UPDATE: WellPoint 4Q Profits Fall 39% Amid High Medical Costs

WellPoint Inc.'s (WLP) fourth-quarter profit fell 39% as high medical costs for seniors continued taking a toll, bucking a trend of generally light costs seen elsewhere in the managed-care sector.

The Indianapolis-based firm's results fell short of analysts' expectations, even though the company said it met its own guidance. Wellpoint set financial targets for the new year that also missed Wall Street expectations.

Shares of WellPoint declined 5.6% to $65.50 in premarket trading, despite the company boosting its dividend by 15%, and weighed on others in the sector, as shares of Cigna Corp. (CI), Aetna Inc. (AET) and UnitedHealth Group Inc. (UNH) all fell more than 1%.

Health insurers have generally benefited from the sluggish pace of patient visits to operating rooms and doctors' offices, brought on by high unemployment and economic instability. The benefit for WellPoint has been muted, however, by unexpectedly high costs for seniors in northern California, where the company picked up thousands of members with expensive health issues who proved a bad match for WellPoint's pricing.

The company has said it expects to fix the issue for the new year, after taking a hit to earnings last year. In its release Wednesday, WellPoint said it has "refined its Medicare Advantage products and pricing for 2012."

Medicare Advantage plans are privately administered health plans for seniors funded by the government. They have become a big focal point for insurers seeking ways to grow as baby boomers become eligible for Medicare.

Leerink Swann analyst Jason Gurda said WellPoint's results were "somewhat disappointing" but not a "disaster" since the company has made Medicare-related adjustments. Wells Fargo analyst Peter Costs, however, said the results--plus weaker-than-expected guidance--could pressure shares for the sector.

WellPoint reported a fourth-quarter profit of $335.3 million, or 96 cents a share, down from $548.8 million, or $1.40, a year earlier. Excluding items such as net investment gains or losses, per-share earnings fell to 99 cents from $1.33. Analysts polled by Thomson Reuters had forecast earnings of $1.12 in the recent quarter.

The quarter included investment losses of 3 cents a share, while the year-earlier quarter included investment gains of 7 cents a share. The year-earlier period benefited from a big reserve release of $315 million, pegged to money the company had left over after health costs wound up being very light in 2010. But WellPoint took a $50 million charge in the recent quarter pegged in part to an acquisition and investments in the business.

Fourth-quarter operating revenue rose 5.5% to $15.18 billion.

Commercial business revenue--the biggest contributor to the company's top-line--rose 1.1%, though its operating profit dropped 16%. The consumer business saw a 14% revenue jump, but the segment swung to a loss due to higher medical costs in the senior business.

The company said its medical-loss ratio--a measure that reflects the portion of insurance premiums used for patient care--rose more than three percentage points to 87.6% in the recent quarter, reflecting the high senior-business costs.

For the new year, WellPoint projected earnings of at least $7.60 a share on operating revenue of about $62.1 billion. Analysts surveyed by Thomson Reuters expected $7.75 a share and $62.76 billion, respectively. Though below expectations, there is room to grow, Wedbush analyst Sarah James said.

The company also increased its quarterly dividend to 28.75 cents from 25 cents. The dividend will be payable March 23 to shareholders of record on March 9.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

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