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Profit Slumps at WellPoint

The health insurer misses analyst estimates and trims its full-year guidance.




prognosis keeps getting worse, but investors seem to be in a forgiving mood.

Hurt by rising medical costs, the nation's largest health insurer failed to muster even the reduced earnings that it promised just last month. Its first-quarter profit of $588 million fell 25% from a year ago, and even excluding the hit caused by an investment loss, earnings per share of $1.13 came in 6 cents shy of Wall Street's shrinking target.

"The sizeable earnings miss against the previously-reduced EPS target would have been even wider were it not for non-operating items," Goldman Sachs analyst Matthew Borsch observed on Wednesday. Thus, "from that perspective, earnings quality was poor."

WellPoint foresees no quick rebound, either. Rather, the company has once again trimmed its guidance for the entire year. Excluding investment losses, the company expects to post a 2008 profit of $5.48 to $5.73 a share. It will need to hit the very top of that range just to match current expectations.

However, shares of WellPoint were caught up in the broader market's upturn in the early session; the stock was recently up nearly 3% to $47.86.

"The already pummeled valuation will likely limit the extent of the downside, as some investors look for this second drop to guidance to be the last for 2008," Borsch explained. However, "we are concerned that the bulk of the negative earnings impact has been recognized in Medicare, leaving potential further downside on the core commercial business where there is industry-wide cyclical pressure on margins."

Thus, he concluded, "our EPS and price target are under review."

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Borsch currently has a neutral rating on WellPoint and the managed care industry as a whole. He has been predicting a "cyclical downturn," caused by pricing pressures on traditional insurance plans, for years. With a string of health insurers reporting dramatic shortfalls in recent weeks, he sees mounting evidence that his bearish forecast is finally playing out.

And WellPoint bolstered that evidence. While the company managed to expand its customer base - avoiding at least one problem suffered by rival


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- it still struggled to meet top-line targets for the first quarter. Revenue, up just 3.5% to $15.37 billion, fell a bit shy of the consensus estimate.

Still, WellPoint's biggest problem -- by far -- proved to be escalating medical costs. The company's all-important "benefit expense ratio," or the percentage of revenue spent on medical care, jumped to 85.1% in the latest period. That ratio, a key factor in determining a health insurer's profitability, now hovers a full 2% above the level seen just one year ago.

WellPoint blamed most of the recent uptick on its Medicare business. During the latest quarter, some of the company's Medicare Advantage customers ran up particularly high bills. The company hopes to better manage their care -- and ultimately raise their prices -- going forward. But it has paid a steep price for its generous coverage in the meantime.

Notably, WellPoint's senior business lost more than $200 million last quarter. As a result, the company's entire "consumer" division -- which includes seniors, state-sponsored customers and individual policyholders -- ended the quarter in the red.

WellPoint's core commercial division also earned less money than it once did. That unit, which specializes in traditional employer-sponsored health plans, saw profit slip 3.4% from a year ago.

Indeed, only WellPoint's "other" division -- offering side coverage for services like mental health care and prescriptions drugs -- posted profit gains for the quarter.