AET Aetna Inc. (delisted)

UnitedHealth Group Inc. (UNH) reported second quarter 2011 operating earnings of $1.16 per share, beating the Zacks Consensus Estimate of 93 cents.

Earnings also compared favorably with 99 cents per share reported in the prior-year quarter. Net earnings increased 13% year over year to $1.3 billion in the reported quarter. Results were aided by a strong revenue growth from UnitedHealthcare, as well as from Optum businesses.

Operational Update

UnitedHealth reported revenue of $25.23 billion in the quarter, up 8.5% year over year. Results also surpassed the Zacks Consensus Estimate of $24.96 billion. The revenue upside was led by an 8% increase in revenues in its health benefits business – UnitedHealthcare, and a 19% increase in health services business branded under Optum.

Operating costs increased 108.8% year over year to $3.7 billion. The medical cost ratio stood at 81.4%, down 10 basis points year over year.

Segment Update

UnitedHealthcare revenues climbed 8% year over year to $23.7 billion. The improvement was due to an increase in the number of members served. Operating earnings improved 13% year over year to $1.8 billion, with operating margin expanding 30 basis points (bps) to 7.4%, benefiting from cost containment measures.

Total commercial members increased 1.11 million year over year to 25.7 million members. Total medical members increased 1.64 million year over year to 34.18 million members.

OptumHealth revenues surged 55% year over year to $1.7 billion, driven by an expansion in clinical services and a strong consumer growth in population health management products sold to payers and plan sponsors. Operating earnings of $135 million represented a 5% year-over-year decrease. This earnings decrease was driven by a margin decline of 430 bps to 8.1%, which reflected costs related to the implementation of Mental Health Parity legislation, internal business realignments and revisions to service arrangements, as well as continued investments in new market development and growth.

OptumInsight reported revenues of $658 million, up 324% year over year, primarily driven by an organic growth and contributions from recent acquisitions. Operating earnings increased a whopping 45% year over year to $87 million. Operating margin improved by 190 bps to 13.2%, reflecting an increased level of higher margin product and solution sales.

OptumRx reported revenue growth of 12% year over year to gross $4.7 billion, driven by a growth in people served and prescription volumes. Operating earnings decreased 12% year over year to $118 million. Higher revenues were offset by costs to support growth initiatives.

Financial Update

UnitedHealth ended the first quarter with cash and short-term Investments of $12.3 billion, up 9.8% from 2010 end. Long-term debt increased 8% from the 2010 level to total $9.4 billion at second quarter end.

Operating cash flows in the quarter under review totaled $2.4 billion, up 26% from 2010 end.

2011 Guidance

UnitedHealth kept its revenue guidance unchanged at $101 billion. The company increased its net earnings guidance to $4.15–$4.25 per share from the previous forecast of $3.95–$4.05 per share. Cash flow from operations is estimated to be more than $6.0 billion.

Dividend Update

On June 21, 2011, UnitedHealth Group paid a cash dividend of 16.25 cents per share. This represented an increase over the quarterly dividend of 12.50 cents per share that the company had paid at the beginning of second quarter 2010. The company’s annualized 10-year dividend growth rate was 52.2%.

A Quick Look at Peers

The company’s close peers Aetna Inc. (AET), WellPoint Inc. (WLP), Humana Inc. (HUM) and CIGNA Corp. (CI) are scheduled to release their second quarter 2011 earnings within a fortnight of UnitedHealth’s earnings release. While WellPoint and Aetna would report on July 27, followed by Humana on August 1, CIGNA would come out with its earnings report on August 4.

All of these insurers exceeded the Zacks Consensus Estimate in the first quarter, owing to their favorable performance. There was some investors’ skepticism at the start of the year as to how the companies would fare, with the minimum medical ratio provision getting affected this year. However, results of the major companies revealed that the provision did impact their earnings considerably. 

We expect earnings upbeat in this quarter as well from all the major players owing to low medical utilization, favorable business performance, easing of the Health Care Act uncertainty, increased share repurchases and dividend hikes.

Going Forward

We expect UnitedHealth to report earnings beat going forward. The company’s health benefits business UnitedHealthcare is expected to grow with its reputable service, value and innovation of affordable benefit products, combined with balanced and trusted local market engagements. The unit has recorded increased memberships even amid a soft employment scenario.

UnitedHealth’s health services, branded under Optum, are also likely to perform well over the course of this year. Management intends to expand the health service business to 30–40% of operating earnings over the longer term, and the company has been making acquisitions in the area. Currently, health services generate about 20% of operating earnings. Management thinks that since the company is under-penetrated in the health service area, investment in this field will be beneficial over the long term.

 
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