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Strong Demand, Tax Reform Drive UnitedHealth Profits Higher

Throughout much of the year, investors in UnitedHealth Group (NYSE: UNH) focused on the potential impact of Republicans' attempts to repeal Obamacare on the health insurance industry. However, tax reform proved to be the defining moment for UnitedHealth, with the Tax Cuts and Jobs Act not only cutting corporate tax rates but also eliminating the individual mandate from the Affordable Care Act.

Coming into Tuesday's fourth-quarter financial report, UnitedHealth investors were optimistic that tax reform measures would produce a big windfall. Yet what they might not have fully appreciated was the fact that UnitedHealth's fundamental business is not only sound but has kept growing at a healthy pace. That bodes well not just for the insurer's immediate bottom line, but also for the remainder of 2018 and beyond. Let's look more closely at how UnitedHealth did and what's ahead for the health insurance giant.

Medical professional in a white coat holding a stethoscope standing along the wall of a medical facility hallway with people out of focus in the distance.
Medical professional in a white coat holding a stethoscope standing along the wall of a medical facility hallway with people out of focus in the distance.

Image source: Getty Images.

UnitedHealth looks fit as a fiddle

UnitedHealth's fourth-quarter results continued a long line of strong quarterly reports from the insurance company. Sales came in at $52.06 billion, up almost 10% from the year-earlier quarter and topping consensus forecasts among those following the stock by about half a billion dollars. Net income more than doubled to $3.62 billion, and after adjusting for extraordinary items, adjusted earnings of $2.59 per share came in above the $2.52 that investors were expecting to see.

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Tax reform was front and center in the report, and UnitedHealth reported a nice gain from the reduction in corporate tax rates. Even before considering the impact on its future business, the health insurer was able to claim a tax benefit working out to $1.22 per share because of the tax liabilities on its balance sheet. Essentially, UnitedHealth had anticipated having to pay tax on certain past items, but now, it'll be able to pay that tax at the lower prevailing rates going forward, producing a one-time savings.

Yet UnitedHealth also did well irrespective of tax changes. Even after removing the impact of tax reform, UnitedHealth's adjusted net margin climbed in the fourth quarter by more than a percentage point to 4.6%, reflecting the efforts that the insurer has made to be as efficient as possible. Earnings from operations jumped by about a quarter. Both the UnitedHealthcare insurance unit and the Optum health services business had revenue gains of 10% each.

During 2017, UnitedHealthcare served 2 million more members, largely coming from the Medicare and retirement segment. At Optum, the OptumHealth services unit had the fastest growth rate at more than 20%, counting 8 million more customers to come in at 91 million as of the end of the year.

UnitedHealth CEO David Wichmann looked forward to the coming year. "We enter 2018 with both growth momentum and opportunity," Wichmann said, "as a result of our focus on improving the experience of those we serve, combined with actions taken to deepen our capabilities and presence in strategic markets."

What's next for UnitedHealth?

The way in which UnitedHealth has grown points toward its future strategy as well. In the insurance area, the community and state segment has been increasingly important, growing by more than 800,000 members, or almost 14% of its previous customer base. The global division has also done well, with a combination of acquisitions, strong pricing, and a weaker U.S. dollar helping to lift sales by nearly 25% in 2017.

But the immediate payoff for shareholders came from UnitedHealth's upward revisions of earnings expectations. The insurer now believes that adjusted net earnings will be between $12.30 and $12.60 per share. That's better than UnitedHealth's previous expectations, with anticipated growth of 13% to 16% from its initial 2017 full-year estimate of $10 per share working out to 2018 guidance for $11.30 to $11.60 per share.

UnitedHealth investors were happy about the report, and the stock climbed between 1% and 2% in pre-market trading following the announcement. Shareholders can expect tax-related tailwinds all year long, and the strength of UnitedHealth's health services and insurance businesses shows its ability to keep moving forward as a leader in the industry.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.