NEW YORK UnitedHealth Group Inc's (UNH.N) quarterly profit crushed estimates, fueled by growth across its health plans and continued benefits from Americans' moderate use of healthcare services, and its shares soared as much as 10.5 percent to a three-year high.
The largest U.S. health insurer by market value also significantly boosted its full-year profit forecast well above Wall Street's target.
UnitedHealth, considered a bellwether because of its size and diversity, kicked off the first-quarter earnings season for health insurers, whose shares have outperformed the market this year.
"It was a great quarter," Gleacher & Co analyst Joseph France said. "The question has been what is enrollment going to look like and what are medical costs going to look like. And I'd say this pretty much confirms, at this point at any rate, the best hopes that you could have had."
Shares of rivals rose after the report, with WellPoint Inc WLP.N up 3.6 percent, Aetna (AET.N) rising 4.6 percent and Coventry Health Care CVH.N climbing 5.3 percent.
The report was the first among large insurers under new spending rules, created by last year's healthcare overhaul law, and indicated that the companies could post strong results despite operating under the new regulations.
The rules require insurers meet certain thresholds, known as medical loss ratios (MLRs), for spending on medical care as opposed to administration and profit. UnitedHealth said it had factored potential payments under the law into its quarterly results and forecast.
"Our first view of managed care with minimum MLRs, and the report card is an 'A'," said David Heupel, a large-cap growth fund portfolio manager with Thrivent Investment Management, whose fund holds Aetna shares. "It's hard to really find anything here that you can poke at."
UnitedHealth's net income rose to $1.35 billion, or $1.22 per share, from $1.19 billion, or $1.03 per share, a year earlier.
That amounted to a whopping 37 percent beat over the average estimate of 89 cents per share among analysts, according to Thomson Reuters I/B/E/S.
Revenue rose 9.7 percent to $25.43 billion, ahead of the $24.95 billion expected by analysts.
"We expected upside to first-quarter results, but we are surprised by the magnitude," Goldman Sachs analyst Matthew Borsch said in a research note.
The results, Borsch said, appear "to reflect a combination of UnitedHealth's initial conservatism on its outlook..., strong enrollment gains and overall execution" as well as low use of medical services.
UnitedHealth shares rose $3.71 to $47.95 in morning trading on the New York Stock Exchange, where they climbed as high as $48.89. Through Wednesday, UnitedHealth shares had risen 22.5 percent this year, in line with rivals, as investors gained more comfort with the new healthcare overhaul law.
Membership stood at nearly 34 million at the end of March, excluding standalone Medicare drug plans, reflecting growth of 1.7 million, or 5 percent.
Gleacher's France pointed to particularly strong gains in UnitedHealth's commercial business that serves employers.
The Minneapolis-based company reported it spent 81.4 percent of its premium revenue on medical costs, up from 81.3 percent.
The percentage -- a closely watched profitability measure watched by Wall Street -- came in well lower than the 82.3 percent expected by Sanford Bernstein analyst Ana Gupte, who attributed the improvement to low use of medical services and a positive impact of claims reserves from prior periods.
Health insurers benefited throughout 2010 from more people postponing doctor visits and procedures to sustain themselves in the weak U.S. economy. The companies have said they factored in a rebound in healthcare use this year, but analysts have said corporate results could exceed expectations should levels stay low.
"Maybe we don't get the snap back in utilization that many of the companies have been looking for," said France.
UnitedHealth said the severe winter storms served to keep consumers from using health services, keeping its medical costs low, although it also saw low utilization in areas not impacted by the weather. The company said it continued to expect a return to higher utilization patterns this year and into 2012.
UnitedHealth projected full-year earnings of $3.95 to $4.05 per share. That compared with its previous range of $3.50 to $3.70 and the analysts' average expectation of $3.78.
The company also sees revenue approaching $101 billion for the year, up from about $100 billion it forecast in January.
(Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn, Dave Zimmerman)