UnitedHealth Group Inc.
(
UNH
) has kicked off earnings season for the health insurance sector
today by reporting second quarter net earnings of $1.27 per share,
up 9% year over year.
The outperformance can be attributed to strong revenue growth at
UnitedHealthcare, higher revenues from the Optum businesses, and
strong enrollment growth, partially offset by higher operating
costs.
The largest publicly traded health insurer (based on total
revenue) posted revenues of $27.3 billion, an increase of 8.0% year
over year. Revenues were ahead of the Zacks Consensus Estimate of
$27.2 billion by a modest 0.4%. The year-over-year increase was led
by higher premiums and higher product revenue in the health
benefits business (UnitedHealth Care), coupled with strong revenue
growth at the service segment.
UnitedHealth's medical costs increased 7.7% year over year to
$20.0 billion. Total operating costs increased 8.2% year over year
to $25.0 billion, owing to growth initiatives undertaken at the
pharmacy benefits business.
Segment performance
During the quarter, UnitedHealth's health benefits segment named
UnitedHealthcare witnessed revenue growth of 8.0% year over year to
$25.5 billion. Earnings from operations also increased 8% to
$1.9 billion.
The company's other segment, the health services segment branded as
Optum, witnessed a growth of 4.0% year over year to $7.3 billion.
The company is aggressively expanding this segment as a means to
diversify its earnings. It expects Optum to contribute more than
30% of the earnings mix.
Membership Enrollment
UnitedHealth, the second-largest insurer after
WellPoint Inc.
(
WLP
) based on enrollment, showed strong enrollment trends, as
membership increased across all major business lines, led by recent
acquisitions. Total commercial enrollment was up 2.8% year over
year and remained stable compared to the previous quarter.
Medicaid grew 5.8% sequentially and 10.7% year over year,
whereas Medicare Advantage grew 3.4% sequentially and 18.1% year
over year.
Capital Position
UnitedHealth continues to maintain a healthy balance sheet,
ending the quarter with a debt-to-capital ratio of 30%, slightly
lower than 31% in the last quarter. Days sales outstanding were 9
days, unchanged relative to the prior-year quarter. Days claims
payable (DCP) were 48 days, up 1 day year over year.
Share Repurchases and Dividend
During the quarter, UnitedHealth hiked its quarterly
dividend by 30% to $21.25 cents per share. The company's
board has also approved the repurchase of 110 million shares, which
is about 10% of UnitedHealth's outstanding
shares.
2012 Guidance Affirmed
Backed by better-than-expected earnings, management raised its
fiscal 2012 earnings estimates to a range of $4.90 - $5.00 per
share from the earlier guidance range of $4.80 - $4.95. It also
revised its revenue estimates at $110 billion from the earlier
guidance range of $109 billion - $110 billion. This is the second
time so far in this year that the company has increased its
earnings estimates.
Our Take
During the quarter, the company won the TRICARE West contract to
serve military service members. The contract will provide
UnitedHealth access to the military health care market, one of the
areas that the company has been trying to penetrate for a while
now.
Coming back to the quarter results, UnitedHealth has been
performing well with continuous revenue as well as membership
growth. We remain bullish about its prospects going forward, given
the proactive measures adopted by the company to align itself with
the changing market scenario and the Health Care Reform.
The company is diversifying across businesses, products as well
as geographies and has taken several strategic initiatives in this
regard. A low reliance on debt, a solid capital position along with
healthy cash flow generation will allow the company to undertake
strategic growth initiatives.
UnitedHealth generally sets the tone for the performance of
other health insurers. Following the strong results of the health
insurer major, we expect favorable performance from its peers
Aetna Inc.
(
AET
),
CIGNA Corp.
(
CI
), WellPoint Inc., and
Humana Inc.
(
HUM
), all of which are slated to release their second quarter earnings
soon.
UnitedHealth currently retains a Zacks #2 Rank, which translates
into a short-term Buy rating. We, however, maintain our long-term
Neutral recommendation on its shares.
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