2006 in Review: WellPoint

While 2006 proved to be a volatile year for the majority of the major health-insurance companies in the U.S., shareholders of WellPoint (NYSE:WLP) enjoyed a slightly more stable year relative to their peers. While trading slightly down at the time of this writing from its open for 2006, the company has turned in a solid year from an earnings and enrollment standpoint.

WellPoint experienced a great deal of growth during 2006 as the result of its acquisition of WellChoice a year ago. Compared to 2005, the first quarter of 2006 saw the company's operating revenue increasing by 10%, to $1.3 billion. Enrollment numbers increased by 947,000 and the company's benefit expense ratio declined by 20 basis points, when looked at on a comparable basis. The company also revised its full-year EPS forecast upward to $4.63 from its previous guidance of $4.54.

Another positive signal for investors was the fact that WellPoint repurchased 24.7 million of its common shares during the first quarter, at a total cost of $1.9 billion. The company also authorized the future repurchase of an additional $1 billion worth of company stock. A similar theme was seen during 2006 at other major insurers. Through the end of the third quarter, Aetna (NYSE:AET) and CIGNA (NYSE:CI) had spent approximately $2 billion and $2.4 billion respectively on share repurchase programs. During the same time period, Stock Advisor and Inside Value pick UnitedHealth Group (NYSE:UNH) had repurchased 3% of its shares that were outstanding as of Dec. 31, 2005.

WellPoint's second quarter was relatively successful as well. Absent the WellChoice acquisition, operating revenue grew by 10.5% as the result of disciplined pricing, the addition of the New York state prescription drug contract, and growth in WellPoint's Medicare Part D products. Enrollment increased by 616,000 members on a comparable basis, and the benefit expense ratio decreased again by 10 basis points. "We are very pleased with our strong second-quarter results that reinforce the very high expectations we set for ourselves at the beginning of the year," said Larry C. Glasscock, chairman, president, and chief executive officer of WellPoint.

In the third quarter of 2006, WellPoint saw its operating revenue increase by $1.6 billion, or 12.3%, and it also saw enrollment increase by 558,000 members on a comparable basis. The company did allow its benefit expense ratio to rise by 80 basis points on a comparable basis, though. This increase was primarily the result of the addition of the New York state prescription drug contract, which has a higher-than-average benefit expense ratio.

During the quarter, WellPoint continued to forge ahead with its stock repurchase program, buying back 5.4 million common shares at a cost of $399.6 million. The company's board also approved an additional $500 million in share repurchase authorization, which WellPoint intended to utilize during the fourth quarter. Management also raised its full-year EPS forecast to $4.81.

Shareholders can expect the company to report its Q4 earnings and full-year results near the end of next month. Given the company's consistent operating performance throughout the year, I am not expecting any major surprises. The company did announce during the quarter that it is significantly expanding its managed-care Medicaid operations and specialty pharmacy business in Indiana. The move should create 1,200 new positions over the next five years.

Overall, WellPoint had a fairly successful year from an earnings-growth standpoint. WellPoint was able to successfully integrate its WellChoice acquisition into its operations, and the company had completed $4.0 billion in share repurchases through the end of the third quarter. I believe these repurchases are an excellent sign for current shareholders with respect to the stock's current valuation. While the stock opened the year at $80 and was trading at $76 in early December, management appears confident in the company's prospects in 2007. The stock is also trading at a forward P/E of just 14.

Our Motley Fool CAPS community members have given their own input on WellPoint's outlook for 2007. This is what the community thinks:

You can see that the majority of CAPS players think that the stock will continue to hold its ground in 2007. CAPS player albiedavis lends some interesting insight into his evaluation of WellPoint. "When those boomers or their Harleys skid off the road, time for well-managed health care," he wrote. Point taken.

While I personally am not hoping for anybody to take any ugly spills off their Harleys in 2007, I am hopeful that WellPoint will continue its strong earnings and enrollment growth. I believe that the stock is reasonably valued and that synergies realized from the WellChoice acquisition will continue to benefit the company throughout 2007.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

UnitedHealth is both an Inside Value and a Stock Advisor recommendation. Try out these or any of our investing newsletter servicesfree for 30 days.

Fool contributor Billy Fisher has no financial interest in any stocks mentioned. The Fool has a disclosure policy.