2nd UPDATE: WellPoint 4Q Net Falls 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 5.7% to $65.45 in recent trading, despite the company boosting its dividend by 15%, and weighed on others in the sector, as shares of Humana Inc. (HUM), 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 confirmed it has fixed the issue by walking away from the problem market, which is part of some planned membership losses for the new year aimed at boosting profit margins.

"We believe we have taken the appropriate actions to improve our senior business results for 2012," Angela Braly, WellPoint's chief executive, said on a call with analysts.

Leerink Swann analyst Jason Gurda said WellPoint's results were "somewhat disappointing" but not a "disaster" since the company has made Medicare-related adjustments to stop the chief 2011 problem from continuing. Some analysts viewed guidance favorably since they believe insurers in general are taking a conservative approach to 2012 forecasts.

But WellPoint's quarterly miss still stood out in a market where investors hold a high bar. "Investors have been expecting strong results from managed care in 4Q, so this report will be viewed as disappointing," Deutsche Bank analyst Scott Fidel said.

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 in part 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 linked 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.

WellPoint ended last year with 34.3 million enrolled medical members, but forecasted the enrollment tally will drop by 600,000 in 2012. Much of this is intentional, as WellPoint has decided to walk away from the problem Medicare product in California, certain self-funded national accounts and the small-group market in New York. The company also is expecting to feel some impact from lower employment of insured employees among companies it serves.

"Despite these selected membership declines in 2012, we have had a positive start to the year," Braly said on the call.

WellPoint on Wednesday 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

--Melodie Warner contributed to this article.

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