UnitedHealth Group blamed its losses on policies sold under the Obama Care or Affordable Care Act (ACA) exchanges for delivering lower profit attributable to shareholders during the fourth quarter of 2015. Specifically, the company stated:
Full year 2015 earnings from operations for UnitedHealthcare of $6.8 billion decreased $238 million from 2014, as operating margins declined to 5.1 percent. These decreases were driven by $720 million in losses related to individual exchange-compliant insurance business, including $245 million recorded in the fourth quarter of 2015 for the advance recognition of 2016 losses. A fourth quarter reserve of $95 million was also established for expected future losses on a state Medicaid contract. Excluding these losses, UnitedHealthcare full year 2015 earnings from operations grew 8 percent year-over-year to $7.6 billion. Reported fourth quarter 2015 earnings from operations of $949 million decreased $777 million year-over-year due to individual exchange-compliant product results, as well as investments to improve Medicare Stars quality performance.
The company warned of the losses in November, stating:
“In recent weeks, growth expectations for individual exchange participation have tempered industrywide,” noted Stephen Hemsley, the CEO of the UnitedHealth Group.
“Co-operatives have failed and market data has signaled higher risks and more difficulties while our own claims experience has deteriorated, so we are taking this proactive step,” he explained.
Credit Suisse opined:
As expected, weak UnitedHealthcare (UHC) segment earnings were driven by losses on the exchanges offset by strong earnings in Optum. UNH recorded $725 mln of individual market losses in 2016. Note that operating income was ~5% above our model partially offset by higher interest expense and tax rate. Operating cash flow was very strong.
The company’s quarterly revenue was strong, which drove the stock price of the company higher. UnitedHealth shares increased more than 1% to $110.40 per share at the time of this writing around 9:48 in the morning in New York.
UnitedHealth Group 4Q financial results
The company reported a fourth-quarter net profit of $1.22 billion or $1.26 per share, down from $1.51 billion or $1.45 per share during the same period in 2014. Its adjusted earnings were $1.40 per shares compared with $1645 per share during the same quarter a year earlier.
UnitedHealth explained that it recorded $245 million losses during the quarter for advance recognition of 2016 losses. The company allocated $95 million in reserves as it expected to incur losses from a state Medicaid contract.
In November, the company already warned investors regarding its expectations to suffer losses on its Obamacare plans, and its intention to exit its exchanges selling the plans in 2017.
The company said its quarterly revenue rose increased 30% to $43.60 billion from $33.43 billion.
Wall Street analysts expected UnitedHealth to deliver earnings of $1.38 per share on $43.22 billion in revenue for the quarter based on data compiled by Thomson Reuters.
Full-year 2015 financial results
For the full-year 2015, UnitedHealth reported that its earnings from operations were $11 billion, and its adjusted net earnings were $6.45 per share. Its revenue increased 20% to $157.1 billion.
According to the company, its full-year adjusted net earnings should have been $7.00 per share excluding its losses on Obamacare plans and one state Medicaid contract.
UnitedHealth said its full-year cash flow from operations rose 21% to more than $9.7 billion, which represent 166% of net earnings. Its operating cost ratio declined 80 basis points to 15.5% due to its business mix and improvements in productivity.
2016 financial outlook
UnitedHealth affirmed its 2016 financial outlook. The company estimated to deliver revenues of more than $180 billion and adjusted earnings of around $7.60 to $7.80 per share. The company also expected to achieve strong cash flow from operation in the range of $9.5 billion to $10 billion.
In a statement, UnitedHealth CEO Stephen Hemsley, said, “The people of UnitedHealth Group are focused sharply on executing fully on 2016 commitments and delivering the highest quality experience for those we are privileged to serve. These efforts are reflected in continuing strong growth as we enter the new year.”
Goldman opines:
A quick analysis of results is obscured by UNH reclassifications (in addition to the conversion to cash EPS, some PBM costs were reclassified from operating into medical and/or product costs). That said, among the items to highlight include that UNH also booked a higher amount of “advance recognition” of 2016 losses in 4Q: specifically, $340m related to 2016
losses, $65m more than expected (incl. $45m more for 2016 ACA loss and $20m more for 2016 Iowa Medicaid loss). Key offsets included prior period reserve development at $250m in 4Q vs. $100m in the year-ago 4Q ($90m related to prior year vs. $40m related to prior year in 4Q14). Another offset was strength in Optum earnings that were about 2% ahead of our estimate.
