Jul. 25, 2012 12:31 PM ET
By Tom Murphy
INDIANAPOLIS (AP) — WellPoint Inc., the nation's second-largest health insurer, surprised Wall Street on Wednesday by cutting its 2012 forecast and reporting second-quarter earnings that both fell and missed expectations.
Investors then sent the Indianapolis company's stock price on its biggest one-day plunge in more than three years.
The insurer said it lowered earnings expectations after enduring a rough month of May and seeing enrollment slip. That fall was largely due to job cuts, which reduce the number of people covered by employer-sponsored health insurance.
"We're not seeing the economy improve, and it continues to be sluggish," Chief Financial Officer Wayne DeVeydt said.
Medical costs came in about $50 million higher than WellPoint expected in May, as more people visited the doctor and then were referred to additional outpatient care, DeVeydt said. Growth in medical costs returned to expected levels in June, but WellPoint decided it was prudent to lower its forecast in case costs spike again later this year.
WellPoint now expects 2012 adjusted earnings, which exclude one-time items, to range between $7.30 and $7.40 per share. That's down from a previous forecast of $7.57 per share. It's also well below the $7.76 per share, on average, analysts surveyed by FactSet expected.
Citi analyst Carl McDonald said in a research note that UnitedHealth Group Inc., a WellPoint competitor, also had higher medical costs. But it still managed to raise its 2012 earnings forecast when it reported second-quarter results earlier this month.
"Time may be running out for WellPoint's management team," McDonald wrote. "Several large (share) holders were already frustrated by WellPoint, and this earnings report won't do much to improve the relationship."
In the second quarter, WellPoint earned $643.6 million, or $1.94 per share. That's down more than 8 percent from $701.6 million, or $1.89 per share, a year ago when the company had more shares outstanding. That marked the fifth-straight quarter in which WellPoint reported a drop in earnings compared to the previous year's quarter. Adjusted earnings were $2.04 per share.
Operating revenue, which excludes investment income and gains, climbed 2 percent to $15.17 billion. Conversely, membership fell 2 percent to 33.5 million people compared with last year's quarter.
The performance missed Wall Street expectations. Analysts had forecast, on average, earnings of $2.08 per share on $15.31 billion in revenue.
WellPoint shares dropped 11.7 percent, or $7.17, to $54.25, the stock's deepest one-day decline since January 2009, according to FactSet.
Shares of other major insurers like UnitedHealth and Aetna Inc. also sank 5 percent while broader trading indexes were mixed. WellPoint shares have now dropped more than 18 percent so far this year.
Chairwoman and CEO Angela Braly told analysts during a Wednesday conference call that WellPoint was disappointed that it had to lower its guidance. But she said the insurer's decision to invest in growth despite tough market conditions will pay off with a better future performance.
Earlier this month, WellPoint said it will spend about $4.46 billion to buy Amerigroup Corp., which runs Medicaid coverage in 13 states. Medicaid is the state-federal program that provides coverage for the needy and disabled. Insurers see lucrative growth opportunities in working with people who qualify for both Medicaid and the federally-funded Medicare program.
Last month, the insurer also completed its purchase of contact lens retailer 1-800 Contacts Inc., and it continues to expand a Medicare Advantage plan provider it acquired last year
DeVeydt, the CFO, said in an interview that the insurer could have cut down on its investments in order to meet its earnings forecast.
"But Angela made the difficult call of saying the future is more important," he said, referring to the CEO.
WellPoint trails only UnitedHealth in size. It runs Blue Cross Blue Shield plans in 14 states, including California, New York and Ohio.