Why did UnitedHealth report a net loss in 1998 despite record revenue?

The company recorded $725 million of operational realignment and other charges in Q2 1998, including $451 million of asset impairments, along with $175 million of medical cost charges tied to Medicare contract losses and commercial cost increases. These one-time and unusual items turned an underlying profit of $858 million in earnings from operations into a reported loss of $(42) million.

Is the Medicare business a concern for investors?

Yes. Medicare's medical care ratio reached 92.0% in 1998 versus 83.3% in 1997, and contract losses hit 13 of 24 markets. Management withdrew from 86 counties effective January 1, 1999, affecting about 60,000 members, and says it cannot assure it will prevent future Medicare losses.

What is the outlook for margins and earnings in 1999?

Management expects average medical cost increases of 4% to 5% in 1999, commercial premium yield increases of 7% to 8% on new and renewal business, and about $75 million of realignment-related cost savings in 1999, with roughly $300 million of annual savings by 2000. These projections are forward-looking and subject to the risks described in the filing, including regulatory change and medical cost trends.

How strong is the balance sheet and liquidity position?

Liquidity is strong overall, with $4.4 billion of cash and investments and over $1.0 billion of operating cash flow, and the company says it was well within its debt covenants. However, only about $500 million of that cash and investments is available for general corporate use after regulatory restrictions, and statutory capital requirements could rise under proposed NAIC HMO risk-based capital rules.

What legal risks does the company face?

Six class action suits filed under federal securities laws allege that UnitedHealth misled investors about Medicare profitability between February and August 1998, when the stock fell from $52 7/8 to $37 7/8 in one day. Two pension funds have also opted out and seek about $12.1 million in damages. The company says it does not expect the pending actions to have a material adverse effect, but the outcome cannot be predicted.

UNH 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.

UnitedHealth Group's 1998 10-K shows a company that grew revenue sharply but posted a net loss, driven by a $725 million^a operational realignment charge and $175 million of Medicare and commercial medical cost charges.

Revenues rose 47% to a record $17.4 billion^b, largely from the $3.5 billion AARP Medicare supplement program and same-store UnitedHealthcare growth. Excluding the special charges, management reports underlying earnings from operations of $858 million, net earnings to common of $509 million, and diluted EPS of $2.62, up 16% to 18% over 1997. Reported results were a net loss applicable to common shareholders of $214 million, or $(1.12) per diluted share, including a $20 million preferred redemption premium.

The key concern for investors is margin pressure. The consolidated medical care ratio rose to 87.2%^c from 84.3%, and the Medicare business posted a 92.0% ratio after contract losses in 13 of 24 markets. Management withdrew Medicare products from 86 counties effective January 1, 1999, and expects commercial premium yields of 7% to 8% to help the ratio improve in 1999.

Balance sheet and cash flow are solid: operating cash flow exceeded $1.0 billion^d, cash and investments totaled $4.4 billion, and the company redeemed $500 million of convertible preferred stock and repurchased 11.3 million shares. Debt rose to $708 million, and only about $500 million of cash and investments was available for general corporate use. Pending securities class actions tied to the 1998 Medicare disclosures, with the stock falling from $52 7/8 to $37 7/8 in one day in August 1998, add legal risk.

02—Key points

Key Highlights

Revenue grew 47% to a record $17.4 billion in 1998, driven mainly by the $3.5 billion AARP Medicare supplement program and same-store UnitedHealthcare growth.
Reported 1998 net loss applicable to common shareholders was $214 million, or $(1.12) per diluted share, after $725 million of realignment charges and a $20 million preferred redemption premium.
Excluding special charges, underlying diluted EPS was $2.62, up 16% from $2.26 in 1997.
Consolidated medical care ratio worsened to 87.2% from 84.3%, with Medicare at 92.0%, reflecting contract losses in 13 of 24 Medicare markets.
Operating cash flow exceeded $1.0 billion (up 57%), and cash and investments totaled $4.4 billion at year-end 1998.
Capital actions included redeeming $500 million of 5.75% convertible preferred stock and repurchasing 11.3 million common shares for $436 million, with new debt of $708 million outstanding.
Six securities class actions and two opt-out pension fund suits seek damages over alleged misstatements about Medicare profitability; the company says it will defend them vigorously.

03—Questions

Frequently Asked Questions

Why did UnitedHealth report a net loss in 1998 despite record revenue?
The company recorded $725 million of operational realignment and other charges in Q2 1998, including $451 million of asset impairments, along with $175 million of medical cost charges tied to Medicare contract losses and commercial cost increases. These one-time and unusual items turned an underlying profit of $858 million in earnings from operations into a reported loss of $(42) million.
Is the Medicare business a concern for investors?
Yes. Medicare's medical care ratio reached 92.0% in 1998 versus 83.3% in 1997, and contract losses hit 13 of 24 markets. Management withdrew from 86 counties effective January 1, 1999, affecting about 60,000 members, and says it cannot assure it will prevent future Medicare losses.
What is the outlook for margins and earnings in 1999?
Management expects average medical cost increases of 4% to 5% in 1999, commercial premium yield increases of 7% to 8% on new and renewal business, and about $75 million of realignment-related cost savings in 1999, with roughly $300 million of annual savings by 2000. These projections are forward-looking and subject to the risks described in the filing, including regulatory change and medical cost trends.
How strong is the balance sheet and liquidity position?
Liquidity is strong overall, with $4.4 billion of cash and investments and over $1.0 billion of operating cash flow, and the company says it was well within its debt covenants. However, only about $500 million of that cash and investments is available for general corporate use after regulatory restrictions, and statutory capital requirements could rise under proposed NAIC HMO risk-based capital rules.
What legal risks does the company face?
Six class action suits filed under federal securities laws allege that UnitedHealth misled investors about Medicare profitability between February and August 1998, when the stock fell from $52 7/8 to $37 7/8 in one day. Two pension funds have also opted out and seek about $12.1 million in damages. The company says it does not expect the pending actions to have a material adverse effect, but the outcome cannot be predicted.

04—Continue

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