(Updates with closing share price in fifth paragraph.)
Oct. 17 (Bloomberg) -- UnitedHealth Group Inc., the biggest U.S. health insurer, reported third-quarter sales below analysts’ expectations while declining to raise its profit projections, driving shares down the most in two years.
Net income rose less than 1 percent to $1.57 billion from a year earlier and the Minnetonka, Minnesota-based insurer reported per-share earnings of $1.53, matching the average of 18 analysts’ estimates compiled by Bloomberg. Revenue climbed 12 percent to $30.6 billion, UnitedHealth said in a statement today. Analysts had estimated $30.9 billion, on average.
UnitedHealth exceeded analyst expectations in all but one quarter over the last four years, helped by rising enrollment and medical costs that have remained low since the recession ended in 2009. While both trends continued in the third quarter, the company also said profit suffered from a decline in government Medicare payments.
“There were a couple undesirable surprises,” wrote Carl McDonald, a New York-based Citigroup analyst, in a note to investors today. “The obvious one is that earnings were in-line with expectations, rather than the big beats we’ve generally become accustomed to.”
UnitedHealth fell 5.1 percent to $71.37 at 4 p.m. New York time, its biggest drop at the close since Oct. 3, 2011. The shares have gained 32 percent this year.
The shares of competing U.S. health insurers also dropped, with Humana Inc., the second-biggest Medicare provider after UnitedHealth, decreasing 2.9 percent to $93.85. WellPoint Inc. fell 1.2 percent to $88.59.
UnitedHealth is the first publicly traded health insurer to release results this quarter. Indianapolis-based WellPoint, the second-biggest U.S. health insurer, is due to report on Oct. 23. Humana, based in Louisville, Kentucky, will release results on Nov. 6.
“United didn’t have a terrible quarter, by any means,” McDonald said. “But we can’t forget that these stocks are all trading at or near 52-weeks highs, with valuation multiples above historical norms, so the bar is a lot higher than it’s been over the last couple of years.”
The company said full earnings excluding some items will be $5.40 to $5.50 a share this year, raising the lower end of the $5.35-to-$5.50 projection it gave in July.
The insurer expects Medicare reimbursements to be a drag on results next year and sees “limited potential” for driving down medical costs, Chief Executive Officer Stephen Hemsley said on a conference call today. UnitedHealth’s initial 2014 forecast will straddle the range it’s given for this year, leaving open the possibility that earnings may not grow.
“We are focused on a number of things that we think will drive toward the upper end of that,” Hemsley said. “But that execution remains to be seen.”
UnitedHealth has limited its presence on the online insurance markets rolled out this year under the U.S. Patient Protection and Affordable Care Act. Instead, it’s been buoyed by growth in Medicare, the U.S.-backed program for the elderly, and Medicaid, the government-funded program for low-income Americans. UnitedHealth also paid $4.9 billion last year to acquire Brazil’s largest insurer.
Enrollment in the company’s medical plans, its main line of business, grew 24 percent to 45.3 million people.
Nonetheless, operating earnings from the insurance business declined. The company cited cuts in Medicare reimbursements and a difficult comparison with last year’s third quarter, when low medical costs gave UnitedHealth an “exceptional” boost.
By contrast, earnings swelled 54 percent in the company’s Optum division, a smaller but growing unit that manages drug benefit plans and provides consulting services for hospitals and other clients.
While investors may have wanted more, today’s results were “robust,” said Sheryl Skolnick, an analyst with Stamford, Connecticut-based CRT Capital Group.
“For our part, we see this as an extremely strong report with no fundamental problems in the business,” she said. The company was “firing on all cylinders.”
Earnings in 2012’s third quarter were $1.56 billion, or $1.50 a share.
Already the largest private provider of Medicare plans, UnitedHealth said Oct. 15 that it was extending a 15-year-old marketing agreement with AARP, the Washington-based group representing older Americans, through 2020.
Like other carriers, the company has benefited from a slowdown in U.S. medical costs amid the halting economic recovery.
Those expenses “continue to remain at suppressed levels,” Sarah James, a Wedbush Securities Inc. analyst in Los Angeles, wrote in a Sept. 30 note to clients. “Low utilization will be a driver of upside across the group.”
--With assistance from Michelle Fay Cortez in Minneapolis. Editors: Bruce Rule, Angela Zimm