01—Abstract
Summary
Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.
UnitedHealth Group's 1999 10-K reports its strongest year on record.
Revenue rose 13% to $19.6 billiona, and earnings from operations reached $943 million, up 10% from 1998's adjusted $858 million. Diluted EPS was $3.20, up 22%, and return on equity improved to 14.1% from 11.9%. Operating cash flow hit a record $1.2 billion.
Management attributes growth to about 9% commercial premium yield increases, the AARP Medicare Supplement contract, and acquisitions in dental (DBP), clinical research (WCT), and HealthPartners of Arizona. Segment operating earnings rose 20% to $953 millionb, with every segment growing. The key risk areas are medical cost management and Medicare.
The consolidated medical care ratio improved to 85.7% from 87.2%, but 1998 included a $175 millionc Medicare contract-loss charge. The Medicare business remains a concern: management withdrew from 135 counties over 1999-2000, Medicare enrollment fell 9%, and the Medicare medical care ratio was still 89.6% in 1999. The company also faces a 1998 operational realignment with $127 million in remaining reserves, pending securities class-action settlement (covered by insurers), and ongoing regulatory exposure including proposed patient-rights legislation and ERISA/RICO class actions.
Balance sheet strength is solid, with $4.7 billiond in cash and investments and about $1.5 billion in statutory capital at regulated subsidiaries. Shareholders' equity declined to $3.9 billion from $4.0 billion because of a $983 million buyback that retired 19.4 million shares.
Total debt rose to $991 million. Management is credit-rated A/A3, and the Company expects its liquidity to cover operating needs.
02—Key points
Key Highlights
- Record 1999 revenue of $19.6 billion, up 13%, with premium revenue of $17.6 billion.
- Earnings from operations of $943 million (up 10% vs. adjusted 1998), and diluted EPS of $3.20 (up 22%).
- Return on equity improved to 14.1% from 11.9%; record operating cash flow of $1.2 billion.
- Medical care ratio improved to 85.7% from 87.2%, driven by commercial premium yield gains of ~9% against ~8% cost growth.
- Medicare remains the weak spot: Medicare medical care ratio of 89.6%, with 135 counties exited across 1999–2000 and enrollment down 9%.
- Aggressive share repurchases: 19.4 million shares bought back for $983 million, cutting shares outstanding to 167.5 million.
- Balance sheet is strong, with $4.7 billion in cash and investments, $1.5 billion in regulated statutory capital, and A/A3 credit ratings.
03—Questions
Frequently Asked Questions
Why did UnitedHealth's reported 1998 results look so poor, and how does 1999 compare?
1998 reported a net loss of $166 million (EPS of -$1.12) because of a $725 million operational realignment charge and $175 million of Medicare and commercial medical cost charges. Excluding these, 1998 earnings from operations were $858 million. On that basis, 1999 earnings from operations rose 10% to $943 million, and net earnings rose 12% to $568 million.
Is the Medicare business still a drag on profitability?
Yes, it remains a concern. The Medicare medical care ratio was 89.6% in 1999, against 87.0% on an adjusted 1998 basis. Management withdrew from 86 counties effective January 1999 and 49 more effective January 2000, and says it may withdraw further. Management believes the actions will improve long-term profitability, but it gives no assurance that future Medicare losses will be prevented.
How significant is the AARP contract to the company?
AARP is a major growth driver. Under a 10-year agreement that began January 1, 1998, UnitedHealth provides Medicare Supplement and hospital indemnity insurance to about 3.7 million AARP members. Its portion generated roughly $3.5 billion in annual premium revenue in both 1998 and 1999. The company carries a rate stabilization fund of $713 million to absorb underwriting losses, but the contract's success depends on pricing, service execution, and regulatory changes.
What legal and regulatory risks do investors need to watch?
The company faces a February 2000 settlement of securities class actions, which its insurers have agreed to cover. It also faces ERISA and RICO class actions by managed care members and providers, routine state and federal audits, and proposed Patients' Bill of Rights legislation. Management says none of the current audits is expected to be materially adverse. The HMO risk-based capital rules could also require more capital in some subsidiaries if states adopt them.
What is the company's capital return policy and balance sheet position?
UnitedHealth repurchased $983 million of stock in 1999 and has authorization for 13.9 million more shares. The annual dividend is only $0.03 per share, so the company returns capital mainly through buybacks. Total debt rose to $991 million, mostly commercial paper, while cash and investments were $4.7 billion. Management says only about $300 million was available for general corporate use after regulatory restrictions, so liquidity depends partly on operating cash flow and its credit facilities.
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