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The market is questioning, rather than celebrating,

WellPoint's

(WLP)

strong earnings.

Shares of the health insurance company took a dip Tuesday despite strong growth in both fourth-quarter and full-year profits. Investors, worried about possible "earnings management," fixated on a single line item in WellPoint's latest results.

For 2002, WellPoint expects to see profits lifted by the recovery of $410 million worth of past medical claims reserves. The company said it has always overreserved for unpaid medical claims -- and recovered the excess reserves later -- in an attempt to be conservative. But investors were clearly rattled by this boost to the bottom line.

In 2001, WellPoint recovered $277 million -- 48% less -- from excess reserves. In 2000, the gain was less than half that amount, at $124 million.

During a conference call Tuesday morning, WellPoint attributed its expanding reserves -- and the resulting recoveries -- to its considerable growth. The company said it has always overestimated the risk of unpaid claims, and has grown even more cautious as it acquires unfamiliar blocks of business.

"We have been consistently conservative," WellPoint CEO Leonard Schaeffer said. "We think that's the right way to run a company."

At least two research firms jumped to WellPoint's defense ahead of Tuesday's conference call. UBS Warburg agreed that the company's reserves were prudently conservative. Similarly, Deutsche Bank concluded that WellPoint's reserves were growing to cover added business rather than to manipulate earnings in any way. Both firms have a buy rating on the stock.

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But the market remained skittish. The stock, down nearly $2 to $66.50 at the open, continued to trade in the red as the day wore on. It was off $1.14 at $67.45 in midafternoon.

That slide came despite strong financial results. The California-based health maintenance organization ended 2002 with a solid fourth quarter that saw profits surge 64% from a year earlier. Quarterly earnings per share of $1.18 came in at the high end of analyst expectations, topping the consensus estimate by 2.3%.

WellPoint -- which boasts the largest for-profit health plan in its home state -- has now beaten Wall Street expectations for at least five quarters in a row. In sharing the company's latest results, CFO David Colby declared 2002 "an outstanding year for WellPoint in almost every operating metric."

Colby highlighted the following as major accomplishments for the year:


  • A 70% jump in annual net income.
  • Better-than-expected membership growth.
  • A notable decline in general and administrative expenses.
  • Premium pricing that continues to sufficiently cover medical cost trends.

For the full year, WellPoint reported net income of $703.1 million, or $4.67 per share. Excluding extraordinary gains, the company posted 2002 earnings of $4.42 a share -- or 3 cents above the mean estimate of analysts polled by Thomson Financial/First Call. Full-year revenue leapt 40% to $17.3 billion.

Like Colby, WellPoint CEO Leonard Schaeffer applauded the company's recent performance.

"Our strong membership growth in the fourth quarter and full year means that we are delivering products and services our customers want," Schaeffer said.

During 2002, membership in WellPoint's medical plans swelled 26% to 13.2 million. WellPoint attributed that growth to three 2002 acquisitions -- Blue Cross and Blue Shield of Missouri, HealthLink and MethodistCare -- as well as continued growth in key areas like California and Georgia.

WellPoint is best known as the first Blue Cross and Blue Shield health plan to become "for-profit" and currently ranks as the largest publicly traded Blue Cross health plan in the nation.