Highlights From WLP's Q3 Conference Call: Guides In-line for FY Revenues; Comments on Legislation

October 28, 2009 1:41 PM EDT

WellPoint, Inc. (NYSE: WLP) reports Q3 EPS of $1.78, versus the analyst estimate of $1.38. Revenue for the quarter was $15.21 billion, which compares to the estimate of $15.15 billion.

Highlights From WLP's Q3 Conference Call:

• Sees FY09 EPS of $5.06 - $5.12, including net investment losses of $0.52 per share and the impairment charge of $0.28 per share, Consensus is $5.67.
  
• Also see FY09 revs of $60.90 billion. The consensus is $60.60 billion
  
• (CEO) Q3 2009 net income of 730 million or $1.53 per share. These results included net investment gains of $0.03 per share and an impairment charge of $0.28 per share for certain intangible assets.
  
• Net income in Q3 of 2008 was 821 million or $1.60 per share and included net investment losses of $0.71 per share, an impairment charge of $0.17 per share related to certain intangible assets in our state sponsored business and income tax benefits totalling $0.90 per share.
  
• We have maintained our guidance for the full year of 2009, reflecting the impairment charge and continued utilization increases due to higher COBRA membership and elevated flu activity.
  
• Medical membership totaled 33.9 million at September 30, 2009, a decrease of 1.5 million members from September 30, 2008. Membership declined by 366,000 during Q3, which was in line with our expectations in total with fully insured memberships slightly better than we projected and self-funded slightly unfavorable.
  
• 80% of Q3 enrollment decline occurred in the Commercial segment.
  
• Our commercial employer-based business continues to be impacted by lapses and in-group membership attrition resulting predominantly from economic conditions.
  
• While the unemployment rate has begun to stabilize, the number of out of work Americans continues to rise, and we do not expect the employment situation to improve until late in 2010.
  
• Additionally, many companies are evaluating changes to benefit design and employee cost-sharing arrangements in an effort to lower overall costs. We believe these factors will continue to place pressure on our commercial enrollment levels next year despite the fact that we continue to win in the marketplace as demonstrated by our successful 2010 national accounts selling season.
  
• National accounts: In total, we have already signed more than 30 new groups for 2010 and expect net growth of more than 400,000 national account members on January 1, excluding expected gains in blue card membership. While we expect broader economic conditions and additional layoffs to impact national membership throughout the year, 2010 will likely mark the ninth consecutive year in which our national business grows significantly.
  
• We continue to gain share in the national accounts market while retaining nearly 90% of our overall customer base.
  
• We could return to a pattern of in-group membership growth by 2011 as we have historically experienced.
  
• We continue to expand customer retention programs and introduce new products in targeted areas in an effort to enhance membership.
  
• While we have increased our underlying medical cost trend forecast primarily to reflect projected higher utilization, we continue to price our products to exceed total cost trends and have opinion been incorporating rising utilization assumptions in our pricing.
  
• The benefit/expense ratio for the third quarter of 2009 was 81.1%, a decline of 140 basis points in the same period last year. We recognized higher than anticipated favorable reserve releases of approximately 112 million in Q3 which favorably impacted the benefit/expense ratio by 80 basis points.
  
• The decline was also driven by operating improvement in the senior and state sponsored businesses which were partially offset by the increase in the benefit expense ratio for local group business.
  
• COBRA membership increased slightly during the quarter and comprised approximately 2.2% of our commercial fully insured membership at September 30, 2009, about 60 basis points higher than at year-end 2008.
  
• We are currently marketing our 2010 Medicare advantage and Part D plans for the annual election period that begins on November 15th. We continue to view the senior market as a long-term growth opportunity and believe that our competitive strength as a blue licensee position us particularly well for the growing number of baby boomers who will begin turning 65 in just over a year.
  
• We achieved acceptable margins during Q3 in most of our key states, after having lost money in state sponsored business during 2008.
  
• Proposed legislation contemplates adding $6.7 billion in new annual taxes on the insurance sector, $4 billion in new annual taxes on medical device companies, and $2.3 billion in new annual taxes on pharmaceutical companies, the cost of which will be absorbed primarily by individuals and businesses who are currently insured.
  
• We are hopeful that Congress takes this opportunity to develop truly bipartisan health reform legislation and we remain committed to working with our elected officials on comprehensive and sustainable changes to our changes to our nation's health care system.
  
• Given the decline in membership we have experienced during the recession, and our expectation for continued high unemployment levels over the next several quarters, we recognize the need to adjust the size of our work force and overhead structure. As a result, we have initiated restructuring activities that will continue into the fourth quarter, and we expect that the savings generated from these initiatives will allow us to make investments in key strategic areas during 2010 particularly in information technology.
  
• (CFO) Premium income was 14.1 billion in the quarter, 160 million or 1% decrease from the prior year quarter, primarily due to fully insured membership declines and our withdrawal from certain unprofitable state-sponsored programs partially offset by premium rate increases across all medical lines of business and increased reimbursement in the Federal employees program.
  
• Administrative fees were 969 million in Q3, up 44 million or 5% over the prior year quarter primarily due to revenues generated by D-Care following our acquisition and improved pricing for cellphone to commercial business partially offset by lower revenues in the National Government Services business and our exit from the Connecticut Medicaid program.
  
• Inpatient hospital trends is in the low double digit range and is 85% related to increases in cost per admission and 15% utilization driven. Unit costs are rising due to an elevated average case acuity and higher negotiated rate increase with hospitals.
  
• Pharmacy trend is in the mid to high single-digit range and is 85% unit cost-related and about 15% utilization driven.
  
• Selling, general and administrative expense was 2.4 billion in Q3 of 2009, an increase of 177 million or a percent from the prior year quarter.
  
• The SG&A expense ratio increased by 130 basis points to 15.8% over the same period. Our SG&A cost increase is a result of higher compensation cost and increased technology in customer service spending.
  
• Net investment income was 197 million in the third quarter of 2009, 18 million or 8% lower than the prior year quarter primarily due to lower yields on short-term investments.
  
• Income tax expense was 387 million in Q3, an increase of 658 million from the prior year quarter. Recall that the tax revenue reported for the third quarter of 2008 was unusually low due to the favorable settlements that occurred last year. We currently expect our full year 2009 tax rate to be 34.6%.
  
• As expected, this level of positive reserve development is significantly higher than the 254 million we experienced for the nine months ended September 30, 2008, and further demonstrates that we address the claims visibility issues we experienced near the end of 2007 following certain systems migrations.
  
• During the third quarter we recognized an estimated 112 million higher-than-anticipated favorable reserve releases that were not re-established at September 30, 2009, 64 million of which was recorded in the Commercial segment and 48 million in the Consumer segment.
  
• During the third quarter we recognized an estimated 112 million higher than anticipated favorable reserve releases that were not re-established at September 30, 2009, 64 million of which was recorded in the commercial segment and 48 million in the consumer segment.
  
• Year to date through September 30, 2009, we estimate that we have recognized 212 million of higher than anticipated reserve releases that were not re-established, most of which relates to the consumer segment.
  
• Days in claims payable as of September 30, 2009, was 46.4 days, an increase of 0.5 days from 45.9 days as of June 30, 2009.
  
• Medical claims inventories declined by 1.6% during the third quarter.
  
• As of September 30, 2009, we had approximately 1.1 billion of cash and investments held at our parent company and available for general corporate use.
  
• Our debt-to-capital ratio ended September at 27.9% down from 29.2% at the end of the second quarter.
  
• We expect to receive 1.3 billion in ordinary dividends from our subsidiaries during Q4 of this year and an additional three billion in cash following the close of the NextRX transaction.
  
• We now expect year-end 2009 medical enrollment to be 33.6 million, including 18.3 million self-funded customers and 15.3 million fully insured. Know that our updated membership guidance reflects a delay in the conversion of an 870,000-member experience rated low margin municipal account from fully insured to self-funded status.
  
• Operating revenues now expected to total approximately 60.9 billion. The benefit expense ratio is now expected to be approximately 82.6%. The SG&A ratio is expected to be approximately 15.7%. Earnings per share are now expected to be in the range of $5.06 to $5.12 on a GAAP basis, which includes the $0.52 per share of investment losses incurred year to date through September 30 and the third quarter impairment charge of $0.28 per share.
  
• We also now expect operating cash flow to exceed 3.1 billion for full-year 2009.
  
• (Q&A) So I guess a lead here just understanding kind of the issues of reform, understanding the issues of flu, but I think in the past kind of your directional view on operatings for 2010 has been it would be extremely difficult to grow op earnings in 2010 given kind of the headwind, tail wind discussion that you took us through there. Is that kind of X reform, X flu? Is that basically still what you'd like to leave us with in terms of thinking about that?(A)John, let me speak to that, and then, Wayne, you might want to add as well. Our experience tells us that you appreciate us being as accurate as we can be, and there are so many changes occurring in the fourth quarter that we want to spike those out. In our second quarter call, we said we're not expecting operating gain growth in 2010, and Wayne can kind of go through the reasons again. But the fourth quarter is going to bring a number of changes, as you know, health care reform, our Express Scripts transaction, the adjustments we're making within WellPoint to position us for the future, and so with those levels of uncertainty and our projections for the fourth quarter in terms of COBRA and flu, we just want to be very thoughtful about that. So, Wayne, do you want to reiterate any of that?(A)Thanks, Angela, and hi, John. Just a couple things, when you think about the commercial book in general though, the member months is really the issue. So while we don't expect a recovery in the economy next year, if you look at most predictions out there from leading economists, they would say it might improve by the end of the year. So medical membership itself may not look that different year over year but the actual member months will be down next year. So in and of itself that does create a headwind, nonetheless while it's in pricing to offset some of that but it does create a headwind. Clearly the Medicare cuts and Brian can expand on that later during the call, will create a headwind. While we've taken initiatives to modify benefits and of course price up we do have a margin compression there. And we don't believe the flu and COBRA will be tail wind until 2011. And we essentially believe that the flu at the pace we expect it to occur in the fourth quarter will carry over into the first quarter so become somewhat neutral year-over-year on a comp basis. Same with COBRA becomes neutral year over year on a comp basis and the real tail wind then occurs in 2011. So we are taking some G&A initiatives as Angela indicated to fund some investments and to offset some of these headwinds. But I think it's fair to say that operatings will be down next year. (A)And the reserve releases won't be too. (A)Yeah. And at this point you cannot expect reserve releases to repeat, albeit we do have a strong balance sheet.
  
• And I just want to kind of bridge the gap here and kind of so it's in context of this. The cost trend indications kind of being maybe -- the signals being a little contradictory in the quarter, but beat on better net cost ratio yet kind of raising your cost trend view. Can you help us bridge that, maybe how much of that is due to kind of the Medicare risk adjuster payments in the quarter and maybe just kind of help us kind of figure that out? (A)John, what we're doing is we're looking prospectively as we raise the trend, and of the increase we're looking at utilization and attributing about half of that to COBRA utilization and half to flu. Do we want to be more specific, Wayne, talking about the Medicare Advantage point? (A)Brian, feel free to jump in on the MA piece, but what I would say, John, is while we did do well on the risk core adjusters in the quarter, they weren't a significant driver of our better than expected results. What we are seeing in the cost trends, and I understand the question, because when you look at underlying cash flow and the strength of the cash flow and the earnings, it does raise a question of why raise medical trend. But what I would tell you is in the last few weeks of the quarter, we have seen a fairly significant spike in H1N1 or flu like claims both physician visits as well as prescription of Tamiflu. So we are taking a cautious view. So when you look at our medical trend, it includes a very significant increase in flu related cost in the fourth quarter as well as COBRA. Now whether or not those ultimately pan out remains to be seen, but a big movement in the trend is exactly related to those two items and it's about 50/50.

Related Categories

Corporate News
Earnings

Stocks Mentioned

Related Entities

• Dividend

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?