UnitedHealth profit drops but tops estimates

Health insurers battered by rising costs and employer benefits cuts caught a break Tuesday when UnitedHealth Group beat Wall Street expecations and saw its stock jump nearly 8 percent, even though it reported a sharp drop in second-quarter profit.

Shares of the Minneapolis-based managed-care provider rose $2.38, or 10 percent, to $26.21 from Monday's closing price of $23.83, as the prices of other publicly traded insurers like Aetna Inc. and WellPoint Inc. also jumped several percentage points.

"The worst case didn't happen to managed care, and that was enough for people to jump back in," said analyst Les Funtleyder of Miller Tabak & Co. "The assumption is the worst is over."

UnitedHealth's net income fell to $337 million, or 27 cents per share, from $1.23 billion, or 89 cents per share, a year ago. Hefty lawsuit settlements and thinner margins in its health care services business contributed to the profit drop.

Tough economic conditions, including a competitive industry that's seeing fewer employers offering insurance, were among factors cited by company officials in a Tuesday morning conference call with analysts.

The company's UnitedHealthcare segment saw its second-quarter membership decrease less than 1 percent, partially due to a drop of 95,000 people in risk-based programs where the company provides the insurance.

"I think affordability is absolutely an issue that employers are very focused on," UnitedHealthcare President Gail Boudreaux said, noting that the company has seen a trend toward leaner benefits products in the small-group market.

Earnings from operations in UnitedHealth's main business line, health care services, fell to $1.14 billion from $1.75 billion, despite an increase in revenue of nearly $1 billion. UnitedHealth's overall medical cost ratio - the percentage of medical expenses over premium revenue - rose 290 basis points to 83.2 percent.

Funtleyder said the trend toward employers reducing benefits has been around for a while, and there's no reason to think it will change in a tough economy. He said insurers have little control over that.

UnitedHealth CEO Stephen J. Hemsley said his company was taking "aggressive actions" to improve what it can control. That includes strengthening underwriting discipline and reducing operating costs.

"As we move toward 2009 the results of these steps will be accelerated if the economic environment improves," he said.

However, Goldman Sachs analyst Matthew Borsch cautioned in a note that too much cost cutting could "impair an already strained operation." Borsch holds a "bearish view" on the company's outlook.

Settlements in two class action lawsuits related to UnitedHealth's former stock option granting practices resulted in a pretax charge of $922 million, or 47 cents per share, for the second quarter. Excluding one-time charges, the company earned 67 cents per share in the latest period. Revenue rose 7 percent to $20.27 billion from $19 billion a year earlier.

Analysts surveyed by Thomson Financial expected adjusted profit of 64 cents per share on revenue of $20.04 billion.