UnitedHealth Profit Rises on Member Gains as Costs Slow

UnitedHealth Group Inc., the biggest U.S. health insurer, reported second-quarter profit that beat analysts’ estimates, as a Brazilian acquisition and gains in U.S. plans swelled enrollment by 25 percent. Shares jumped the most in about two years.

Net income jumped 7.4 percent to $1.44 billion, or $1.40 a share, the Minnetonka, Minnesota-based insurer said today in a statement. The per-share earnings beat by 15 cents the average of 20 analysts’ estimates compiled by Bloomberg. Revenue climbed 12 percent to $30.4 billion on customer gains from employer plans and U.S. government Medicare and Medicaid coverage.

Chief Executive Officer Stephen Hemsley added almost 10 million members, raising enrollment to 45 million on the strength of the company’s purchase of Brazil’s biggest insurer as well as a new contract to cover U.S. military personnel. The gains were enough to overcome higher medical costs and lower profit margins for some of those businesses, said Sheryl Skolnick, a CRT Capital Group analyst in Stamford, Connecticut.

“They are firing on all cylinders in terms of membership,” Skolnick said in a telephone interview. “It’s a very strong statement about their ability to read what the market wants and to deliver it.”

UnitedHealth rose 6.5 percent to $70.55 at the close in New York, the biggest single-day gain since Aug. 9, 2011. The shares have increased 30 percent this year.

Profit Forecast

The insurer raised the lower end of its 2013 forecast, saying it now expected profit of $5.35 to $5.50 a share. Hemsley had said in April that, while the company continues to grow, funding reductions to Medicare may make it harder to increase earnings next year. Medicare is the government-backed insurance program for the elderly while Medicaid covers poor Americans.

President Barack Obama’s 2010 health-care law lowers reimbursements for insurers’ private versions of Medicare, bringing them in-line with what government pays on its own to care for seniors.

Hemsley told analysts on a conference call today that the “severe underfunding” of private Medicare plans will continue to pressure profit margins next year, and the insurer will exit some markets and cut benefits in others.

The cuts are scheduled to ease in 2016 and “the prospects for growth after that are quite compelling,” he said.

UnitedHealth is the biggest provider of private Medicare Advantage plans, with 3 million members. The program accounted for about a quarter of its earnings last year.

First Report

Even with concerns about next year, Hemsley’s long-term outlook for the program was “remarkably more bullish” than investors had expected, Skolnick said.

UnitedHealth was the first major medical carrier to report quarterly results this month and today’s report “sets a positive tone for the managed-care earnings season,” said Matthew Borsch, a Goldman Sachs Group analyst, in a note to clients.

Indianapolis-based WellPoint Inc., the second-biggest carrier, is scheduled to announce its results on July 24.

UnitedHealth’s second-quarter net income a year earlier was $1.34 billion, or $1.27 a share.

UnitedHealth benefited from medical claims that came in below the company’s initial projections, continuing a trend that’s helped insurers for the past four years. The company said it was able to shift $310 million from its reserves to boost earnings, $100 million more than a year earlier.

The company boosted international membership by almost 5 million people, after last year’s $4.9 billion purchase of Brazilian insurer Amil Participacoes SA. In April, it added 3 million more members after winning a $20.5 billion contract to cover military families.

It was also helped by its growing business beyond health insurance. The Optum division, which provides consulting, information-technology and drug-benefits management services, saw revenue increase 21 percent and contributed about a quarter of the company’s second-quarter operating earnings.

Before it's here, it's on the Bloomberg Terminal.