Health insurer WellPoint Inc. (WLP) reported second quarter GAAP results of $693.5 million or $1.43 per share that were in-line with the Zacks Consensus Estimate. Non-GAAP earnings, excluding net investment losses of 7 cents per share, came in at $1.50 per share. On a GAAP basis, profits declined 7.6% from the year-ago period.

Total operating revenues declined 1.4% to $15.265.8 million. Operating gains from the Commercial Business segment declined 31.2% to $582.8 million. Results were affected by the increasing unemployment rate. The Consumer Business reported an operating gain of $382.1 million, up 67.7% from the year-ago period. Operating improvements in the Senior business helped drive growth in this segment. The Other segment reported a 12.5% year-over-year increase in operating gain, which was driven by growth in the company’s NextRx pharmacy benefit management operation.

We were disappointed to see a significant decline in medical enrollment in the reported quarter. Medical enrollment fell by 1.1 million people, or 3%, to 34.2 million members. Rising unemployment led to the decline in enrolment. With the increasing trend in unemployment rates, we expect medical enrolment to decline further. The company cut down its year-end membership expectations to 33.6 million.

WellPoint lowered its earnings guidance for 2009 to $5.06 to $5.12 per share (including net investment losses of $0.54 per share) from the earlier guidance of $5.14 – $5.20 per share, (including net realized investment losses of $0.46 per share). Operating revenues are now expected in the range of $60.6 billion, down from the previous guidance of $61.2 billion.

The company also presented a bleak outlook for 2010. WellPoint announced that it does not expect operating earnings growth in 2010 given the unemployment scenario and the increase in COBRA membership which will lead to greater costs. COBRA membership has risen from approximately 1.6% of fully insured enrollment as of year end 2008 to 2.2% currently.

We believe the Commercial Business segment will remain under pressure in the coming quarters. A stronger than expected flu season would also dampen on earnings. WellPoint’s competitors include UnitedHealth Group (UNH) and Coventry Health Care (CVH).
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