WellPoint Inc. (WLP) has agreed to pay $90 million as settlement payment pertaining to a lawsuit against its subsidiary, Anthem Insurance, according to Reuters. However, the settlement is subject to the approval of a federal judge, following which the payment will be made to over 700,000 former members of Anthem in Indiana, Ohio, Kentucky and Connecticut.

In 2005, former members of Anthem filed a class action lawsuit claiming that they did not receive adequate compensation for their ownership stake in the company during its conversion from a mutual company to a stock company in 2001.

The settlement payment is expected to reduce the earnings of WellPoint in 2012. The company had increased its adjusted earnings per share guidance to $7.65 in April this year.

However, the settlement payment will not have a drastic impact on WellPoint’s cash and cash equivalents, which stood at $2.3 billion as of March 31, 2012. Thus, the settlement payment amounts to only 3.9% of the cash balance at the end of the first quarter.

However, WellPoint is also expected to finance the acquisition of 1-800 CONTACTS Inc., a web- and phone-based eyewear retailer, from its cash on hand. The deal, which was announced earlier this month and is expected to be completed in the third quarter of 2012, is estimated to be valued at $900 million. Thus, together the settlement payment and acquisition will reduce the cash balance of WellPoint substantially.

Nevertheless, WellPoint generates strong cash flows. Operating cash flow in the first quarter of 2012 amounted to $1.2 billion. Thus, cash flow generated in one quarter will be adequate to compensate for the cost of the acquisition as well as the settlement payment.

The Zacks Consensus Estimates for WellPoint’s second quarter earnings is currently pegged at $2.08. This represents a year-over-year increase of 14.1%. For 2012, the Consensus Estimate stands at $7.76 per share, up 10.9% over 2011.

WellPoint has emerged as the largest insurer on the basis of enrollment, nudging aside the likes of Aetna Inc. (AET), CIGNA Corporation (CI) and UnitedHealth Group Inc. (UNH).

We maintain a long-term Neutral recommendation on WellPoint. Also, the company retains a quantitative Zacks #3 Rank (short-term Hold rating).

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