WC Wellchoice

WellChoice, Inc. (NYSE: WC): -- Second quarter 2005 net income of $74.6 million, or $0.88 per diluted share -- Commercial managed care membership, excluding NYC and NYS PPO, increased by 152,000, or 6.1%, over the second quarter 2004 and 2.9% since year-end 2004 -- Full-year 2005 earnings guidance raised to a range of $3.37 to $3.43 per diluted share, from a range of $3.35 to $3.41 per diluted share WellChoice, Inc. (NYSE: WC) today reported results for the second quarter ended June 30, 2005. WellChoice reported net income for the second quarter 2005 of $74.6 million, or $0.88 per diluted share, and for the six months ended June 30, 2005 of $145.5 million, or $1.72 per diluted share. "WellChoice once again delivered strong financial performance this quarter," said Michael A. Stocker, M.D., President and Chief Executive Officer of WellChoice. "We continue to experience solid growth in our managed care products and also benefit from our continued focus on achieving administrative expense efficiencies." "Our second quarter 2005 results reflect pricing discipline, expense control and membership growth," said John W. Remshard, Senior Vice President and Chief Financial Officer. "We expect to see solid earnings growth in 2005." Compared to December 31, 2004, enrollment in the Commercial Managed Care segment, excluding New York State and New York City PPO membership, increased by 2.9% as of June 30, 2005. Membership in the entire Commercial Managed Care segment increased by 1.7% to 4,455,000 since December 31, 2004. Membership in the Other Insurance Products and Services segment, which includes indemnity and individual products, declined by 0.7% since December 31, 2004. Total membership at June 30, 2005 was 5,025,000, an increase of 1.4% since December 31, 2004. Self-funded membership grew 2.7% since December 31, 2004 to 2,002,000 as of June 30, 2005, and now accounts for 39.8% of overall membership, an increase of 40 basis points over the prior year-end. Total revenues for the six months ended June 30, 2005 were $3.2 billion compared to $2.9 billion for the six months ended June 30, 2004. Administrative service fees increased $35.9 million to $281.1 million. Insured premiums were $2.88 billion for the six months ended June 30, 2005, compared to $2.61 billion in the first half of last year. The overall medical loss ratio was 86.2% for the six months ended June 30, 2005, flat compared to the six months ended June 30, 2004. Compared to the six months ended June 30, 2004, administrative expenses increased by $36.8 million to $485.0 million in the six months ended June 30, 2005. Total revenues for the second quarter 2005 were $1.65 billion compared to $1.50 billion for the second quarter last year. Insured premiums were $1.49 billion compared to $1.36 billion in the second quarter last year. Administrative service fees increased $15.9 million to $139.8 million. The overall medical loss ratio was 86.1% in the second quarter 2005, a 90 basis point improvement compared to the second quarter last year. Administrative expenses increased by $28.2 million to $251.9 million in the second quarter 2005 compared to the prior year second quarter. On June 29, 2005, the company entered into a final settlement agreement with the New York State Insurance Department for contributions and distributions related to its participation in Non-Medicare Supplemental Regulation 146 pools. The results of this agreement and a litigation reserve adjustment led to a net income benefit of $1.7 million, or $0.02 per diluted share for both the quarter and the six months. Cash flow from operating activities was $241.7 million for the six months ending June 30, 2005. The Company experienced net positive prior period reserve development of $2.2 million for the second quarter 2005 for its prospectively rated business, excluding the impact of the Regulation 146 settlement agreement and the litigation reserve adjustment referenced above. Days claims payable was 53.6 days for the quarter ended June 30, 2005, unchanged from the quarter ended March 31, 2005. EARNINGS OUTLOOK WellChoice is increasing its earnings guidance for 2005 to be in the range of $3.37 to $3.43 per diluted share, based on 85 million weighted average shares outstanding. For the third quarter 2005, WellChoice expects earnings to be in the range of $0.84 to $0.88 per diluted share. About WellChoice WellChoice, Inc. is the parent company of the largest health insurer in the State of New York based on PPO and HMO membership. WellChoice, through its Empire Blue Cross Blue Shield subsidiaries, has the exclusive right to use the Blue Cross and Blue Shield names and marks in 10 downstate New York counties and one or both of these names and marks in selected counties in upstate New York. WellChoice offers a broad portfolio of products, including managed care and traditional indemnity products, and has a broad customer base including large group, middle-market and small group, individual, and national accounts. Additional information on WellChoice can be found at www.wellchoice.com. Conference Call and Webcast The Company will host a conference call and webcast today at 5:30 PM (EST) to review these results, as well as to discuss the outlook for the third quarter 2005. Financial, statistical and other information, including non-GAAP reconciliations, related to the conference call will be available under the "Quarterly Financial Reporting and Supplemental Data" section of the Financial Reporting tab at www.wellchoice.com/investors. The conference call can be accessed domestically by dialing (800) 784-3697. International participants dial (706) 643-1656. Please ask for reference number 7401664 ten minutes prior to the start of the call. An audio replay of the call will be available for seven days following the conference call. To access the replay, please dial (800) 642-1687 and enter reference number 7401664. International callers can access the replay by dialing (706) 645-9291 and enter reference number 7401664. Investors, analysts and the general public are also invited to listen to the conference call over the Internet by visiting WellChoice's web site at www.wellchoice.com. Cautionary Statement Some of the information contained in this press release is forward-looking, including statements relating to future financial or business results. Forward-looking information is based on management's estimates, assumptions and projections and is subject to significant uncertainties and other factors, many of which are beyond the company's control. Important risk factors could cause future results to differ materially from those estimated by management. Those risks and uncertainties include but are not limited to: our ability to accurately predict health care costs and to manage those costs through underwriting criteria, quality initiatives and medical management; product design and negotiation of favorable provider reimbursement rates; our ability to maintain or increase our premium rates; possible reductions in enrollment in our products or changes in membership including the loss of either the New York City or the New York State account; the regional concentration of our business in the New York metropolitan area and the effects of economic downturns in that region or generally; future bio-terrorist activity or other potential public health epidemics; the impact of health care reform and other regulatory matters; and the outcome of litigation. For a more detailed discussion of these and other important factors that may materially affect WellChoice, please see WellChoice's filings with the Securities and Exchange Commission, including the discussion of risk factors and historical results of operations and financial condition in its Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Report on Form 10-Q for the three months ended March 31, 2005 and for the six months ended June 30, 2005 to be filed with the Commission this afternoon. -0- *T EXHIBIT A WellChoice, Inc. Membership June 30, March 31, December 31, (In thousands) 2005 2004 2005 2004 ----------------------------------- Products and services: ---------------------- Commercial managed care: Group PPO, HMO, EPO and other (1)(2) 2,631 2,479 2,627 2,558 New York City and New York State PPO 1,824 1,815 1,823 1,823 ----- ----- --------- ------------ Total commercial managed care 4,455 4,294 4,450 4,381 Other insurance products and services: Indemnity 366 373 367 364 Individual 204 213 207 210 ----- ----- --------- ------------ Total other insurance products and services 570 586 574 574 ----- ----- --------- ------------ Overall total 5,025 4,880 5,024 4,955 ===== ===== ========= ============ Customers: ---------- Large group 3,002 2,945 3,003 2,986 Small group and middle market 490 455 484 472 Individual 264 266 265 266 National accounts 1,269 1,214 1,272 1,231 ----- ----- --------- ------------ Overall total 5,025 4,880 5,024 4,955 ===== ===== ========= ============ Funding type: ------------- Commercial managed care: Insured 2,705 2,644 2,699 2,678 Self-funded 1,750 1,650 1,751 1,703 ----- ----- --------- ------------ Total commercial managed care 4,455 4,294 4,450 4,381 ===== ===== ========= ============ Other insurance products and services: Insured 318 335 323 327 Self-funded 252 251 251 247 ----- ----- --------- ------------ Total other insurance products and services 570 586 574 574 ----- ----- --------- ------------ Overall total 5,025 4,880 5,024 4,955 ===== ===== ========= ============ (1) Our HMO product includes Medicare+Choice. As of June 30, 2005, June 30, 2004, March 31, 2005 and December 31, 2004, we had approximately 60,000 members, 54,000 members, 58,000 members and 56,000 members, respectively, enrolled in Medicare+Choice. (2) "Other" principally consists of our members enrolled in dental only coverage and includes POS members. EXHIBIT B WellChoice, Inc. Consolidated Statements of Income Three Months Ended June 30, 2005 2004 ----------- ----------- ($ in millions, except share and per share data) Revenues: Premium earned $1,491.1 $1,363.7 Administrative service fees 139.8 123.9 Investment income, net 23.1 16.5 Other (expense) income, net (0.1) - ----------- ----------- Total revenue 1,653.9 1,504.1 Expenses: Cost of benefits provided 1,283.2 1,186.2 Administrative expenses 251.9 223.7 ----------- ----------- Total expenses 1,535.1 1,409.9 Income before income taxes 118.8 94.2 Income tax expense 44.2 28.8 ----------- ----------- Net income $74.6 $65.4 =========== =========== Basic net income per common share $0.89 $0.78 Diluted net income per common share $0.88 $0.78 Shares used to compute basic net income per common share, based on weighted average shares outstanding 83,715,312 83,493,145 Shares used to compute diluted net income per common share based on weighted average shares outstanding 84,758,059 83,798,907 Additional data: ---------------- Medical loss ratio (1) 86.1% 87.0% Administrative expense ratio (2) 15.4% 15.0% (1) Medical loss ratio represents cost of benefits provided as a percentage of premiums earned. (2) Administrative expense ratio represents administrative expense as a percentage of premiums earned and administrative service fees. As presented, our administrative expense ratio does not take into account a significant portion of our activity generated by self-funded, or ASO, business, which, at June 30, 2005, represented approximately 39.8% of total membership. Therefore, in the following table, we provide the information regarding premium equivalents and the administrative expense ratio on a "premium equivalent" basis because that ratio measures administrative expenses relative to the entire volume of insured and self-funded business serviced by us and is commonly used in the health insurance industry to compare operating efficiency among companies. Administrative expense ratio on a premium equivalent basis is calculated by dividing administrative expenses by "premium equivalents" for the relevant periods. Premium equivalents is the sum of premium earned, administrative service fees and the amount of paid claims attributable to our self-funded business pursuant to which we provide a range of customer services, including claims administration, billing and membership services. Claims paid for our self-funded health business is not our revenue. EXHIBIT B (continued) The premium equivalents for the years indicated were as follows: Three Months Ended June 30, 2005 2004 -------- -------- Revenue: Premiums earned $1,491.1 $1,363.7 Administrative service fees 139.8 123.9 Claims paid for our self-funded health business 1,098.2 888.7 -------- -------- Premium equivalents $2,729.1 $2,376.3 ======== ======== Administrative expense ratio, premium equivalent basis 9.2% 9.4% ======== ======== EXHIBIT C WellChoice, Inc. Consolidated Statements of Income Six Months Ended June 30, 2005 2004 ----------- ----------- ($ in millions, except share and per share data) Revenue: Premiums earned $2,876.2 $2,609.2 Administrative service fees 281.1 245.2 Investment income, net 41.5 34.1 Other (expense) income, net (0.2) 0.2 ----------- ----------- Total revenue 3,198.6 2,888.7 Expenses: Cost of benefits provided 2,480.5 2,249.1 Administrative expenses 485.0 448.2 ----------- ----------- Total expenses 2,965.5 2,697.3 Income before income taxes 233.1 191.4 Income tax expense 87.6 66.7 ----------- ----------- Net income $145.5 $124.7 =========== =========== Basic net income per common share $1.74 $1.49 Diluted net income per common share $1.72 $1.49 Shares used to compute basic net income per common share, based on weighted average shares outstanding 83,695,867 83,492,194 Shares used to compute diluted net income per common share, based on weighted average shares outstanding 84,647,354 83,762,915 Additional data: ---------------- Medical loss ratio (1) 86.2% 86.2% Administrative expense ratio (2) 15.4% 15.7% (1) Medical loss ratio represents cost of benefits provided as a percentage of premiums earned. (2) Administrative expense ratio represents administrative expense as a percentage of premiums earned and administrative service fees. As presented, our administrative expense ratio does not take into account a significant portion of our activity generated by self-funded, or ASO, business, which, at June 30, 2005, represented approximately 39.8% of total membership. Therefore, in the following table, we provide the information needed to calculate the administrative expense ratio on a "premium equivalent" basis because that ratio measures administrative expenses relative to the entire volume of insured and self-funded business serviced by us and is commonly used in the health insurance industry to compare operating efficiency among companies. Administrative expense ratio on a premium equivalent basis is calculated by dividing administrative expenses by "premium equivalents" for the relevant periods. Premium equivalents is the sum of premium earned, administrative service fees and the amount of paid claims attributable to our self-funded business pursuant to which we provide a range of customer services, including claims administration, billing and membership services. Claims paid for our self-funded health business is not our revenue. The premium equivalents for the years indicated were as follows: Premium Equivalents Table: Six Months Ended June 30, 2005 2004 -------- -------- Revenue: Premiums earned $2,876.2 $2,609.2 Administrative service fees 281.1 245.2 Claims paid for our self-funded health business 2,077.9 1,712.4 -------- -------- Premium equivalents $5,235.2 $4,566.8 ======== ======== Administrative expense ratio, premium equivalent basis 9.3% 9.8% ======== ======== EXHIBIT D WellChoice, Inc. Consolidated Balance Sheets June 30, December 31, 2005 2004 -------------------------- (In millions, except share and per share data) Assets Investments: Fixed maturities, at fair value (amortized cost: $1,572.7 and $1,374.6) $1,558.2 $1,361.9 Marketable equity securities, at fair value (cost: $44.1 and $43.8) 55.0 53.4 Short-term investments 215.2 170.6 Other long-term equity investments 19.3 18.6 -------------------------- Total investments 1,847.7 1,604.5 Cash and cash equivalents 750.4 758.5 -------------------------- Total investments and cash and cash equivalents 2,598.1 2,363.0 Receivables: Billed premiums, net 108.7 107.6 Accrued premiums 344.1 340.8 Other amounts due from customers, net 129.2 125.8 Notes receivable, net 13.1 12.7 Accrued investment income 12.7 10.7 Miscellaneous, net 119.5 73.2 -------------------------- Total receivables 727.3 670.8 Property, equipment and information systems, net of accumulated depreciation 101.8 107.1 Prepaid pension expense 62.6 60.7 Deferred taxes, net 127.6 157.7 Other 30.9 30.8 -------------------------- Total assets $3,648.3 $3,390.1 ========================== EXHIBIT D (continued) WellChoice, Inc. Consolidated Balance Sheets (Continued) June 30, December 31, 2005 2004 -------------------------- (In millions, except share and per share data) Liabilities and stockholders' equity Liabilities: Unpaid claims and claims adjustment expense $755.1 $678.8 Unearned premium income 96.9 138.7 Managed cash overdrafts 196.5 215.4 Accounts payable and accrued expenses 81.9 67.4 Advance deposits 220.3 160.6 Group and other contract liabilities 84.9 99.3 Postretirement benefits other than pensions 144.2 144.6 Obligations under capital lease 41.5 44.0 Other 191.4 159.0 -------------------------- Total liabilities 1,812.7 1,707.8 Stockholders' equity: Common stock, $0.01 par value, 225,000,000 shares authorized; shares issued and outstanding: 2005--84,125,288; 2004--84,047,152 0.8 0.8 Class B common stock, $0.01 par value, one share authorized, issued and outstanding - - Preferred stock, $0.01 per share value, 25,000,000 shares authorized; none issued and outstanding - - Additional paid-in capital 1,280.0 1,275.2 Retained earnings 554.2 408.7 Unearned restricted stock compensation (6.8) (9.9) Accumulated other comprehensive income 7.4 7.5 -------------------------- Total stockholders' equity 1,835.6 1,682.3 -------------------------- Total liabilities and stockholders' equity $3,648.3 $3,390.1 ========================== EXHIBIT E WellChoice, Inc. Consolidated Statements of Cash Flows Six Months Ended June 30, ---------------- 2005 2004 ---------------- ($ in millions) Cash flows from operating activities Net income $145.5 $124.6 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18.9 20.5 Net realized gain on sales of investments (3.5) (6.7) Provision (credit) for doubtful accounts 1.0 (2.0) Accretion of discount, net 1.4 1.0 Equity in earnings of other long-term equity investments (0.3) (1.3) Deferred income tax expense 30.2 30.0 Other (1.9) (3.4) Changes in assets and liabilities: Billed and accrued premiums receivables (5.2) (49.3) Other customer receivable (12.3) 9.9 Notes receivable (0.4) 0.4 Accrued investment income (1.9) (0.5) Miscellaneous receivables (46.4) (1.4) Other assets 8.4 (1.0) Unpaid claims and claims adjustment expenses 76.3 76.4 Unearned premium income (41.8) (33.4) Managed cash overdrafts (18.8) (14.2) Accounts payable and accrued expenses 16.5 (30.2) Advance deposits 59.7 38.9 Group and other contract liabilities (14.5) 2.2 Postretirement benefits other than pensions (0.3) 3.0 Other liabilities 31.1 2.8 ---------------- Net cash provided by operating activities 241.7 166.3 ---------------- Cash flows from investing activities Purchases of property, equipment and information systems (11.3) (17.5) Purchases of available for sale investments (625.8) (812.1) Proceeds from sales and maturities of available for sale investments 386.3 719.8 ---------------- Net cash used in investing activities (250.8) (109.8) ---------------- Cash flows from financing activities Decrease in capital lease obligations (2.5) (2.1) Proceeds from the exercise of stock options and employee stock purchase plan, net of treasury stock repurchases 2.8 - Excess tax benefits on stock compensation 0.7 - ---------------- Net cash provided by (used in) financing activities 1.0 (2.1) ---------------- Net change in cash and cash equivalents (8.1) 54.4 Cash and cash equivalents at beginning of period 758.5 697.5 ---------------- Cash and cash equivalents at end of period $750.4 $751.9 ================ Supplemental disclosure: Income taxes paid $43.5 $38.5 ================ EXHIBIT F WellChoice, Inc. Segment Operating Results Three Months Ended June 30, 2005 2004 ------------------ ($ in millions) Commercial Managed Care: Total revenue $1,422.6 $1,281.0 Income before income taxes 80.3 78.3 Medical loss ratio (1): Commercial managed care total 88.1% 87.8% Commercial managed care, excluding New York City and New York State PPO (2) 84.8% 84.2% Administrative expense ratio (3) 13.4% 12.6% Other Insurance Products and Services: Total revenue $231.3 $223.1 Income before income taxes 38.5 15.9 Medical loss ratio (1) 71.1% 81.6% Administrative expense ratio (3) 27.9% 29.3% (1) Medical loss ratio represents cost of benefits provided as a percentage of premiums earned. (2) We present commercial managed care medical loss ratio, excluding New York City and New York State PPO, because these accounts differ from our standard PPO product in that they are hospital-only accounts which have lower premiums relative to claim expense than accounts with full medical and hospital coverage. The lower premiums and the size of these accounts distort our performance when the total medical loss ratio is presented. (3) Administrative expense ratio represents administrative expenses as a percentage of premiums earned and administrative service fees. EXHIBIT G WellChoice, Inc. Segment Operating Results Six Months Ended June 30 2005 2004 ------------------ ($ in millions, except earnings per share) Commercial Managed Care: Total revenue $2,737.7 $2,440.1 Income before income taxes 181.1 165.4 Medical loss ratio (1): Commercial managed care total 87.4% 86.7% Commercial managed care, excluding New York City and New York State PPO (2) 84.1% 82.9% Administrative expense ratio (3) 13.3% 13.3% Other Insurance Products and Services: Total revenue $460.9 $448.6 Income before income taxes 52.0 26.0 Medical loss ratio (1) 78.3% 83.2% Administrative expense ratio (3) 27.7% 28.9% (1) Medical loss ratio represents cost of benefits provided as a percentage of premiums earned. (2) We present commercial managed care medical loss ratio, excluding New York City and New York State PPO, because these accounts differ from our standard PPO product in that they are hospital-only accounts which have lower premiums relative to claim expense than accounts with full medical and hospital coverage. The lower premiums and the size of these accounts distort our performance when the total medical loss ratio is presented. (3) Administrative expense ratio represents administrative expenses as a percentage of premiums earned and administrative service fees. *T