Insurers like WellPoint (ELV 3.19%) are generating billions in additional revenue thanks to health care reform and (so far) worries that participating in exchanges would imperil insurer earnings appear to lack teeth. However, a lot can happen from quarter to quarter, especially when it comes to healthcare -- a market that is plagued by rising costs.
During WellPoint's second-quarter conference call, the company offered investors additional insight into how reform is impacting its business and what investors might expect for the rest of the year. So, let's consider five can't-miss quotes from this earnings conference call and what they may mean for WellPoint's investors.
Source: WellPoint.
1. Firing on all cylinders
"We grew by another 328,000 members in the second quarter driven by contributions from both the public exchanges and the Medicaid expansion....We've now added 1.6 million new members served so far in 2014, representing growth of 4.5% versus year-end 2013." -- CEO Joe Swedish
WellPoint is getting bigger every quarter thanks to offering plans on healthcare exchanges in 14 states and running state Medicaid programs. The 769,000 new members signing up through public exchanges out-paced WellPoint's 600,000 forecast, and thanks to Medicaid expansion in some states (and increased awareness) WellPoint is serving 446,000 more people through its private Medicaid programs this year than it did last year.
Source: WellPoint
2. A bright future
"We continue to see meaningful, long-term opportunities to grow our customer base across our Commercial and Government segments. We expect 2014 will prove to be the first year of a multiyear opportunity to grow through continued growth of public exchanges as well as Medicaid expansion." -- CEO Swedish
A multi-year window of growth is exactly the kind of commentary shareholders want to hear from WellPoint. Thanks to its success so far, WellPoint expects that Medicaid expansion alone will result in 500,000 to 600,000 new members this year, up from the company's prior predictions of between 400,000 and 500,000 new members.
But it's not just public exchanges and Medicaid driving the multi-year growth opportunity at the company. WellPoint estimates that it has up to $40 billion in business it can bid on over the coming year, about $31 billion of which could represent new business for the company.
3. Keeping costs in check
"We are improving our MLR [medical loss ratio] outlook for the year from 83.7% plus or minus 30 basis points to 83.5% plus or minus 30 basis points." -- CFO Wayne DeVeydt.
One of investors' biggest knocks on the Affordable Care Act was that insurer's restricted ability to model pricing based on patient health would result in older, more costly enrollees that would swamp any chances for profitability.
However, WellPoint reports that the average age and health of its applicants is tracking as well as (and in some cases, better than) hoped. WellPoint says despite the fact that treating patients covered by these plans costs WellPoint more than patients covered by its other insurance products, its paid claims trends are "encouraging." The company says that its costs aren't coming in as high as it had modeled, and that has led to a benefit expense ratio of 82.7% in Q2, down 1.2% from last year.
4. Plenty of shareholder-friendly cash
"We generated operating cash flow of approximately $2.5 billion, roughly 1.7 times net income." -- CFO DeVeydt.
While margin at insurers is typically measured in the single digits, the sheer size of their business means insurers like WellPoint kick off plenty of shareholder friendly cash that can be used for dividends and buybacks.
WellPoint's solid cash generation allowed it to repurchase more than 8.2 million shares during the quarter at a cost of $815 million. It also allowed the company to return over $120 million to shareholders through dividend payments. Since WellPoint is upping its cash flow forecast to above $2.7 billion this year, it's likely there will be plenty of money sloshing around for buybacks and dividends.
5. Potentially more upside
"We think the balance sheet is prudently conservative for all the unknown. I really want to emphasize that it's prudently conservative based on all the unknowns. The cash flow would seem to imply that it could be more conservative than needed and we want to see some of that cash flow continue in the second half. But if it does, that would argue that there could be upside to our outlook [emphasis added]." -- CFO DeVeydt.
WellPoint has already increased its outlook twice this year. At the end of the first quarter, it increased its earnings per share prediction from at least $8 exiting 2013 to at least $8.40. Coming out of the second quarter, WellPoint bumped that forecast up again, calling for at least $8.60 in EPS this year. Given management comments relating to patient cost trends and reserves, it would seem there may be even more room to increase that guidance if the third quarter comes in as expected.
Fool-worthy final thoughts
Insurers have already had an impressive run from their lows, and valuation (even when considering next year's earnings) has moved to the high end of historical norms, suggesting that a lot of the better-than-hoped results are already priced into shares. However, investors are right to be looking at insurers like WellPoint given that reform tailwinds are likely to support membership growth over the coming years.
