WellPoint Reports Second Quarter 2007 Results

) today announced that second quarter 2007 net income was $835.2 million, or $1.35 per share, representing 15.4 percent growth over the second quarter of 2006. Net income in the second quarter of 2006 was $751.2 million, or $1.17 per share, including $0.01 per share in net realized investment losses. The benefit expense ratio was 81.8 percent in the second quarter of 2007, an increase of 60 basis points compared to 81.2 percent in the second quarter of 2006, and a 130 basis point improvement from 83.1 percent in the first quarter of 2007.



"We continue to demonstrate our ability to consistently deliver strong earnings growth while also providing members with new benefit options and services that improve the affordability and quality of the health care they receive," said Angela F. Braly, president and chief executive officer of WellPoint, Inc. "As a result of our efforts during the first half of the year, we are raising our full year earnings guidance to $5.55 per share and continue to target long-term annual earnings per share growth of 15 percent. At the same time, we continue to expand our efforts to find new solutions for those who do not have health insurance in addition to undertaking strategic initiatives to reduce growth in health care expenditures, increase transparency, and promote improved quality."
"Our solid financial performance is reflective of our continued commitment to improve operational efficiency and effectively deploy our capital," said Wayne S. DeVeydt, chief financial officer of WellPoint, Inc. "In the first six months of 2007, we generated operating cash flow of $2.7 billion, which allowed us to repurchase 24.4 million shares of our common stock for $2.0 billion. As of June 30, 2007, our remaining Board-approved authorization was $1.0 billion, which we intend to utilize during the remainder of the year. We continue to expect full year 2007 operating cash flow of $4.4 billion."
CONSOLIDATED HIGHLIGHTS
Membership: Medical enrollment totaled 34.8 million members at June 30, 2007, an increase of 604,000 members from 34.2 million reported at June 30, 2006. The increase was driven by National Accounts and State Sponsored business, which added 477,000 members and 364,000 members, respectively, over the last twelve months. Growth from the prior year in State Sponsored business excludes the impact of the change in the Company's 50 percent ownership interest in a joint venture in Puerto Rico to a smaller percentage ownership in the joint venture's parent company. Accordingly, the Company no longer includes the 222,000 members related to this investment in its enrollment. This growth was partially offset by declines in Individual and Local Group business.
During the second quarter of 2007, medical enrollment declined by 108,000 members, led primarily by higher-than-expected in-group declines in National Accounts, as the Company was impacted by employee reductions in various industries, including the automobile, home building, mortgage, and related sectors. The Company also experienced lower sequential claims volume in the BlueCard program, which resulted in lower BlueCard membership as this membership is estimated in part by the average BlueCard claims processed in the period.
Sequentially, medical enrollment in Individual declined by 24,000 members as rate increases were implemented in certain geographies. Local Group enrollment was essentially flat as growth in the Company's Blue branded business was offset by membership losses in the Company's non-Blue branded businesses. State Sponsored enrollment increased by 31,000 members during the quarter.
Operating Revenue: Operating revenue was $15.0 billion in the second quarter of 2007, an increase of 7.5 percent from $14.0 billion in the prior year second quarter. The increase resulted primarily from disciplined pricing in Local Group business, growth in State Sponsored, Medicare Advantage, and Medicare Part D membership, and increased reimbursement in the Federal Employee Program ("FEP").
Benefit Expense Ratio: The benefit expense ratio was 81.8 percent in the second quarter of 2007, a 130 basis point improvement from 83.1 percent in the first quarter of 2007, driven primarily by a lower benefit expense ratio in the Commercial and Consumer Business segment and the expected seasonality of the Senior businesses. Additionally, the benefit expense ratio in State Sponsored operations improved slightly due to the implementation of various cost of care initiatives and expected seasonality.
The benefit expense ratio increased 60 basis points compared to 81.2 percent in the second quarter of 2006. The 60 basis point increase from the prior year is primarily attributable to the Company's Specialty, Senior, and State Sponsored Business segment.
Increases in State Sponsored claims experience in certain geographies caused the benefit expense ratio to increase by 440 basis points in that line of business between the second quarters of 2006 and 2007. Benefit expense ratios were unacceptably high in California and Connecticut. The Company continues to anticipate receiving rate increases in California effective October 1, 2007 and in Connecticut retroactive to July 1, 2007. Additionally, the Company has implemented numerous cost of care initiatives to improve financial performance in these geographies. The Company remains disciplined in its pricing and will take appropriate action if acceptable reimbursement cannot be obtained.
The Life and Disability benefit expense ratio was also higher in the second quarter of 2007 when compared to the second quarter of 2006, as the prior year period was favorably impacted by a change in experience factors for waiver of premium reserves that did not recur in 2007.
As expected, these increases were partially offset by a year-over-year improvement in the benefit expense ratio for the Company's Commercial and Consumer Business segment, reflecting disciplined underwriting and the timing of prior period development in 2006.
Premium and Cost Trends: Trends include Local Group and Individual fully- insured businesses.
For the rolling 12-month period ended June 30, 2007, the primary drivers of medical trend were outpatient and inpatient costs. The Company continues to price its commercial business so that expected premium yield exceeds total cost trend, where total cost trend includes medical costs and selling, general and administrative ("SG&A") expense.
Based on medical trends in the first and second quarters of 2007, the Company continues to believe its 2007 medical cost trend estimate of less than 8.0 percent is appropriate.
SG&A Expense Ratio: The SG&A expense ratio was 15.1 percent in the second quarter of 2007, a decrease of 60 basis points from 15.7 percent in the second quarter of 2006. The ratio improved year-over-year as the Company continued to control spending and spread administrative expenses across a growing revenue base.
The SG&A expense ratio increased 70 basis points from the first quarter of 2007 as the Company resumed the discretionary spending that had been postponed in the first quarter.
Operating Cash Flow: For the six months ended June 30, 2007, operating cash flow totaled $2.7 billion, or 1.7 times net income. As expected, the second quarter operating cash flow of $725.9 million was lower than the first quarter as the Company made two federal income tax payments during the period totaling $802.1 million and received one additional CMS payment in the first quarter of 2007.
Days in Claims Payable: Days in claims payable as of June 30, 2007, was 45.5 days, an increase of 0.8 days from 44.7 days as of March 31, 2007. The increase was primarily due to lower benefit expense per day, the timing of medical claim payments, and increased provider incentive accruals, which were partially offset by the timing of claim payments in the pharmacy benefit management ("PBM") operation.
Share Repurchase Program: During the second quarter of 2007, the Company repurchased 16.2 million shares of its common stock for $1.3 billion. As of June 30, 2007, the Company's remaining Board-approved share repurchase authorization was $1.0 billion. The Company intends to utilize the remaining authorization during 2007, subject to market conditions. At June 30, 2007, cash and investments held at the parent company and available for general corporate use totaled $2.7 billion.