UnitedHealth Group (NYSE:UNH) released its Q4 and full year 2012 earnings Thursday,  which were mostly in line with our moderate growth expectations (Read UnitedHealth Earnings Preview: What We Are Watching). Its total Q4 revenues grew by 11% as healthcare insurance business continued to add new customers, mainly in government funded Medicare and Medicaid coverage plans. Higher premiums coupled with addition of international customers pursuant to acquisition of Brazil’s largest health insurer, Amil Participacoes SA also added to the growth. Operating profit in the insurance business was flat due to slightly higher medical care ratio. As expected, the Optum line of businesses (excluding OptumRx) also registered strong growth. Cost effective measures translated into higher margins, leading to significantly higher operating profits in its Optum franchise.
We are updating our $69 price estimate for UnitedHealth, which is about 30% above the current market price, to reflect the earnings.
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Insurance Business Trends
As expected, the total number of customers on UNH’s medical plans continued to increase on a year-over-year (y-0-y) basis as UHN now serves over 83 million customers. This was mainly due to continued addition of customers in its Medicare and Medicaid businesses. However, its fully insured commercial customers declined as more businesses cover healthcare costs themselves while they hire the insurer to manage healthcare benefits as has been witnessed through an increase in commercial fee-based customers. On a sequential basis, the total addition of new customers in these two businesses was mostly flat. A big boost, however, came from its international business as over 4 million customer came on board following ongoing acquisition of Amil in Brazil. UNH was also able to charge higher premiums to its customers.
In line with our expectations, UNH’s medical care ratio, which is medical costs and claims reflected as percentage of total collected premium, increased in Q4, on both y-o-y as well as sequential basis due to higher claims and increases in customers’ visit to doctors. This weighed on the operating profit margins of the division.
Trends In Optum Franchise
UNH provides health management, wellness, financial services, as well as advisory and consulting through its Optum franchise. As anticipated, OptumHealth and OptumInsight segments, registered mid to high double-digit growth in their revenues on addition of network-based health programs and demand for its clinical systems and compliance services. UNH’s OptumRx business witnessed a decline in revenues. However, the same was expected due to loss of UNH Part D plan participants in Q1 2012, following higher bids in certain regions. Growth in cheaper generic outpaced high cost branded prescription drugs.
Continued focus on operating efficiency and cost management resulted in improving the operating margins in the quarter.
Updates On Amil Acquisition
As part of its strategy to focus on international expansion to maintain its growth momentum, UNH had announced its intention to acquire Brazilian health insurer, Amil for nearly $4.9 billion. Amil has over 5 million customers. At the announcement of the deal, UNH had acquired 60% of Amil’s outstanding equity, which increased to 65% by the end of Q4. UNH expects to acquire the remaining 25% shares through a tender offer and close the deal by Q2 2013.
Well-Positioned For Long Term Growth
In the near term, UnitedHealth could witness a decline in its commercial health insurance business due to persistently high unemployment even as economic conditions are gradually improving. Beginning 2014, the situation may improve and we expect employer-sponsored health coverage to increase along with the quality of those plans (which will in turn bring higher premiums). Further, the Patient Protection and Affordable Care Act (PPACA), whose purpose is to reduce healthcare costs and expand healthcare coverage among Americans will bring an additional 30 million Americans (either private, Medicare or Medicaid).  The act will allow the company to meaningfully increase its enrollments over the next four years.
In addition, UnitedHealth won a five year TRICARE contract to manage active-duty and retired military personnel in western U.S. and their families. The contract, starting from April 1, 2013, will add 2.9 million beneficiaries. Acquisition of Amil will also allow the company to expand its footprint outside U.S. and capitalize on the growth potential in Latin America.
Margin Risks Are Already Incorporated
The PPACA will also introduce health insurance exchanges in order to encourage competition in the market, and will regulate premiums and medical care ratios (medical costs/premiums) of health insurers. This will likely have a negative effect on large insurers such as UnitedHealth Group, as it will result in pressure on pricing and mandatory caps on margins. We, therefore, expect margins to decline going forward. However, we believe that the benefits for UnitedHealth from the increase in enrollments will outweigh the pressures on pricing and margins.
- UnitedHealth Group Reports 2012 Results, Highlighted by Strong and Consistent Growth, UnitedHealth, Jan 17 2013 [↩]
- FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, White House, June 28 2012 [↩]