Health insurers, which delivered better-than-expected first-quarter results, may have potential for more earnings growth before a new health care overhaul regulation begins to have a meaningful impact on their business, according to a Jefferies analyst.
Analyst David Windley upgraded UnitedHealth Group to "Buy" from "Hold" and raised his price target on that company's stock, as well as several others in the sector. Windley said in a Monday morning research note that a new overhaul measure governing the percentage of premiums insurers spend on health care and quality has placed "unexpectedly small constraints" so far on earnings-per-share upsides.
Starting this year, insurers must meet minimum medical-loss ratios or issue rebates to customers. The new rule governing so-called MLRs aims to ensure that a good portion of the premiums an insurer collects goes toward care and not profits or big salaries. But the regulation had worried insurance investors and analysts because it essentially regulates company profits.
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Health insurers were helped in the first quarter by care utilization that climbed at a slower-than-expected rate. Windley said in his note they could see further earnings upside from this trend, although that eventually will be limited by the MLR guidelines.
Minnetonka, Minn.-based UnitedHealth is the largest health insurer based on revenue. Windley upgraded the company and raised his price target on the stock to $60 from $50 "based on its leadership role in the industry, dynamic strategy, well-diversified business, and our now improved understanding of MLR floor levels."
Company shares fell 14 cents to $49.60 in pre-market trading.
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