UnitedHealth Group Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparative periods are the corresponding 2010 periods. Amounts are in millions of dollars except per-share data. UnitedHealth Group operates UnitedHealthcare (health benefits) and Optum (health services), reported through four segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenues | $25,234 | $23,264 | $50,666 | $46,457 |
| Earnings from operations | $2,099 | $1,901 | $4,320 | $3,917 |
| Net earnings | $1,267 | $1,123 | $2,613 | $2,314 |
| Diluted EPS | $1.16 | $0.99 | $2.38 | $2.02 |
| Medical care ratio | 81.4% | 81.5% | 81.4% | 81.4% |
| Operating cost ratio | 14.8% | 14.4% | 14.5% | 14.3% |
| Operating margin | 8.3% | 8.2% | 8.5% | 8.4% |
- Q2 revenue rose 8%, net earnings 13% and diluted EPS 17% year over year. First-half revenue rose 9%, net earnings 13% and diluted EPS 18%.
- Q2 premiums increased 8%; services revenue rose 17%, products 5%, and investment and other income 7%. Management attributed growth mainly to UnitedHealthcare risk-based offerings and growth across Optum.
- For the first half, UnitedHealthcare revenue increased 8% and operating earnings 12%. Optum revenue increased 20%, while total Optum operating earnings were nearly flat at $662 versus $661. OptumHealth operating earnings fell 14% and OptumRx fell 6%; OptumInsight earnings rose 50%.
- Medical costs rose 8% in both the quarter and first half, alongside membership growth and higher cost per service. Operating costs rose 11% in both periods.
- Medical costs included $560 of favorable development of prior-year estimates in the first half of 2011, compared with $580 in first-half 2010. Q2 2011 also included $120 of favorable prior-year development and $60 related to Q1 2011. These reserve developments supported reported results.
Cash flow, balance sheet and capital
- First-half operating cash flow was $2,419, up from $1,928. Investing activities used $1,558, mainly reflecting investment purchases and $827 of net acquisition spending; financing activities used $209. Cash increased $652 to $9,775.
- At June 30, 2011, total assets were $66,115 and shareholders’ equity was $27,363. Cash and cash equivalents were $9,775; short- and long-term investments totaled $17,467.
- Commercial paper and long-term debt had a combined carrying value of $11,131, including $1,085 of commercial paper. Debt-to-total-capital was 28.9%, versus 30.1% at year-end 2010; the company reported compliance with its debt covenant requiring a ratio below 50%.
- A $2.5 billion revolving credit facility, maturing May 2012, was undrawn. Cash, cash equivalents and available-for-sale investments totaled $27.0 billion. The investment portfolio had a 2.1-year weighted-average duration and AA weighted-average credit rating.
- The company issued $750 of senior notes in February, repurchased 28 million shares for $1.3 billion during the first half, and paid $309 in dividends. In May, the board raised the annual dividend rate to $0.65 per share and authorized repurchases of up to 110 million shares.
Changes, outlook and principal risks
- Effective January 1, 2011, the company realigned certain businesses and renamed its segments; prior-period segment results were recast. OptumHealth goodwill rose substantially, primarily due to acquisitions. Management cited acquisitions and organic growth as drivers of Optum revenue, with business mix and growth investments weighing on Optum margins.
- Management expected health-system utilization to increase seasonally in the second half of 2011, potentially raising medical costs and the medical care ratio. It cited network arrangements, provider reimbursement programs and clinical initiatives as cost-management measures.
- Management projected its second-half 2011 effective tax rate would be 2 percentage points below the first-half rate, based on anticipated favorable resolution of tax matters.
- The company forecast a potential $250–$300 assessment related to Penn Treaty policyholder claims, then expected in Q4 2011. The timing and amount remained dependent on court proceedings and other factors; the company said it would accrue the assessment if the state court made the relevant determination.
- Health reform creates uncertainty around medical-loss-ratio rebates, premium rate review, product economics and new requirements. Management cited greater rate scrutiny in some states and possible margin pressure, and noted Medicare Advantage reimbursement reductions, with further reductions beginning in 2012.
- CMS risk-adjustment data validation audits were ongoing. The company said current audits were not expected to have a material impact, but warned that a proposed methodology using extrapolated error rates for retroactive payment adjustments could materially affect results, financial position or cash flows depending on the final methodology.
- Other disclosed exposures include legal and regulatory proceedings, guaranty-fund assessments, investment-market risk, and dependence on regulated subsidiaries for dividends. The company said it could not reasonably estimate potential losses for certain litigation and regulatory matters. It reported no material changes to the risk factors in its 2010 Form 10-K.
Important facts for investors to verify
- How much reported earnings growth depended on favorable medical-cost reserve development, and whether utilization trends subsequently increased as management expected.
- Final 2011 medical-loss-ratio rebate exposure and the effect of state premium-rate review on pricing and margins.
- The timing, amount and accounting treatment of any Penn Treaty guaranty-fund assessment.
- Final CMS risk-adjustment audit methodology and any resulting payment adjustments.
- Optum’s ability to convert strong revenue growth into operating earnings, particularly in OptumHealth and OptumRx.
- Debt, liquidity and capital returns in light of the May 2012 credit-facility maturity, continuing repurchases and increased dividend.