UnitedHealth Has Strong Q3, ‘It’s All About The Government Business’

UnitedHealth Has Strong Q3, ‘It’s All About The Government Business’

UnitedHealth Group Inc. (NYSE:UNH) reported Q3 2012 EPS of $1.50, above pre-announced guidance of at least $1.45 and our revised upward estimate of $1.45. The quarter contained $190 million (about $0.12) of net prior period favorable development. Even excluding the net prior period development, UnitedHealth Group Inc. (NYSE:UNH) reported earnings above the $1.27 estimate analysts had for the quarter prior to UnitedHealth’s preannouncement. UnitedHealth Group Inc. (NYSE:UNH)’s strong earnings was a result of strong MLR, which receives revenue from the Government programs of Medicaid and Medicare.

 UnitedHealth Has Strong Q3, 'It's All About The Government Business'
Margins improved year overyear and sequentially in both UnitedHealthcare and Optum. UnitedHealth Group Inc. (NYSE:UNH) increased 2012 EPS guidance to a range of $5.205.25 from prior guidance of $4.905.00, which, at the midpoint, is about $0.05 more than the upside in the current quarter from our original estimate.
UnitedHealth’s consolidated MLR improved to 79.0% from 81.3% in Q2 2012 and 80.7% in Q3 2011

UnitedHealthcare’s commercial MLR improved to 80.2% from 80.8% in Q2 2012 and 81.6% in Q3 2011. While not disclosed, the Medicare MLR likely improved more than the commercial MLR, based on the better improvement in the consolidated MLR than the
commercial MLR. Medicare and Medicaid revenues grew year over year 13% and 12%, respectively, while commercial revenues increased 2%. Prior period favorable development was $390 million in Q3 2012 compared to $200 million in Q3 2011 and $210 million in Q2 2012, with $170 million from prior year.

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Third quarter EBITDA was $2.8 billion, $123 million above expectations, adding $0.08 per share. Strength was driven primarily by a consolidated medical loss ratio in the quarter that was 170 basis points better than projections, at 79.0%, positively impacting EPS by $0.27 per share. The bulk of the improved medical loss appears to be driven by $390 million in favorable reserve development, which added about $0.24 per share.

The share count was in line with expectations, with the company repurchasing 15 million shares in the quarter, and the tax
rate was slightly higher than expected. No new information was disclosed regarding the purchase of Amil.


The strong and high quality 3Q sets a positive tone for the managed care earnings season, implying underlying pricing and medical cost trends may have improved for 2H2012 after a choppy 1H (though, as in prior quarters, UNH-specific outperformance is clearly a factor as well).

Citigroup analysts went so far as to state  ‘United’s third quarter was all about the government business’

The commercial risk business did fine, with the commercial MLR improving 60 basis points sequentially, to 80.2%. But the stars this quarter were United’s government products, where the MLR improved 360 basis points sequentially, to 78.1%. Analysts estimate Medicare Advantage represents about half of United’s government premiums, so it would seemingly be hard to report such a big improvement in government MLR unless Medicare was doing quite well.

Key focus for the 8.45am call will be directional view on 2013 (although analysts expect 2013 guidance will not be provided until the Nov. 29 investor day as was the case last year).

Disclosure: long UNH

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