(Reuters) - WellPoint Inc WLP.N posted a quarterly profit that missed analysts’ estimates, hurt by high claims in its Medicare plans for the elderly, and issued a 2012 profit forecast that could fall short of Wall Street’s target.
Shares of the No. 2 U.S. health insurer by market value dropped nearly 6 percent on Wednesday, and the disappointing results dragged down rivals. Humana Inc (HUM.N), which has a large Medicare business, fell 1.6 percent, Aetna Inc AET.N declined 2.3 percent and Cigna Corp (CI.N) was down 1.4 percent.
WellPoint warned in July that surprisingly high claims from a Medicare plan in California would hurt earnings in 2011. Those losses ended up weighing on 2011 results more than the company initially expected.
WellPoint pointed to problems in northern California, where the insurer expanded its Medicare plan after previously operating in the southern part of the most populous U.S. state.
“The weaker fourth quarter and the guidance a little below consensus is probably something investors don’t tolerate very well,” Jefferies & Co analyst David Windley said. “When you get below expectations on both fronts, it’s hard to find that silver lining.”
Like rivals, WellPoint is seeking to increase its business of selling privately administered Medicare Advantage plans to capitalize on the aging postwar baby boom generation becoming eligible for the government-run Medicare program.
“As you’re growing in a new market, and you’ve got such a large population aging in, you could have a little more volatility like we saw in this product,” WellPoint Chief Financial Officer Wayne DeVeydt said in an interview.
But DeVeydt said he remained bullish on the Medicare business. WellPoint last year bought privately held CareMore to expand its Medicare presence.
“You have to be in this space,” he said. “Too much of the population is moving there.”
WellPoint’s disappointing profit contrasted with results from large health insurers that have topped forecasts over the past year. The industry has benefited from low medical claims as Americans avoid doctor visits and procedures to save money in the weak economy.
WellPoint’s disappointing earnings are the primary reason “why its stock so badly underperformed peers in 2011,” Citigroup analyst Carl McDonald said in a research note. WellPoint shares rose 18 percent last year, he said, compared with gains of 40 percent or more for UnitedHealth Group Inc (UNH.N) and Aetna.
WellPoint, which also raised its dividend 15 percent, said fourth-quarter net income fell 39 percent to $335.3 million, or 96 cents per share. That compared with $548.8 million, or $1.40 per share, a year earlier.
In the year-ago quarter the company booked additional profit from reserves set aside to pay medical claims, since those claims came in below expectations.
Excluding special items, WellPoint reported earnings of 99 cents per share. Analysts on average were looking for $1.12, according to Thomson Reuters I/B/E/S.
Revenue rose 5.5 percent to $15.18 billion. Membership stood at about 34.3 million at the end of the year, up 2.8 percent.
WellPoint posted a fourth-quarter loss of $4.6 million for the consumer business that includes its Medicare plans. That compared with a year-earlier profit of $112 million.
“Clearly, our consumer segment underperformed, and it was almost entirely due to the senior business,” WellPoint Chief Executive Angela Braly said on a conference call with analysts.
DeVeydt said the California Medicare problems cost the company $150 million this year, and WellPoint took an additional $20 million reserve in case high claims drag into next year.
For 2012, the company said it had fixed the issue by withdrawing its broader Medicare plan covering California and replacing it with more targeted local plans in the state.
A year earlier, the company was able to book additional profit from reserves set aside to pay medical claims, since those claims came in below expectations.
For 2012, WellPoint forecast net income of “at least” $7.60 per share. Analysts have been looking for $7.75.
The company also forecast membership would decline by 600,000 to 33.7 million this year.
UnitedHealth, the largest U.S. health insurer by market value, last week stuck to a 2012 profit forecast that called for a possible decline and was below Wall Street’s target.
Through Tuesday, WellPoint shares had risen nearly 5 percent this year. They were down 5.8 percent at $65.40 in midday trading Wednesday on the New York Stock Exchange.
Reporting by Lewis Krauskopf; Editing by Michele Gershberg, Lisa Von Ahn and John Wallace