We recently upgraded our recommendation on Aetna (AET) to Neutral. The current state of the global economy and market conditions are quite challenging with high levels of unemployment, diminished business and consumer confidence and volatility in both the US and international capital and credit markets. However, we feel Aetna has a strong balance sheet which will enable it to tide over the current crisis.
 
At the end of 2009, Aetna had $1.20 billion of cash and cash equivalents banking on which the company repurchased approximately 28.9 million shares of common stock for approximately $773 million. In addition, the company declared an annual cash dividend of 4 cents per share in September 2009.
 
The recently passed health care reform will ultimately lead to an additional 32 million people getting access to health care insurance. Moreover, dramatic changes are not expected currently since many provisions of the bill do not come into effect until 2014.
 
However, The Medicare Advantage program, which costs the government substantially more per person than regular Medicare, will be cut back, forcing some seniors to lose extra benefits.
 
For 2009, Aetna received about 20% of its premiums from Medicare plans. With a cutback in the medicare advantage program, this segment is likely to suffer. However, we believe for Aetna the prospect of more customers should outweigh the loss of the Medicare Advantage subsidy program.
 
Membership has slumped throughout the health insurance sector as employers have cut jobs thereby leading to a reduction in the number of people covered by employer-sponsored plans.
 
Although healthcare membership during the fourth quarter improved compared to the year-ago period, it declined sequentially. In order to boost earnings in a scenario of declining membership, the company has undertaken several restructuring activities including job cuts and rationalization of field offices.
 
We believe increased medical costs have forced Aetna to project earnings lower than the 2009 level. The company now projects full-year 2010 operating earnings per share in the range of $2.55−$2.65. Revenues are also expected to be lower by 1%−2% compared to the 2009 level. However, the company’s outlook should improve following an improvement in the economic scenario.
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