WellPoint (WLP)

Q2 2012 Earnings Call

July 25, 2012 8:30 am ET

Executives

Michael Kleinman - Vice President of Investor Relations and Acting Vice President of Internal Audit, Ethics & Compliance

Angela F. Braly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Wayne S. Deveydt - Chief Financial Officer and Executive Vice President

Kenneth R. Goulet - Executive Vice President of Employer, Medicaid, Individual and Specialty

Analysts

Justin Lake - JP Morgan Chase & Co, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Melissa McGinnis - Morgan Stanley, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the WellPoint second quarter conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Michael Kleinman

Good morning, and welcome to WellPoint's Second Quarter Earnings Conference Call. I'm Michael Kleinman, Vice President and Chief of Staff. With me this morning are Angela Braly, our Chair, President and Chief Executive Officer; and Wayne Deveydt, Executive Vice President and Chief Financial Officer. Angela will begin this morning's call with an overview of our second quarter results, and then we'll discuss our revised full year 2012 outlook. Wayne will then offer a detailed review of our financial performance, capital management and updated guidance, which will be followed by a question-and-answer session. Ken Goulet, Executive Vice President and President of our Commercial Business, and Raja Rajamannar, Executive Vice President of our Senior Business and Chief Transformation Officer, are available to participate in the Q&A session.

During this call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP are included in today's press release and available on our company website at www.wellpoint.com.

We will be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC.

I will now turn the call over to Angela.

Angela F. Braly

Thank you, Michael, and good morning. I'm going to start by discussing the quarter and some of the dynamics in the marketplace that have contributed to our decision to reduce our full year 2012 earnings guidance. I'll then turn the call over to Wayne for a more detailed discussion of our results, medical cost trends and the changes to our outlook.

Earnings per share in the second quarter of 2012 totaled $1.94, which included net costs of $0.10 per share. These net costs included expenses related to litigation settlements and the closing of our 1-800 CONTACTS acquisition, partially offset by net investment gain. Earnings per share in the second quarter of 2011 were $1.89 and included net investment gains of $0.06 per share.

Excluding the items in each period, adjusted net income was $2.04 per share in the second quarter of 2012, an increase of 11.5% compared with adjusted net income of $1.82 per share in the prior year quarter.

While our second quarter EPS results improved from the prior year and are ahead of our plan through the first 6 months, the combination of lower enrollment and slightly higher medical cost trends are driving a reduction in our full year 2012 outlook. We're disappointed with the need to lower our guidance, but believe it's the right action to take, given the challenging marketplace we see, our commitment to maintaining pricing discipline and our intention to continue investing for the strong future growth opportunities ahead of us.

We now expect full year 2012 net income to be in the range of $7.30 to $7.40 per share. This represents a reduction of $0.25 to $0.35 per share or approximately 4% at the midpoint of the range from the guidance we gave on our first quarter earnings call for full year adjusted EPS of $7.65.

Most of the reduction in our outlook relates to lower-than-expected membership volume. Medical enrollment declined by 126,000 during the second quarter and totaled 33.5 million members as of June 30, 2012. Commercial membership decreased by 169,000, driven by our strategic product repositioning in the New York small group market, competitive situations and continued economy-related in-group membership attrition. The pricing dynamics in the marketplace are varied across our different geographies, but overall are more intense this year. And we're being thoughtful in our competitive strategies as we maintain pricing discipline. This has resulted in lower-than-anticipated Commercial enrollment through the first 6 months of the year.

Although results in our Commercial segment are lower than we would like, this business remains strong with attractive operating margin, and we remain committed to maximizing its contribution through targeted approaches to the unique dynamic in each market.

Specifically, our plans to improve profitable enrollment growth include: one, leveraging our strong cost position; two, expanding our investment in product design, including narrower or more efficient network offerings; and three, continuing to invest in customer-facing capability.

We also have a number of cost of care initiatives under way to mitigate the short-term impact of higher-than-expected medical trends and also achieve more significant incremental savings for our customers over the long term. We're cautiously optimistic about our ability to improve Commercial enrollment trends over the next year, obviously with an eye on the macro-employment background. We have seen Commercial membership pressures in California, Virginia and Georgia. In those markets, there are number of market dynamics in play, but in general, competition is intensified in 2011 and has continued into 2012. We're starting to see some marginal signs of those markets stabilizing, and we remain focused on pricing appropriately to cover our expected costs trend while providing consumers with attractive product offerings.

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