UnitedHealth Group (NYSE:UNH) is set to release its earnings Thursday, and we expect Q4 2012 earnings to be relatively lukewarm compared to its past quarters of better than expected growth. We anticipate UNH will continue to see high single-digit revenue growth on the back of new customers, mainly from government funded Medicare and Medicaid coverage plans. Its Optum line of businesses are also expected to exhibit strong growth with the exception of the OptumRx. However, our biggest focus will be on the updates relating to UNH’s $4.9 billion acquisition of Amil Participacoes SA, Brazil’s largest health insurer, announced during Q3 results.
We have a $69 price estimate for UnitedHealth, which is about 30% above the current market price.
Insurance Business: Overall Customers To Increase, But Focus Will Be On Medical Care Ratio
We expect the total number of customers on UNH’s medical plans to increase on a year-over-year (y-0-y) basis, mainly because of continued addition of customers in its Medicare and Medicaid businesses. The acquisition of XLHealth last February, has also added new customers in those businesses. This coupled with higher premiums charged, will translate into revenue growth.
Revenue will likely be partially offset by a decline in its fully insured commercial customers as more businesses are seen covering healthcare costs themselves while they hire the insurer to manage healthcare benefits. Further, high persistent unemployment levels have had an adverse impact on the number of employer-sponsored health insurance enrollments as many employers have cut healthcare benefits in response to market conditions.
However, our focus is on medical care ratio, which was the main driver of a surprising double-digit jump in operating earnings, in Q3 2012. Medical care ratio is medical costs and claims reflected as percentage of total collected premium. In the last quarter, UnitedHealth reported a significant dip of 170 basis-point in medical care ratio, as customers were avoiding medical expenses altogether due to bleak economic conditions. However, we don’t see the fall continuing since the economy is gradually improving. But, healthcare reforms will also weigh on margins.
Optum: Expecting High Revenue Growth With Margins Improvement
OptumHealth and OptumInsight, through which UNH provides health management, wellness, financial services as well as advisory and consulting, could continue to witness mid-double-digit growth. The health insurer continues to add network-based health programs. Further, both, more health care providers and payers are opting for its compliance services.
However, UNH’s OptumRx business will witness a decline in revenues due to loss of UNH Part D plan participants in Q1 2012, following higher bids in certain regions. Also, continued migration of consumers to cheaper generic, from high cost branded prescription drugs, will also weigh on growth. We expect continued focus on operating efficiency and cost management to reflect as a slight improvement in the operating margins in the quarter.
Amil Acquisition: A Key To Growth Going Forward
UNH is focusing on international expansion to maintain its growth momentum. In Q3 2012, the company announced its intention to acquire Amil Participacoes SA, Brazil’s largest health insurer, with over 5 million customers, for $4.9 billion. While UNH has already acquired 60% of Amil’s outstanding equity by Q4 2012, the deal is expected to be concluded by Q2 2013. We will be closely watching the earnings for the progress on deal. The acquisition will allow the company to expand its footprint outside U.S. and capitalize on the growth potential in Latin America. We will update our analysis to include the acquisition when more information is available from the impending 10-k form.