July 21, 2009 / 10:23 AM / 10 years ago

UPDATE 4-UnitedHealth shows diversity as profit beats views

* Q2 EPS 73 cents vs Wall St estimate of 70 cents

* Sees 2009 EPS $3-$3.15, raising low end by 10 cts

* Growth in Medicare, Medicaid offset commercial declines

* CEO sees challenging 2010

* Shares rise 2.4 percent (Adds analyst, CEO comments, details, updates shares)

By Lewis Krauskopf

NEW YORK, July 21 (Reuters) - UnitedHealth Group Inc (UNH.N) posted stronger-than-expected second-quarter profit on Tuesday, helped by growth in the insurer’s plans for elderly and low-income Americans and in its drug benefit business, and its shares rose 2 percent.

The largest U.S. health insurer by market value also held down administrative costs better than analysts expected and raised the low end of its 2009 earnings forecast.

UnitedHealth continues to struggle with its central business of providing employer-based commercial insurance, where it continues to face declining enrollment stemming in part from the weakening economy.

“It really shows the positives in their diversified business model,” Edward Jones analyst Steve Shubitz said. “If they were just commercial insurance, this would not have been a very good quarter. It’s really the diversification that’s shining through.”

UnitedHealth is the first health insurer to report second-quarter results, which arrive as Congress’ efforts to overhaul the U.S. healthcare system has gripped investor attention and left uncertain the industry’s future.

Chief Executive Stephen Hemsley told analysts on a conference call that 2010 “looks like a challenging year for us.” Without giving a specific forecast, Hemsley cited job losses squeezing enrollment and pressure on Medicare profit margins as among the factors making next year difficult.

“Caution certainly was the theme of the day,” Stifel Nicolaus analyst Thomas Carroll said. “I think management downplayed most of their businesses in the midst of recession and reform.”

Net income in the quarter rose to $859 million, or 73 cents per share, from $337 million, or 27 cents per share, a year earlier, when the company took a big charge for a legal settlement.

Analysts on average expected 70 cents a share, according to Reuters Estimates.

Revenue rose 6.8 percent to $21.7 billion.

Revenue in the company’s Ovations unit serving seniors rose 13 percent to $8 billion. Enrollment in its Medicare Advantage plans jumped nearly 20 percent to 1.74 million.

At its unit serving Medicaid plans for low-income Americans, revenue shot up 45 percent to $2 billion, spurred by strong enrollment gains.

“Medicare and Medicaid enrollment growth was strong,” Wells Fargo analyst Matt Perry said in a research note.

Its commercial plans for employers stood at 25.03 million at the end of June, down 1.46 million members from a year ago. UnitedHealth, along with other insurers, has seen membership fall as employers pare job rolls because of the weak economy.

The company projected full-year commercial enrollment declines of around 1.5 million people, depending on the level of job losses and the state of the economy.

Earnings from operations for its prescription drug benefit unit soared 77 percent to $166 million, helped by prescription volume growth and a shift to higher-margin generics.

“The story this quarter may be the huge earnings growth United reported in its prescription solutions segment,” Oppenheimer & Co analyst Carl McDonald said in research note.

UnitedHealth spent 83.6 percent of its premiums on medical costs, up from 83.2 percent a year earlier, but within company expectations. The H1N1 flu outbreak contributed 0.2 percentage points to the cost increase.

The ratio came in higher than the projection of Wall Street analysts, which closely watch it to gauge profitability.

The Minneapolis-based company’s tax rate fell to 34 percent from 35.8 percent a year ago, as the company benefited from resolving federal and state tax matters.

It forecast 2009 earnings of $3 to $3.15 per share, lifting the bottom of its range by 10 cents.

UnitedHealth said on Monday that it would acquire the northeast U.S. operations of Health Net HNT.N for about $510 million to expand in the region. UnitedHealth said the deal is expected to modestly boost its earnings. [ID:nN20147931]

UnitedHealth shares rose 60 cents to $25.44 in midday trading on the New York Stock Exchange. Through Monday, they had fallen 6.6 percent this year. (Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn, Derek Caney and Gunna Dickson)

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