United Health Group (UNH) has kicked off the earnings season for the health insurance group by reporting core operating earnings of $1.14 cents per share. The earnings are well ahead of the Zacks Consensus Estimate of 84 cents. Earnings also compares favorably with the 89 cents reported in the prior year quarter.
Better than expected earnings sprang from higher total revenues which increased 9.0% year over year to $23.7 billion. The Zacks Consensus Estimate predicted revenues of $23.3 billion. The increase in revenues were brought primarily by a double-digit surge in revenues in UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State, Ingenix and Prescription Solutions units.
Medical cost ratio came in at 80.1% down by 190 basis points year over year, benefiting from a favorable prior year development, lower medical utilization and solid cost management. Though the company is limiting its spending of premium revenue on medical costs as compared with last year, such expenses will come under regulation in 2011, under the Patient Protection and Affordable Care Act, which will in turn hit the bottomline to some extent.
Operating costs came in at $3.5 billion or 15.0% of revenues, up 50 basis points year over year due to greater cost related to quality improvements and health care reform.
Health Benefits which accounts for the greatest percentage of the company’s revenues and serves through UnitedHealthcare, Ovations and AmeriChoice, reported an 8.8% year -over -year increase in revenues to $22.0 billion. The increase in the segment came due to a year -over -year increase in membership in Medicaid and Medicare Advantage (government programs), coupled with an increase in commercial enrollment.
UnitedHealth has been generating strong cash flow from operations which increased 6% year over year to $2.9 billion during the quarter. The debt to capital ratio decreased to 30.1% from 32.8% as of September 30, 2009, further strengthening the company’s financial flexibility.
Given solid results for the first nine months of 2010, UnitedHealth has raised its expectations for EPS, revenues and cash from operations for a second time in a row.
Thus the company expects EPS in the range of $3.85 –$3.95 versus $3.40–3.60 previously. Revenues of $94 billion compared to previous expectation of $93 billion. Cash from operations is expected to come over $5 billion above the expectation of $5 billion.
Though UnitedHealth reported a very favorable result and upped its guidance, there remains a concern as to whether the earnings momentum will uphold in 2011. The company will be faced with rising costs that will unfold with the implementation of minimum MLR requirement of 85% for commercial large group market and 80% for the individual/small group market starting in 2011 and reduction of rates of Medicare Advantage plans.
Results of UnitedHealth which is considered to be a bellwether for the industry indicates strong rebound in the industry, but we stress the effect that the new reform will bring on the companies.
UnitedHealth Group surprised by 36% in the quarter. It has been putting together a nice steak of earnings surprises including the last 4 quarters by an average of 27.5%. Shares were up in the pre-market trading on NYSE by 0.75%.
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