UnitedHealth Group Inc (UNH.N) posted a higher-than-expected 3 percent rise in quarterly profit on Thursday, benefiting from an increase in membership across its health plans and lower-than-expected medical claims.
The largest U.S. health insurer by market value also raised its full-year profit outlook, and its shares rose nearly 3 percent.
UnitedHealth's results indicated the company was taking market share from rivals across its plans, CRT Capital Group analyst Sheryl Skolnick said.
"The company is really firing on all cylinders," said Skolnick, adding that the stock rarely rises on days when UnitedHealth reports quarterly results.
"It's way far ahead of its competitors, and it's the stock to own in the space," Skolnick said.
Shares of health insurers rose broadly after the news from UnitedHealth, the first in the sector to report first-quarter results and the industry's bellwether because of its size and diversity of health plans. Aetna Inc (AET.N) was up 2.4 percent, while WellPoint Inc WLP.N gained 1.8 percent.
Health insurers largely posted higher-than-expected profits in 2011 because of American's low use of medical services in the weak economy, leading their shares to far outperform the broader stock market. Wall Street is eager to see if the trend has continued this year.
UnitedHealth Chief Executive Officer Stephen Hemsley told analysts on a conference call that medical utilization trends remained "moderate," but the company still expects a gradual rise over the rest of the year.
Investors also are concerned about the impact of the Supreme Court's decision on President Barack Obama's healthcare overhaul law. Worries about the decision, which is expected in June, may prevent health insurance stocks from making more significant gains during the first-quarter reporting period.
UnitedHealth's first-quarter net income rose to $1.39 billion, or $1.31 per share, from $1.35 billion, or $1.22 per share, a year earlier.
The profit topped the analysts' average estimate by 14 cents per share, according to Thomson Reuters I/B/E/S.
Revenue rose 7 percent to $27.28 billion, slightly ahead of Wall Street's target.
"It's pretty hard to find any fault with the quarter," said Scott Schermerhorn, chief investment officer at Granite Investment Advisors, which holds UnitedHealth shares. "In an uncertain environment, the company delivered all the way around."
Membership stood at 35.57 million at the end of March, up about 5 percent from a year earlier.
But membership in its employer-based plans for which UnitedHealth assumes full insurance risk declined by 190,000, or 2 percent, to 9.36 million from the end of 2011. These plans are one of its most important product lines.
However, UnitedHealth repeated its forecast for a loss of only 100,000 to 200,000 such members for the year, indicating the plans could regain membership by year's end. Overall, the company expects to gain 1.7 million to 1.9 million members this year, an increase of more than 750,000 from its previous forecast.
The company spent 81 percent of its premiums on medical claim costs, down from 81.4 percent a year earlier. The spending was also below the 81.9 percent that Susquehanna Financial Group analyst Chris Rigg expected.
The first-quarter "outperformance relative to our estimates was driven by lower-than-expected medical costs," Rigg said in a research note.
Earnings fell 22 percent to $252 million in UnitedHealth's Optum line of health service businesses, which include data and analytics, pharmacy benefits, and other technology services.
But the company backed its previous projection that it would more than double Optum's 2011 operating earnings by 2015.
UnitedHealth raised its 2012 earnings forecast to a range of $4.80 to $4.95 per share. Analysts have been looking for $4.84.
In February, UnitedHealth projected 2012 earnings of $4.60 to $4.80 per share, after closing its deal for privately held Medicare specialist XLHeath Corp.
Shares of UnitedHealth were up 2.9 percent at $58.99 in mid-day trading.
Through Wednesday, the stock had climbed 13 percent so far this year, in line with the Morgan Stanley Healthcare Payor index .HMO of health insurers.
(Reporting by Lewis Krauskopf in New York; Editing by Lisa Von Ahn, Maureen Bavdek and Bernard Orr)