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UnitedHealth (UNH -4%) looks frail today after its Q4 revenue growth fell mildly short of consensus triggered by relative weakness in its core UnitedHealthcare insurance division. The health insurance giant did exceed bottom-line estimates, but by a slimmer margin than in the past three quarters as medical costs continue to squeeze profitability. For the year, UNH's medical care ratio (MCR), which measures the percentage of premiums used to cover medical expenses, ticked 230 bps higher yr/yr to 85.5%, modestly above street estimates and 150 bps above UNH's initial outlook. On a lighter note, UNH reiterated its FY25 guidance. However, the company outlined its annual outlook just last month, so this did not come as much of a surprise.

• For the quarter, UNH recorded adjusted EPS of $6.81, a 17% improvement yr/yr. Consolidated operating margins were nearly flat compared to last year, inching just 10 bps higher to 5.9%, reflecting the consistently increasing MCR throughout the year. The underlying causes remained the same. UNH continues to notice an aggressive upshift in hospital coding intensity, a timing mismatch between the status of remaining people served by Medicaid and the lagging state rate updates, and the adverse effects of CMS's Medicare funding reductions.
• Revenue was underwhelming, expanding by 6.8% yr/yr to $100.81 bln, missing analyst forecasts for the first time since 2Q20 (UNH's pandemic quarter). The rare miss was fueled by a meager 4.7% bump in UnitedHealthcare revenue yr/yr to $74.1 bln. UNH's consistent star, Optum, its health services division, continued to shine in Q4, expanding revs by 9.4% yr/yr, supported by Optum Rx and Optum Health. Operating margins in this segment also ticked 30 bps higher yr/yr, helping offset UnitedHealthcare's 30 bp margin compression.
• Moving forward, UNH continues to expect FY25 adjusted EPS of $29.50-30.00 and revs of $450-455 bln. However, UNH's missing top-line estimates in Q4 is a minor concern heading into FY25 as it could signal the start of a worrying trend, potentially leading to a future downward revision.
• However, UNH is focused more on the cost side of its business as the health insurance industry grapples with stubbornly rising costs. The company reiterated its MCR ratio target of 86.0-87.0% for FY25, representing a 1 pt jump from FY24, a decent improvement over the 2 pt increase in FY24. Management touched on the factors influencing the slowing uptick, citing the gap in Medicaid between people's health status and state rates narrowing, a growing tilt toward self-funded offerings supporting pricing, and AI-driven initiatives underpinning operating efficiencies.

Overall, UNH delivered an adequate quarter. However, there were few noticeable bright spots for investors to hang their hats on. As such, sellers remain in control of the stock, which trades around 15% below levels directly before the murder of UnitedHealthcare CEO Brian Thompson. Rising costs remain a troubling trend for the UNH and the health insurance industry, dampening the tone ahead of many of UNH's peers' upcoming reports, such as Elevance Health (ELV) on January 23, Centene (CNC) on February 4, Molina Healthcare (MOH) on February 5, and Humana (HUM) on February 11.