AET Aetna Inc. (delisted)

UnitedHealth Group Inc. (UNH) managed to perform quite well in 2011, in contrast to analyst predictions that the stock might be under pressure, given the challenges posed by the HealthCare law and pressure on its government programs like Medicare and Medicaid.

The stock of the biggest insurer (on the basis of revenue) gained 38% in 2011 compared with 15% in 2010, a year in which Health Care Reform was signed into law and 13% in 2009, the year which saw heated debates over the Health Care reform.

UnitedHealth also managed to perform well versus its peers Aetna Inc. (AET), WellPoint Inc. (WLP), CIGNA Corp. (CI), which saw surges of 37%, 16% and 11%, respectively, in 2011.

Considering that new provisions relating to unreasonable premium increases, adherence to minimum medical loss ratios (“MLR”) and denying coverage to pre-existing diseases would pressurize its earnings, UnitedHealth spent $4.9 million in 2009, on lobbying against the reform. It spent $2.5 million in 2010 and $2.2 million in 2011 to try and water down the reforms.

The law's impact on UnitedHealth’s business model and operating fundamentals turned out to be quite manageable, albeit still subject to uncertainty. The mandate regarding minimum MLR that went into effect at the start of 2011 did not have a major effect on the company’s bottom line.

UnitedHealth was also able to post better-than-expected results throughout 2011, attributable to low medical claim costs, as Americans delayed doctor visits and medical procedures in the face of a weak economy.

In order to position itself for long-term growth, given the Health Care Reform challenges, UnitedHealth continued to focus on shifting more of its earnings to faster growing and less regulated health-related service (non-insurance) businesses, with the goal of ultimately making 30%-40% of operating income, up from about 20% currently.

It believes that demand for consulting services, data management, information technology and related infrastructure development, disease management, and population-based health and wellness programs will continue to grow. It also continues to focus on Medicaid/state program business, highlighting the significant upcoming opportunities and capabilities that a diversified carrier could offer to state governments looking to move the program to managed care.

UnitedHealth expects its 2012 EPS to be in the range of $4.55-$4.75 and revenues in the $107.0 billion-$108.0 billion range, up approximately 6.5% from the 2011 revenue guidance of more than $101 billion. We expect the company to easily achieve the targets based on its strong operating fundamentals. In fact, UnitedHealth has had a tradition of guiding conservatively and then beating the estimates to surprise investors.

Some of the factors that would boost UnitedHealth earnings in 2012 are:

Medicare, Medicaid Gains: UnitedHealth enjoys a high exposure in the Medicare market, which is expected to boom in the coming years as millions of Americans will enter the retirement age. Moreover, with the acquisition of XLHealth, the company will further strengthen its position in the Medicare Advantage market, compelling long-term growth.

Fast-growing Health Services segment: This business, branded under the name Optum, boasts of higher margin and is a very important part of the company’s diversification strategy. For the nine months ended September 30, 2011, the segment delivered approximately 18% growth. Now with the expansion of the health service business, management expects the revenue contribution to approximately double over time.

Strong balance sheet: The insurer enjoys a solid balance sheet with adequate financial flexibility and a favorable debt ratio, which helps it take decisions on acquisitions easily. Moreover, UnitedHealth has opted for shareholder-friendly measures for managing capital such as dividend payment and share buybacks.

 UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the fundamentals, we are maintaining our long-term Outperform recommendation on the shares.

 
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