Wellpoint Inc (NYSE:WLP) disappointed last quarter and has repeatedly underperformed competitors. Various large investors believed that management was mostly to blame for the poor performance, leading them to pressure the board to remove CEO Angela Braly, who resigned late Tuesday, effective immediately.
Braly’s exit, while abrupt, was not unexpected. Various WellPoint shareholders had written open letters to the board calling for a change as their disappointment over the company’s performance grew. Included in one of the open letters was a letter from Robert Medway, managing partner at Royal Capital Management. Summing up the thoughts of many investors, Medway stated that “for whatever reason the previous CEO, while a very intelligent, very capable executive, could not create a culture of accountability and excellence where people met their numbers and did what they said they were going to do.”
Braly was Wellpoint’s CEO since 2007, and prior to that she spent two years as the CEO of Anthem Blue Cross and Blue Shield of Missouri. In the past three years Braly was compensated $13 million every year, which is not out of line for the industry.
Braly will not be remembered for her achievement while she was CEO but for her lack of direction and various mistakes. One of her few achievements was in 2008, when management impressed investors by the speed with which they recognized and reacted to accelerated medical costs. Investors also appreciated the share repurchase program that was enacted while she was in management. These achievements will be overshadowed by a high profile actuarial mistake made in California in 2010, which resulted in a costly delay in implementing a rate increase and blemished relationships with regulators across the country. In the scope of her time at Wellpoint, the company lacked strategic vision and did not handle reform developments as positively and proactively as we would like. Wellpoint was also slow to reduce administrative costs in light of declining operating revenue.
John Cannon will serve as interim CEO, but he has stated that he does not wish to be considered for the permanent CEO role. Prior to his interim position of CEO, Cannon served as the company’s executive vice president, general counsel, corporate secretary and chief public affairs officer. Wellpoint stock rose nearly 8% on the news of Braly’s departure, signaling a new CEO could serve as a catalyst that the company will reach its potential under new management.
Prospective candidates for the permanent CEO position include former Medco CEO David Snow, whose résumé shows that while he was CEO at Medco he steadily captured market share, more than doubled sales over eight years, and turned the stock into a six-bagger by the time the company was sold to Express Scripts Holding Company (NASDAQ:ESRX). Other possible candidates include Amerigroup’s (NYSE:AGP) James Carlson, whose company is being acquired by Wellpoint. He will join Wellpoint management at some level regardless, and UnitedHealth’s (NYSE:UNH) Gail Bourdreaux, who was a key player in fixing the United sinking ship and turning it into an industry star.
Whoever is elected as the new CEO will have his or her work cut out for them. Wellpoint faces various risks moving forward including regulatory scrutiny of premium increases and the likelihood that health insurance exchanges will increase competition. Wellpoint’s current combination of regional and national scale allows them to spread fixed administrative costs over more members, and helps them negotiate the best discounts with health care providers. The acquisitions of CareMore and Amerigroup Corporation (NYSE:AGP) have deepened Wellpoint’s scale and management expertise. With a new CEO and the opportunity to increase scale through their recent acquisitions, we believe that Wellpoint has the ability reach its full potential and be a turnaround stock for 2012. Billionaires Leon Cooperman, David Einhorn, and Steven Cohen are among hedge fund managers who have bullish bets on the stock (see David Einhorn’s top stock picks).
