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Health insurance giant and Dow component UnitedHealth (UNH +5%) may have encountered rising costs in Q2, experienced decelerating top-line growth, and increased the estimated impact a previously disclosed cyberattack will have on earnings. However, by still delivering a double-digit EPS beat while reiterating its FY24 adjusted earnings outlook, investors are signaling relief over a quarter that could have been much worse, especially with many cost-related headwinds swirling about.

The cyberattack on Change Healthcare took a $0.92 per share bite out of Q2 earnings -- most of which is related to UNH's direct response, affecting GAAP EPS -- and will now clip FY24 earnings by $1.90-2.05 per share compared to $1.30-1.35 predicted last quarter. Meanwhile, medical costs continue to rise, illuminated by a 190 bp jump yr/yr in UNH's medical care ratio (MCR) -- the percent of premiums used to cover costs -- to 85.1% in Q2, above its previous 83.5-84.5% forecast. UNH is also working through the decision by the Centers for Medicare & Medicaid Services (CMS) to leave its 2025 Medicare Advantage (MA) rate unchanged.

Nevertheless, UNH remains confident in its positioning to enjoy positive growth this year and into 2025, supported by resilient demand characteristics across several facets of its organization.

• Revenue growth may have slowed to 6.4% in Q2 from +8.6% in Q1 but was still mildly ahead of consensus at $98.86 bln. Underpinning UNH's consistent quarterly sales growth was a strong expansion in the number of people served at Optum and UnitedHealthcare. The standout remained Optum Health, which boasted a 13% bump in revs yr/yr. Partially offsetting this strength was the cyberattack, which caused some revenue loss.
• When excluding the cyberattack direct response and South American impacts, including the sale of UNH's Brazilian business, adjusted EPS increased by 10.7% yr/yr to $6.80. While UNH's MCR edged higher yr/yr, around 40 bps of the 190 bp jump was attributed to suspending some care management activities following the cyber attack. Most of the remaining impact stemmed from member mix within MA, which has seen unusual competitive configurations and a timing mismatch related to Medicaid members that UNH anticipates will realign in the coming months.
• Despite these issues, UNH reaffirmed its MCR forecast of 83.5-84.5%, albeit at the upper end. It also left its FY24 adjusted EPS guidance unchanged at $27.50-28.00. Meanwhile, management was unperturbed by the CMS's decision earlier this year, commenting that it is navigating the funding reduction well. While UNH touched on a couple areas of margin pressure, it stated that they will primarily work their way through the pricing cycle, making the problems mostly transitory.

Coming into Q2, fears lingered over how UNH would juggle numerous cost-related problems, reflected by the stock consolidating throughout June and July. By delivering a report that looked strikingly similar to last quarter, which kicked off a solid rally, investors feel relieved today, pushing the stock toward 2024 highs. While UNH could be an outlier in its handling of current headwinds, its results still bode well ahead of its peers Q2 numbers, including Elevance Health (ELV) on July 17, Molina Healthcare (MOH) on July 24, Centene (CNC) on July 26, and Humana (HUM) on July 31.