 1.0 times net income, partially reflecting the timing of payments related to various health care reform fees and better than expected operating results.

Operating cash flow was $3.1 billion, or 1.5 times net income, in the first nine months of 2014, and the company has increased its full year 2014 operating cash flow expectation to greater than $3.3 billion.

Share Repurchase Program: During the third quarter of 2014, the Company repurchased nearly 5.1 million shares of its common stock for $579 million, or a weighted-average price of $114.50. During the first nine months of 2014, the company repurchased approximately 27.6 million shares of its common stock, or 9.4 percent of the shares outstanding as of December 31, 2013, for nearly $2.7 billion, or a weighted-average price of $96.20. As of September 30, 2014, the Company had approximately $1.0 billion of Board-approved share repurchase authorization remaining. On October 2, 2014, the Company’s Board of Directors raised the share repurchase authorization by $5.0 billion to approximately $6.0 billion.

Cash Dividend: During the third quarter of 2014, the Company paid a quarterly dividend of $0.4375 per share, representing a distribution of cash totaling $119.2 million.

On October 28, 2014, the Audit Committee declared a fourth quarter 2014 dividend to shareholders of $0.4375 per share. On an annualized basis, this equates to a dividend of $1.75 per share. The fourth quarter dividend is payable on December 22, 2014, to shareholders of record at the close of business on December 5, 2014.

Investment Portfolio & Capital Position: During the third quarter of 2014, the Company recorded net realized gains on investments totaling $25.7 million, partially offset by other-than-temporary impairment losses totaling $13.8 million. During the third quarter of 2013, the Company recorded net realized gains of $95.4 million, partially offset by other-than-temporary impairment losses totaling $26.2 million.

As of September 30, 2014, the Company’s net unrealized gain position in the investment portfolio was $1,005.6 million, consisting of net unrealized gains on equity and fixed maturity securities totaling $563.4 million and $442.2 million, respectively. As of September 30, 2014, cash and investments at the parent company totaled approximately $2.1 billion.

Discontinued Operations: In late December 2013, the Company entered into agreements to divest its 1-800 CONTACTS subsidiary and related assets. The sales were completed on January 31, 2014. As a result, the current and prior period operating results of 1-800 CONTACTS have been classified as discontinued operations, net of the related tax effects.

REPORTABLE SEGMENTS

WellPoint, Inc. has three reportable segments: Commercial & Specialty Business (comprised of the Local Group, National Accounts, Individual and Specialty businesses); Government Business (comprised of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program); and Other (comprised of unallocated corporate expenses and certain other businesses that do not meet the quantitative thresholds for separate reportable segment disclosure).

Commercial & Specialty Business: Operating gain in the Commercial & Specialty Business segment totaled $915.7 million in the third quarter of 2014, an increase of $204.0 million, or 28.7 percent, from $711.7 million in the third quarter of 2013. The increase reflects the change in the mix of the product portfolio, predominantly due to the implementation of Health Care Reform product offerings.

Government Business: Operating gain in the Government Business segment was $283.9 million in the third quarter of 2014, a decrease of $10.7 million, or 3.6 percent, from $294.6 million in the third quarter of 2013. The slight decrease was driven primarily by lower margins in the Medicare segment and higher Hepatitis C costs.

Other: The Company reported an operating loss of $8.3 million in the Other segment for the third quarter of 2014, compared with an operating loss of $5.3 million in the prior year quarter.

OUTLOOK

Full Year 2014:

• Net income is now expected to be within the range of $8.83 - $8.93 per share, including $0.08 per share of net favorable items in the first nine months. Excluding these items, adjusted net income is expected to be within the range of $8.75 - $8.85 per share (refer to the GAAP reconciliation table).
• Medical membership is now expected to be in the range of 37,200,000 – 37,300,000. Fully insured membership is now expected to be in the range of 14,600,000 – 14,650,000 and self-funded membership is now expected to be in the range of 22,600,000 – 22,650,000.
• Operating revenue is now expected to be in the range of $73.25 - $73.5 billion.
• Benefit expense ratio is now expected to be in the range of 83.3% plus or minus 20 basis points.
• SG&A ratio is now expected to be in the range of 15.9% plus or minus 20 basis points.
• Operating Cash flow is now expected to be greater than $3.3 billion.

Basis of Presentation

1. Operating revenue and operating gain, both non-GAAP measures, are the key measures used by management to evaluate performance in each of its reporting segments, allocate resources, set incentive compensation targets and to forecast future operating performance. Operating gain, is calculated as total operating revenue less benefit expense and selling, general and administrative expense. It does not include net investment income, net realized gains/losses on investments, other-than-temporary impairment losses recognized in income, interest expense, amortization of other intangible assets, loss on extinguishment of debt or income taxes, as these items are managed in a corporate shared service environment and are not the responsibility of operating segment management (refer to the GAAP reconciliation tables).
2. Operating margin is defined as operating gain divided by operating revenue. Consolidated operating margin is a non-GAAP measure.
3. In late December 2013, WellPoint, Inc. entered into agreements to divest its 1-800 CONTACTS subsidiary and related assets. As a result, the Company reclassified the current and prior period results of 1-800 CONTACTS as discontinued operations, net of the related tax effects. The 1-800 CONTACTS subsidiary and related assets sale was completed on January 31, 2014.

Conference Call and Webcast

Management will host a conference call and webcast today at 8:30 a.m. Eastern Daylight Time (“EDT”) to discuss the company’s first quarter results and outlook. The conference call should be accessed at least 15 minutes prior to the start of the call with the following numbers:

An access code is not required for today’s conference call. The access code for the replay is 310063. The replay will be available from 11:00 a.m. EDT today, until the end of the day on November 12, 2014. The call will also be available through a live webcast at www.wellpoint.com under “Investors.” A webcast replay will be available following the call.

About WellPoint, Inc.

WellPoint is working to transform health care with trusted and caring solutions. Our health plan companies deliver quality products and services that give their members access to the care they need. With nearly 69 million people served by its affiliated companies, including more than 37 million enrolled in its family of health plans, WellPoint is one of nation’s leading health benefits companies. WellPoint companies serve members as the Blue Cross licensee for California; and as the Blue Cross and Blue Shield licensees for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (as the Blue Cross Blue Shield licensee in 10 New York City metropolitan and surrounding counties and as the Blue Cross or Blue Cross Blue Shield licensee in selected upstate counties only), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.), and Wisconsin. In most of these service areas, WellPoint does business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia and Empire Blue Cross Blue Shield, or Empire Blue Cross (in the New York service areas). It also serves customers in other states through its Amerigroup, CareMore and UniCare subsidiaries. To find out more about WellPoint, go to wellpoint.com.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

WellPoint and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA), including statements in this press release, in presentations, filings with the Securities and Exchange Commission, or SEC, reports to shareholders and in meetings with analysts and investors. The projections referenced in this press release are forward-looking and they are intended to be covered by the safe harbor for “forward-looking statements” provided by PSLRA. Words such as “expect(s)”, “feel(s)”, “believe(s)”, “will”, “may”, “anticipate(s)”, “intend”, “estimate”, “project” and similar expressions are intended to identify forward-looking statements, which generally are not historical in nature. These statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. These risks and uncertainties include: those discussed and identified in our public filings with the SEC; increased government participation in, or regulation or taxation of, health benefits and managed care operations, including, but not limited to, the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (Health Care Reform); trends in health care costs and utilization rates; our ability to secure sufficient premium rates including regulatory approval for and implementation of such rates; our participation in the federal and state health insurance exchanges under Health Care Reform, which have experienced technical difficulties in implementation and which entail uncertainties associated with the mix and volume of business, particularly in our individual and small group markets, that could negatively impact the adequacy of our premium rates and which may not be sufficiently offset by the risk apportionment provisions of Health Care Reform; our ability to contract with providers consistent with past practice; competitor pricing below market trends of increasing costs; reduced enrollment, as well as a negative change in our health care product mix; risks and uncertainties regarding Medicare and Medicaid programs, including those related to non-compliance with the complex regulations imposed thereon and funding risks with respect to revenue received from participation therein; a downgrade in our financial strength ratings; litigation and investigations targeted at our industry and our ability to resolve litigation and investigations within estimates; medical malpractice or professional liability claims or other risks related to health care services provided by our subsidiaries; our ability to repurchase shares of our common stock and pay dividends on our common stock due to the adequacy of our cash flow and earnings and other considerations; non-compliance by any party with the Express Scripts, Inc. pharmacy benefit management services agreement, which could result in financial penalties, our inability to meet customer demands, and sanctions imposed by governmental entities, including the Centers for Medicare and Medicaid Services; events that result in negative publicity for us or the health benefits industry; failure to effectively maintain and modernize our information systems and e-business organization and to maintain good relationships with third party vendors for information system resources; events that may negatively affect our licenses with the Blue Cross and Blue Shield Association; possible impairment of the value of our intangible assets if future results do not adequately support goodwill and other intangible assets; intense competition to attract and retain employees; unauthorized disclosure of member sensitive or confidential information; changes in the economic and market conditions, as well as regulations that may negatively affect our investment portfolios and liquidity; possible restrictions in the payment of dividends by our subsidiaries and increases in required minimum levels of capital and the potential negative effect from our substantial amount of outstanding indebtedness; general risks associated with mergers and acquisitions; various laws and provisions in our governing documents that may prevent or discourage takeovers and business combinations; future public health epidemics and catastrophes; and general economic downturns. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Except to the extent otherwise required by federal securities law, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures in our SEC reports.