April 22, 2008 / 1:17 PM / in 10 years

UPDATE 4-UnitedHealth 1st-qtr profit misses, cuts forecast

(Adds investor comment, details, updates shares)

By Lewis Krauskopf

NEW YORK, April 22 (Reuters) - Health insurer UnitedHealth Group Inc UNH.N posted a lower-than-expected first-quarter profit on Tuesday, hurt by weakness in its business serving employers, and slashed its full-year earnings forecast, sending its shares down as much as 11.5 percent.

The gloomy outlook from the largest U.S. health insurer by market value -- which cited both broad factors and company missteps -- became the latest hit to confidence in the industry. Shares of rivals Aetna Inc AET.N, WellPoint Inc WLP.N and Cigna Corp also fell about 4 percent.

Although prior UnitedHealth comments had girded investors for a forecast cut, analysts said the 10 percent reduction was worse than expected.

“This is nowhere near what we thought; this is much worse,” said David Heupel, a portfolio manager with Thrivent Investment Management. “For the industry bellwether to come out and cut numbers to that extent is significantly bad.”

The lower outlook stemmed largely from weaker revenue growth and margins for its commercial plans for employers and Medicare plans for the elderly. UnitedHealth lowered membership forecasts in both areas.

The Minneapolis-based company also said industry competition for membership growth is taking a toll on its enrollment. Furthermore a weak U.S. economy is causing customers to seek leaner benefits that produce less revenue and companies to cut jobs that reduce membership.

The company is being hurt to a lesser degree by high costs from the flu and reduced investment income.

“These financial results are not acceptable for a company with our capabilities and potential,” UnitedHealth Chief Executive Officer Stephen Hemsley said in a statement. “They are due in part to broader economic challenges and in part to our own performance.”

UnitedHealth, whose report kicks off earnings season for the industry, is the latest health insurer to lower its 2008 forecast since March. At the time, WellPoint, the largest U.S. health insurer by membership, stunned the market by cutting its outlook.

While several health insurers have since warned about their 2008 prospects, some companies have said their problems are contained while others like UnitedHealth and WellPoint blamed multiple issues.

Analysts are divided over whether these profit warnings represent company-specific problems or evidence of a broad industry downturn.

“I think we’ll see better reports coming out of some of the peers in the next week or two, but there’s no question that there’s some macro-economic concerns that are going to impact everybody in this industry,” Heupel said.

UnitedHealth posted first-quarter net income of $994 million, or 78 cents per share, compared with $927 million, or 66 cents per share, a year earlier.

Analysts on average expected 80 cents, according to Reuters Estimates.

Revenue rose 7 percent to $20.3 billion.

The company served medical benefits to about 32.4 million people as of the end of March, up about 5 percent from a year ago, helped by its acquisitions of Fiserv and Sierra Health Services.

But excluding acquisitions, membership fell sharply for its commercial plans for which it assumes full insurance risk.

UnitedHealth said it was refusing to cut premium pricing to compete with other plans for such commercial business, hurting its growth.

The company’s operating costs also jumped to 14.3 percent of revenue, 1.2 percentage points higher than a year earlier. It said it incurred those costs to support business that failed to materialize and said it would selectively pare back expenses throughout the year.

Further, the company said its Medicare business is shifting toward less profitable products, and lowered its membership forecast for full-service Medicare Advantage plans. UnitedHealth is one of the largest U.S. providers of Medicare plans.

One bright spot has been its Medicaid business serving low-income Americans, which grew revenues by 23 percent to $1.2 billion. The company said on Tuesday it won a Medicaid contract in Tennessee that will add $1 billion in revenue next year.

The company reduced its 2008 outlook by 40 cents per share to a range of $3.55 to $3.60 per share, reflecting growth of as much as 5 percent. Analysts expect $3.86 per share.

It expects $81 billion to $82 billion in revenue this year, compared with its prior projection of $82.5 billion to $83 billion.

UnitedHealth said it remained committed to major share repurchases, with plans to buy back $4 billion worth of its shares this year.

Shares of UnitedHealth fell $4.16, or 11 percent, to $33.65 in midday trading on the New York Stock Exchange. They earlier fell as low as $33.48, their lowest price in more than 3 years.

UnitedHealth shares have tumbled some 42 percent this year amid service problems and fears of a broad industry downturn. The Morgan Stanley Healthcare Payor index .HMO is off 36 percent this year. (Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn and Derek Caney)

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