"Clearly, we missed trends," said Wellpoint Chief Executive Angela Braly, in comments made during a conference call earlier this month. While remaining confident that Wellpoint can fix the issue, investors initially took the dim view and responded with an immediate 18 per cent drop in stock price in after-hours trading immediately following the announcement, according to a report in Reuters published March 10th.
It has been reported elsewhere that stock dropped 28.3 per cent overall, based on the March 10th announcement.
The development, and the reasons for it, may become the basis for litigation as investors, and holders of 401(k) plans seek to recover losses should Wellpoint be found lacking in its fiduciary duty with respect to the prudent management of 401(k) plans given the alleged instability and inconsistency of the company's economic forecasts.You may not be overly familiar with the name Wellpoint, but you will know the franchise—Blue Cross and Blue Shield, which it is licensed to provide in 14 States. However, in spite of membership well over 30 million, Wellpoint posted a disappointing fourth quarter to close out 2007.
That's hardly surprising, as '07 was tough on everybody. However, in January Wellpoint was presenting some pretty optimistic forecasts. In spite of a benefit expense ratio (BER) of 82.9 per cent for the fourth quarter as compared with 81 per cent a year earlier, Wellpoint said on January 23rd that it stood by its original forecast of 81.6 per cent for the year.
"We're feeling really good about 08," Braly stated to analysts during a January 23rd conference call, according to Reuters.
However, there appeared to be signs that the train was going a bit askew of the rails.
For one, the revised membership forecast for 2008 as announced on January 23rd was 200,000 lower than a previous estimate. And one day earlier, on January 22nd it was reported that health insurer stocks fell in broad fashion following an announcement by UnitedHealth regarding worrisome trends in its commercial business.
Wellpoint, it seems, opted to stay on message and place its bets on optimism.
Overall, investors tend to favor the insurer industry as a good defense when the economy starts to tumble, as it has in the aftermath of the sub-prime pickle. And the sector has performed well over the past five years, with the S&P Managed Healthcare Index rising 160 per cent since 2003.
With so much confidence flowing from Wellpoint and that January 23rd conference call, one could forgive investors for embracing the company, and getting on board the feel-good bandwagon.
That all changed on March 10th, when Wellpoint revealed a change in its forecast for 2008. Suddenly the projected growth in membership was clawed back by 300,000. Combined with the 200,000 reduction noted earlier, that figure equates to a growth expectation lowered by a half million when compared with original estimates. Wellpoint now forecasts membership to hit 35.3 million by year-end.
Beyond that, the figure that seemed to really derail confidence in Wellpoint was the adjustment in its benefit expense ratio to somewhere between 82.8 percent and 83.1 per cent for the year. As confident as they were at standing by their original BER of 81.6 per cent on January 23rd, reality set in March 10th with the announcement of a revised BER that lay closer to the final benefit expense ratio of 82.9 percent for the fourth quarter.
Any rise in the benefit expense ratio is usually interpreted as a sign of lower profitability.
Wellpoint cites the overall economic climate, as well as disappointing enrollment in fully insured policies, which are more profitable for the company than self-funded products.
Still, when the company signaled on January 23rd that it would damn the torpedoes and stick with its original profit and BER forecasts, it suggested an economic climate that, in hindsight, was somewhat off the mark. As a result, investors who jumped on board based upon those January 23rd forecasts could be forgiven for their disappointment when Wellpoint reneged on those forecasts March 10th.
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Some investors are seeking compensation for those investments made between January 23rd and March 10th, and some are alleging that Wellpoint made false and misleading statements on January 23rd with alleged full knowledge they would be unable to meet those targets. A class action lawsuit has been filed in US District Court for the Southern District of Indiana under the Securities and Exchange Act of 1934.Additionally, Wellpoint may have breached its fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, regarding the prudent management of 401(k) plans, had they invested those plans in Wellpoint stock allegedly knowing that the company could not meet their profitability forecasts, and that the stock price could take a hit once news of the revised forecasts became known.
