UnitedHealth’s Market Potential In Brazil Part 2: Pricing And Margins

In the first part of our analysis on UnitedHealth Group (NYSE:UNH), we discussed the company’s prospects in Brazil, focusing on enrollment growth in the expanding private healthcare sector. With a growing number of middle class Brazilian residents opting for private health insurance, we expect the total number of private enrollments to reach 69 million by the end of the decade. UnitedHealth acquired Brazilian healthcare company Amil Participações SA last year, and now has a market share of close to 10% in Brazil. We believe it can achieve 6.9 million enrollments by 2020. However, the company’s pricing strategy and margins will be crucial for the venture in the coming years.

Our $73 price estimate for UnitedHealth’s stock is in-line with the current market price.

See Full Analysis For UnitedHealth Group Here

Premiums Are Growing

Amil had shown revenue growth of more than 15% for the last two years before the acquisition, with gross margins around 25% ^[1] The revenue growth was largely driven by price hikes as average monthly premiums per enrollment in terms of the local currency, Brazilian Real, were around R$120 in 2010 but increased to R$ 130 in 2011. In the first half of 2012, the company reported average monthly premiums of R$140, close to $70 in terms of U.S. Dollars. Membership growth was quite low, 3% in 2010, 2% in 2011 and 1% in the first half of 2012.

UnitedHealth’s peer, SulAmerica has also reported strong premium growth of around 18% for the last three years. ^[2] This growth was also driven by price hikes, the company’s average monthly premiums increased from R$ 182 in 2010 to R$ 216 in 2011, and further to R$ 245 in 2012.  The two companies have similar customer profiles. Around half of Amil’s members were provided health insurance by their employers while 30% of the members had dental insurance plans and 20% had individual insurance plans. The same holds for SulAmerica. The difference in monthly premiums might be due to the different nature of coverage provided by the two companies. But it indicates that UnitedHealth might have room to increase prices further.

Post acquisition, UnitedHealth reported 4.4 million international enrollments, earning $88 in monthly premiums through the last quarter of 2012. At the end of the third quarter of 2013, the figure had grown to 4.8 million, with the company earning an average of $110 in monthly premiums from each participant. SulAmerica reported an 8.3% increase in members for the first three quarters of the year, with the average monthly premiums growing to R$ 255. Given the current trend, strong demand and currency fluctuations, we expect strong growth in UnitedHealth’s average monthly premiums from Brazil in the coming years.  We currently forecast the figure to cross the $150 mark by the end of the decade.

Room For Improvements In Margins

Despite high gross margins, Amil’s operating margins were quite low, around 3% for 2010 and 2011. This was primarily due to high Sales, General and Administrative costs (SG&A), which were around 85% of the gross profit for the two years. UnitedHealth currently reports the results for its international operations along with its U.S. operations, under the division UnitedHealthcare. The operating margin for this division was 6.5% for the first nine months of the current year, down from 8.1% last year.

The U.S. margins are expected to decline due to the implementation of the Patient Protection and Affordable Care Act (PPACA), which mandates a minimum medical care ratio (medical costs divided by premiums) of 80% for individual and small group plans, and 85% for large group plans. UnitedHealth has maintained a medical care ratio of 80% for the last few years, allowing its EBITDA margins to stay around 9%. We currently expect the revenue contribution from Brazil to remain relatively low, around 6% in the coming years. Low margins from the country could deter the company from aggressive expansion. Taking into account the U.S. and Brazil margins, we forecast an EBITDA margin of around 7% for UnitedHealth in the coming years. There is a 20% upside to our price estimate, should the margins stay around the 2012 level of 9%. However, there is also a potential downside of 30% should the margins drop down to 5%. You can modify the interactive charts in this article to gauge the effect a change in margins would have on our price estimate for the company.

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1. Amil Participacoes SA – AMIL3, Income Statement, Morning Star [↩]
2. Presentations and Conference Calls, SulAmerica [↩]