DOW JONES NEWSWIRES 
 

WellPoint Inc.'s (WLP) third-quarter earnings fell 11% on asset write-downs, but the results were better than expected, driven by lower than seen medical costs.

Chairman and Chief Executive Angela Braly said the nation's largest health insurer by members remains confident about the outlook for the current quarter and expects net growth of more than 400,000 national members in January.

The managed-care industry faces concerns about Washington's health-care debate and an expected wave of H1N1 flu this fall and winter, in addition to remaining challenges from the recession. WellPoint in recent quarters has shown signs of getting a better handle on rising medical costs, and the company has introduced more-affordable products and expanded retention programs amid the recession.

For the quarter ended Sept. 30, WellPoint reported a profit of $730.2 million, or $1.53 a share, down from $820.7 million, or $1.60 a share, a year earlier. Excluding a gain of 3 cents a share from investments and a write-down of 28 cents a share for impaired assets, WellPoint's per-share earnings were $1.78, above the average analyst estimate on Thomson Reuters of $1.37 a share.

Revenue rose 3.1% to $15.43 billion, also above the Thomson Reuters estimate of $15.15 billion.

"The outperformance was largely on the medical expense line," Morgan Stanley analyst Doug Simpson said. WellPoint's medical-loss ratio, or the amount of premiums used to pay patient medical costs, fell to 81.1% from 82.5% a year earlier and 82.9% in the second quarter.

"While the backdrop is challenging, we are encouraged by stronger than expected Q3 results now posted by both [UnitedHealth Group Inc. (UNH) and [WellPoint], the two biggest players," Simpson said. UnitedHealth reported better-than-expected results last week.

Simpson added that roughly 15 cents a share of the beat "was from higher than expected favorable reserve development, which are 'real' earnings."

WellPoint shares, up 11% in 2009, rose 2.9% premarket to $48.05. Simpson noted that WellPoint's valuation is about 15% below its peers.

"This valuation is attractive as we forecast that over the next 12-15 months, WLP has $8.4B in identifiable excess cash, worth nearly 40% of the current market cap," said Simpson, who rates WellPoint at overweight.

For the year, the company lowered its 2009 earnings forecast to $5.06 to $5.23 a share from $5.60 to $5.66 a share to reflect the asset write-downs and increased usage of health benefits after an employee loses his or her job. But revenue estimates were raised $300 million to $60.9 billion. WellPoint also expects year-end medical enrollment of 33.6 million members, which would be down 300,000 from Sept. 30 levels.

Medical membership fell 4.2% to 33.9 million as of Sept. 30 from a year earlier and dropped 300,000 during the quarter.

Express Scripts Inc. (ESRX) in April agreed to buy WellPoint's in-house pharmacy-management business for $4.68 billion. The deal, expected to close before year-end, is a shift from a prior strategy among health insurers to own and control their own PBMs, and could pressure rivals to do the same.

-By Tess Stynes, Dow Jones Newswires; 212-416-2481; Tess.Stynes@dowjones.com;

(George Stahl contributed to this report.)