AET Aetna Inc. (delisted)

UnitedHealth Group Inc. (UNH) has kicked off the earnings today for the health insurance sector by reporting fourth quarter earnings of $1.17 per share, substantially higher than the Zacks Consensus estimate of $1.02. Earnings also compared favorably with 94 cents per share reported in the prior-year quarter.

The outperformance was driven by strong revenue growth from UnitedHealthcare, as well as from the Optum businesses, partially offset by higher medical cost.

For the full year, net income applicable to common stock was $5.1 billion or $4.73 per share, up 15% year over year. Earnings per share for full year also surpassed the Zacks Consensus Estimate of $4.58 per share.

The largest publicly traded health insurer based on total revenue posted total revenues of $25.9 billion, up 8.0% year over year, and up 0.4% compared to the Zacks Consensus estimate of $25.8 billion. The increase was led by higher premiums and higher product revenue in the health benefits business (UnitedHealth Care), coupled with strong revenue growth from the service segment.

For the full year, revenue was $101.8 billion, up 8.1% from $94.2 billion in 2010. This also compares favorably with the Zacks Consensus Estimate of $101.7 billion.

UnitedHealth’s medical cost went up 7.9% year over year to $18.6 billion. Total operating cost increased 7.2% year over year to $23.8 billion.   

Segment performance

During the quarter, UnitedHealth’s health benefits segment named UnitedHealthcare grew revenues 7.6% year over year to $24.2 billion.

The company’s other segment, Health Services branded as Optum, witnessed a much higher growth of 23.4% year over year to $7.6 billion. The company is aggressively expanding this segment as a means to diversify its earnings and expects to grow Optum to contribute more than 30% of the earnings mix.

Membership Enrollment

The second-largest insurer after WellPoint Inc. (WLP), based on enrollment, showed strong enrollment trends, as membership grew sequentially across all major business lines. Commercial risk enrollment came in at 9.55 million risk members up 1.5% year over and up 0.05% quarter over quarter. Meanwhile, commercial fee-based enrollment was 16.3 million up 5.9% year over year and up 0.4% quarter over quarter.

Commercial risk enrollment growth remained positive for the seventh straight quarter, reflecting strong execution and impressing in an economy plagued by continued high unemployment. It is also to be noted that this is the fourth time in 12 quarters that commercial risk enrollment has grown on a year-over-year basis.

 Medicaid grew 1.2% sequentially and 6.2% year over year, and Medicare Advantage grew 1.1% sequentially and 8.2% year over year.

Capital Position

UnitedHealth continues to maintain a healthy balance sheet, ending the quarter with a debt-to-capital ratio of 29%. Days Sales outstanding were 8 days, unchanged relative to the prior-year quarter. Days claims payable (DCP) were 48 days, down 1 day year over year, due to continued acceleration in the timing of claims receipts.

Share Repurchases

Historically, repurchases and acquisitions have been one of the most prevalent uses of capital for the company. During the year, the company bought back close to 64.8 million shares at a total cost of $3.0 billion.    

2012 Guidance Affirmed

Management perceives an uptick in medical cost utilization in the year. As such it has reiterated its revenue guidance range of $107.0 billion to $108.0 billion and EPS guidance range of 4.55 to $4.75 issued earlier during November.

Our Take

Overall, UnitedHealth managed to perform quite well in 2011, in contrast to analyst predictions that the company’s earnings might be under strain, given the challenges posed by the HealthCare law and pressure on its government programs like Medicare and Medicaid.

But the reform'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 affect on the company’s bottom line. UnitedHealth was also able to post better-than-expected results throughout 2011, attributable to low medical claim costs.

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.

We expect the company to continue performing well in 2012. We expect UnitedHealth to continue to benefit from gains in the Medicaid and Medicare segments, fast growing health services segment and a strong balance sheet.

UnitedHealth is a bellwether for the managed care sector and it gives a glimpse of earnings performance of other players – WellPoint, Cigna Corp. (CI) Aetna Inc. (AET) and Humana Inc. (HUM) all of which are due to release their earnings shortly.

 
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