Aetna Outshines Q1 Earnings, Ups View


Aetna Inc. (AET)  reported first-quarter 2014 earnings of $1.98 per share, handily beating the Zacks Consensus Estimate of $1.56. Earnings also grew 27% year over year. Better-than-expected earnings came on the back of higher underwriting margins in Aetna’s Health Care business and accretion from the Coventry acquisition. 
Including one-time items, net income came in at $1.82 per share, up 23% year over year. 
Total revenue grew significantly by 47% year over year to $14.0 billion, led by higher Health Care premiums from the acquisition of Coventry as well as increased membership in Health Care business. Reported revenues also topped the Zacks Consensus Estimate of $13.8 billion. 
Operating expense ratio declined 20 basis points year over year to 17.8%. The improvement came on the back of operating revenue growth from the acquisition of Coventry and continued execution of the company’s expense management initiatives. 
Aetna ended the first quarter with record medical membership of nearly 22.7 million, up 529,000 sequentially. 
Segmental Performance 
Inclusion of Coventry revenues, pricing action undertaken by the company as well as growth in Medicare membership drove 50% year-over-year top-line growth in Aetna’s Health Care segment which recorded revenues of $13.2 billion. Operating earnings increased by 40.0% year over year to $719.0 million, due to earnings accretion from Coventry, along with higher underwriting margins in its Commercial business as well as Government business.  
Aetna’s Group Insurance revenues climbed 5% year over year to $612.0 million. Higher margins in the company’s Disability insurance business led to a 29% year-over-year improvement in operating earnings to $41.2 million.
At Large Case Pensions, revenues increased 4.1% year over year to $136.0 million. Operating earnings however, fell 23% year over year to $4.8 million. 
Share Repurchase and Dividend Update 
In the reported quarter, Aetna spent $465 million in share repurchases and returned $82 million in quarterly dividends to the shareholders.
2014 Guidance Raised
With solid earnings boosting confidence, management pulled up its earnings guidance for 2014 to $6.35–$6.55 per share. Aetna had earlier announced its expectations of earning a minimum of $6.25 per share in 2014. 
Aetna also expects to earn revenues in the range of $56 to $57 billion, higher than the previous estimation of $54 billion. The company also hopes to include 0.8 to 1.0 million members in 2014.  
Our Take
Aetna’s stellar results reported during the quarter reinforce our confidence in the company which had earlier given a cautious outlook for 2014 amid the current tough operating environment.  We expect the company to maintain its earnings trends given its diversified portfolio, continued progress in integrating the Coventry acquisition, pricing discipline and solid execution. We also expect the company to gain on membership enrollment in its Commercial as well as Government business. The recently completed acquisition of InterGlobal is also expected to accrue to earnings going forward. Further, strong capital management will also aid the bottom line.
Among other health insurers, UnitedHealth Group Inc. (UNH) reported its first quarter results beating the Zacks Consensus Estimate by a penny. Other players like WellPoint Inc. (WLP) and Cigna Corp. (CI) are expected to release their first quarter earnings on April 30 and May 1, respectively. 
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