UnitedHealth Group Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Amounts are in U.S. dollars; financial statement amounts are in billions unless noted. The company provides health benefits and related services through Health Care Services, OptumHealth, Ingenix and Prescription Solutions.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $21.695 | $20.156 | $65.354 | $60.732 |
| Operating earnings | $1.676 | $1.598 | $4.784 | $3.984 |
| Operating margin | 7.7% | 7.9% | 7.3% | 6.6% |
| Net earnings | $1.035 | $0.920 | $2.878 | $2.251 |
| Diluted earnings per share | $0.89 | $0.75 | $2.43 | $1.80 |
| Medical care ratio | 82.0% | 81.7% | 82.7% | 82.4% |
- Nine-month revenue rose 8%; premium revenue increased 8%, while investment and other income fell 32% to $451 million, reflecting lower investment yields and fewer net realized gains.
- Nine-month operating earnings rose 20% and net earnings rose 28%. The company reported a 34.2% effective tax rate versus 35.7% a year earlier; Q3 rates were 32.7% and 35.8%, respectively.
- Operating cash flow was $4.345 billion for the first nine months, compared with $2.637 billion in 2008. Cash and cash equivalents increased to $9.535 billion from $7.426 billion at year-end 2008.
- At September 30, cash, cash equivalents and investments totaled approximately $23.7 billion. Total debt was $11.190 billion, down from $12.794 billion at December 31, 2008. Current assets were $17.304 billion and current liabilities $19.745 billion.
Changes versus the prior comparable period
- Premium growth was driven mainly by public- and senior-market risk-based business and rate increases. Total people served declined 4% to 70 million: commercial membership fell 6%, while public and senior membership increased 14%.
- Medical costs rose 9% year to date, faster than premiums. Management cited growth in public and senior business, medical-cost inflation, increased utilization and H1N1-related costs. Favorable prior-period medical-cost development was $300 million year to date, versus $210 million in 2008.
- Quarterly operating margin edged down to 7.7% from 7.9%; the year-to-date margin improved to 7.3% from 6.6%. The nine-month comparison benefited from substantial 2008 expenses, including $882 million for settlements and related legal costs, $50 million of estimated legal costs and $46 million of severance, partly offset by a $185 million asset-sale gain.
- Prescription Solutions’ nine-month operating earnings increased to $502 million from $283 million, while Health Care Services earnings decreased to $3.638 billion from $3.800 billion. The latter reflected weaker commercial results, lower-margin public and senior business mix, and lower investment income.
- The company repurchased 66.4 million shares for $1.6 billion during the first nine months, at an average price of approximately $24 per share. It had authorization for up to 36.5 million additional shares at quarter-end.
Outlook, risks and unusual items
- The filing gives no specific quantified earnings or revenue forecast. Management said recession-driven employment losses were pressuring commercial membership and expected elevated attrition to continue until employment stabilized. Reduced investment yields and possible provider financial stress were also cited as concerns.
- CMS’s Medicare Advantage reimbursement reduction of approximately 5% for 2010 was expected to affect results. The company said it adjusted benefits and premiums selectively, exited certain county plans and intensified cost management; success was not assured.
- Medical-cost estimates are a significant judgment area. Q3 included $100 million of favorable development for prior fiscal years and $90 million for the first half of 2009. The company cautioned that actual claims experience may differ from estimates.
- Legal and regulatory matters include the historical stock-option investigations and litigation; a securities class-action settlement of $895 million, finally approved in 2009 and effective October 23, 2009; a proposed $350 million out-of-network reimbursement settlement still subject to court approval; and a $50 million NYAG settlement payment made October 2, 2009. A California claims-processing administrative proceeding remained pending. Adverse outcomes in unresolved matters could be material.
- Investment portfolio risks include interest-rate and equity-market movements. The company reported $24 million of gross unrealized losses on available-for-sale debt securities at September 30 and said it did not intend to sell securities in unrealized-loss positions. Its credit ratings included negative outlooks from S&P and Fitch; it was in compliance with debt covenants, with a 32.8% debt-to-total-capital ratio versus a 50% covenant limit.
- The company cited evolving federal and state health-care regulation, possible Medicare and Medicaid funding changes, litigation, credit-rating downgrades, and restrictions on dividends from regulated subsidiaries as material risks. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether medical-cost trends and the elevated medical care ratio persist, and how much earnings continue to benefit from favorable claims development.
- Commercial membership trends, public- and senior-market growth, and the margins of the changing business mix.
- The realized impact of 2010 Medicare Advantage reimbursement reductions and the company’s plan and benefit actions.
- The status, timing and financial exposure of the out-of-network settlement, California proceeding, and remaining historical stock-option matters.
- Cash-flow sustainability, investment portfolio valuation and credit quality, debt repayment needs, and continued access to regulated-subsidiary dividends and external financing.