01—Abstract
Summary
Summary of the 10-K filed March 28, 1997. Cited figures are marked; the original filing is the authoritative source.
United HealthCare Corporation (NYSE: UNH) reported a strong but margin-pressured 1996 in its FY1996 Form 10-K.
Revenues rose 78% to $10.07 billiona, driven largely by the October 1995 MetraHealth acquisition and other 1996 deals, while net earnings grew 24% to $355.6 million, or $1.76 per share. Excluding merger costs and a $45 million provision for losses on two St. Louis contracts, adjusted net earnings were $392.2 million ($1.96 per share), though the filing shows adjusted net operating earnings up only 2% year over year. The core concern for investors is the medical expense ratio, which rose to 84.6% from 79.7% in 1995, reflecting a 3-4% commercial health cost trend that outpaced the 1-2% pricing assumed in late 1995 and early 1996 renewals.
The balance sheet and cash flow look solid. Cash and investments grew to $3.45 billionb, operating cash flow was $562 million, and shareholders' equity reached $3.82 billion. Total assets rose to $7.0 billion, with goodwill and intangibles of $2.14 billion from acquisitions, which makes acquisition integration and intangible valuation important risks.
Management says premium rate increases of 4-5% at renewal since February 1996 have improved the pricing environment, but it does not guarantee that trend will continue. Looking ahead, the 10-year AARP Medicare supplement contract, expected to contribute about $4.0 billionc in annual premium revenue starting January 1998, is a major growth driver. Its success depends on servicing new members and pricing competitively, and the filing notes ongoing Medicare start-up losses and regulatory exposure.
02—Key points
Key Highlights
- Total revenues increased 78% to $10.07 billion in 1996, up from $5.67 billion in 1995, largely due to the MetraHealth acquisition and other 1996 acquisitions.
- Net earnings rose 24% to $355.6 million ($1.76 per share) from $286.0 million ($1.57 per share); excluding HealthWise merger costs and a $45.0 million contract-loss provision, earnings were $392.2 million ($1.96 per share).
- The medical expense ratio worsened to 84.6% in 1996 from 79.7% in 1995 as commercial health cost trends rose to 3-4%, above the 1-2% assumed in pricing.
- Enrollment totaled 13.8 million at year-end 1996 (+1%), including 4.86 million health plan members (+39%), while indemnity enrollment fell 26%.
- Cash and investments reached $3.45 billion and operating cash flow was $562.3 million, providing liquidity for operations and integration.
- Goodwill and other intangible assets of $2.14 billion (about 31% of total assets) create acquisition-related impairment and integration risk.
- The 10-year AARP Medicare supplement contract, expected to add about $4.0 billion in annual premium revenue from January 1998, is a major growth catalyst that depends on successful servicing and pricing.
03—Questions
Frequently Asked Questions
Why did UnitedHealth's margins deteriorate in 1996 even as revenue grew sharply?
The medical expense ratio rose from 79.7% to 84.6%. Management attributes this to commercial health care cost trends of 3-4%, above the 1-2% assumed when premiums were set in late 1995 and January 1996. Higher outpatient, physician, and prescription drug utilization contributed, along with a $45.0 million provision for losses on two St. Louis contracts and MetraHealth products that carry higher medical cost ratios. Management says renewal rate increases of 4-5% since February 1996 have better matched costs.
How much of the 1996 revenue growth came from acquisitions versus organic growth?
Most of it came from acquisitions. Premium revenue rose 72% to $8.50 billion, but excluding MetraHealth, HealthWise, and PHP, the increase was 28%, tied to 30% total health plan enrollment growth and modest 1-2% premium rate increases. Management services and fee revenues roughly doubled to $1.40 billion, and excluding those acquisitions they grew 42% to $409.1 million. Much of the fee revenue comes from about 7.9 million self-funded enrollees, mostly from MetraHealth.
What is the significance of the AARP contract for future growth?
The 10-year agreement, finalized in February 1997 and starting January 1, 1998, covers Medicare supplement insurance and new products for AARP members. The company's portion is expected to represent about $4.0 billion in annual premium revenue from over 5 million policyholders, based on year-end 1996 figures. The filing warns that results depend on servicing these members, developing products, pricing competitively, and managing the transition, which runs through 1997.
Are there contingent liabilities or risks tied to the MetraHealth acquisition?
Yes. The MetraHealth acquisition carries an earnout of up to $175.0 million per year for 1996 and 1997 if combined net earnings reach specified levels. The company does not expect to pay the 1996 earnout based on 1996 results, but any payments would increase goodwill. Restructuring costs for information systems, operating losses in discontinued businesses, and relocation and training costs are being recognized as incurred. The company also has $950 million in future payments under outsourcing contracts and about $1.19 billion in MetraHealth goodwill and intangibles.
Is the company's shareholder base or dividend policy a concern for investors?
Dividends are minimal. The common dividend is $0.03 per share annually, and the 5.75% Series A Convertible Preferred Stock ($500 million, issued to former MetraHealth owners) pays about $28.8 million per year in dividends and is mandatorily redeemable by October 1, 2005. Common shareholders' equity stood at about $3.82 billion, and the stock traded between $30.00 and $69.00 during 1996 and between $42.63 and $54.50 through February 28, 1997. The company had 14,938 shareholders of record and about 185.6 million shares outstanding as of March 17, 1997.
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