Aetna Inc. (AET) reported fourth quarter operating earnings per share (EPS) of 40 cents, missing the Zacks Consensus Estimate of 42 cents and was 58% lower than the 96 cents reported in the year-ago quarter. The primary reason for the decline was lower commercial underwriting margin, lower operating earnings in the Group Insurance business and an increase in pension expenses, partially offset by the lower number of outstanding shares. For the full year of 2009, operating EPS came in at $2.75, a 30% decline from last year.
Revenues (excluding capital gain/losses) during the quarter increased 9% to $8.7 billion, driven by a 9% increase in premium revenues and a 2% increase in fees and other revenue. For the full year, Aetna recorded a 10% increase in revenues to $34.7 billion.
Total medical membership rose 6.9% to 18.9 million at the end of the reported quarter compared to the year-ago period, but declined 113,000 sequentially. In case of pharmacy and dental categories, membership declined both sequentially as well as from the year-ago period. Sequentially, membership has come down by 122,000 to 14.061 million for the pharmacy segment and 142,000 to 11.013 million for the dental segment.
The three business segments of Aetna – Health Care, Group Insurance and Large Case Pensions − recorded a robust revenue growth compared to the prior-year quarter. Recorded revenues were $8 billion (up 9.6%), $510.1 million (up 3.2%) and $141.2 million (up 38.9%), respectively.
Health care costs increased considerably during the quarter. Given the situation, medical benefit ratio (MBR) increased 360 basis points for the three groups taken together. Commercial MBR increased 440 basis points year-over- year to 85%.
The huge increase in Commercial MBR was primarily due to continuous higher claims, additional costs from the H1N1 flu and higher COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) participation. Under COBRA, people can continue their employer sponsored insurance coverage even after they have lost their jobs.
Aetna projects full-year 2010 operating EPS in the range of $2.55 − $2.65, way below the Zacks Consensus Estimate of $2.86. Although the current economic scenario is improving gradually, it is still posing a major challenge for Aetna. The company is witnessing several headwinds such as rising unemployment, uncertainty related to health care reform and increasing cost pressure among others. We have an Underperform recommendation on the stock.
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