Strong 1Q Earnings for Aetna, View Up

Zacks

U.S. health insurer, Aetna Inc. (AET) reported first-quarter 2013 earnings of $1.50 per share, up 11 cents from the Zacks Consensus Estimate of $1.39 per share. Earnings increased 12% year over year.

Improved top line more than offset the increase in expense, driving better-than-expected numbers in the quarter.

Including transaction and integration costs related to the proposed acquisition of Coventry Health Care Inc. (CVH), of 8 cents and net realized capital gains of 6 cents, net income was $1.48 per share, up 3% year over year.

Aetna’s total revenue for the reported quarter grew 7% year over year to $9.5 billion, led by higher Health Care premiums in Medicare and Medicaid businesses. Reported revenue was a tad lower than the Zacks Consensus Estimate of $9.58 billion.

Operating expenses were $1.71 billion, up 4.4% year over year. Operating expense ratio was 18% compared with 18.8% in the prior-year quarter.

Pre-tax operating margin was 9% for the reported quarter, up 40 basis points year over year.

Segmental Performance

Aetna’s Health Care segment recorded revenues of $8.79 billion, up 7% year over year.

Total medical membership was 18.295 million as of Mar 31, 2013. This is a sequential increase of 159,000 prior to a reduction of about 106,000 Medicaid members due to the previously announced sale of Missouri Care. It increased 486,000 year over year prior to the Missouri Care sale.

Operating earnings increased by 5% year over year to $492.8 million, largely attributable to higher underwriting margins in our Commercial business.

Aetna’s Group Insurance revenues climbed 9% year over year to $581.3 million.

The segment’s operating earnings decreased by 23.7% year over year to $31.2 million reflecting higher operating expenses to support growth in life and disability products.

At Large Case Pensions, revenues slipped 0.7% year over year to $130.7 million.

Operating earnings increased by 6.9% year over year to $6.2 million.

Dividend and Share Repurchase Update

In the reported quarter, Aetna spent $184.1 million to buyback 3.7 million shares.

It had spent $66 million in dividend.

2013 Guidance

Aetna projected operating earnings per share in a range of $5.50 to $5.60 for 2013, up from $5.40 guided earlier.

Medical membership is expected to increase to 18.4 million by end of 2013.

Our Take

The quarter performed better than expected with strong growth in membership, revenues increasing year over year and effective reduction in operating expense ratio. The quarter marked the fourth consecutive quarter of medical membership growth driven by strong growth in Medicare business.

We expect favorable performance from Aetna going forward. The company has made considerable investments in products and technology, with intention to extend its core health business and to capitalize on exciting new consumer and provider opportunities emerging in the marketplace.

Aetna's strong operating results and significant capital generation will allow it to make further investments. We expect the company to continue performing well in 2013 backed by the performance of the Medicaid and Medicare segments, fast growing health services segment and a strong balance sheet. It also enhanced shareholder value via share buybacks and dividend payments.

Performance of Other Health Insurers

Molina Healthcare, Inc. (MOH), reported first-quarter 2013 net earnings per share of 64 cents, significantly surpassing the Zacks Consensus Estimate of 26 cents and the year-ago earnings of 39 cents.

WellPoint Inc. (WLP) reported first-quarter 2013 adjusted income of $2.94 per share, beating the Zacks Consensus Estimate of $2.37 as well as the year-ago earnings of $2.34 per share.

Zacks Rank

Aetna currently retains a Zacks Rank #3 (Hold).
 

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