Aetna Inc. (AET) reported first quarter 2011 operating earnings of $1.43 per share which were substantially ahead of the Zacks Consensus Estimate of 96 cents.
This was a stark improvement of 46% from 98 cents earned in the prior-year quarter.
Better-than-expected results stemmed from a higher commercial underwriting margin owing to favorable development of prior-period health care cost estimates, partially offset by lower Commercial Insured membership.
Including net realized capital gains of $25.8 million or 7 cents per share, the company reported net income of $586 million or $1.50 per share compared with $562.6 million or $1.28 in the first quarter of 2010. The prior year quarter included Litigation-related insurance proceeds of $45.5 million or 10 cents per share and net realized capital gains of $86.5 million or 20 cents per share.
Operational Update
The third largest commercial health insurer reported total revenue of $8.388 billion in the quarter, ahead of the Zacks Consensus Estimate of $8.368 billion but down 3% on a year-over-year basis. This was primarily due to a decline in Health Care premium revenues from lower commercial insured membership, as well as a decline from the mix of business, partially offset by premium rate increases.
Net investment income of $252.6 million was down 8.2%.
Total operating expenses in the quarter were down 3% year over year to $1.56 billion, due to lower Commercial membership and productivity and other improvements. This was partially offset by information technology spending related to the implementation of ICD-10 and Health Care Reform provisions and the inclusion of Medicity’s expenses.
Segmental Performance
Aetna’s Health Care segment recorded revenues of $7.7 billion, down 2.2% year over year. The decline was due to lower Commercial Insured membership coupled with changes in the customer market, product and geographic mix of business. This was partially offset by premium rate increases.
Premium collected declined 2% year over year due to a 2.5% decline in Commercial business and a 7.2% decline in Medicare business. Total medical membership declined 894,000 year over year to 17.8 million.
Operating earnings increased 21% year over year to $555.3 million. The improvement stemmed from higher Commercial underwriting margins owing to favorable development of prior-period health care cost estimates and improved underlying performance. This was partially offset by lower Commercial Insured membership.
The Group Insurance segment also saw a 8.1% year over year decline in revenues to $510.9 million. Operating earnings of $42.9 million were a whopping increase of 50%, fueled by higher disability underwriting margins and higher net investment income.
The Large Case Pensions segment witnessed a 9% year-over-year decline in revenues to $133.5 million. Operating earnings plummeted 40% to $5.8 million due primarily to lower net investment income.
Aetna spent $250 million to buy back 6.7 million shares in the first quarter of 2011.
Guidance
Aetna expects to deliver 2011 operating earnings between $4.20 and $4.30 per share.
Peer Comparison
UnitedHealth Group Inc. (UNH), which competes with Aetna, reported first quarter 2011 net earnings of $1.22 per share, well ahead of the Zacks Consensus Estimate of 89 cents. Results were aided by strong revenue growth from UnitedHealthcare as well as from Optum businesses.
Another peer WellPoint Inc. (WLP) reported first-quarter 2011 income from continuing operations of $2.35 per share, surpassing the Zacks Consensus Estimate of $1.87. The improved showing was attributable to higher operating cash flows and the implementation of organizational changes in health care. The jump in medical enrollment also contributed to the increase.
Acquisition
Aetna signed a deal to acquire Prodigy Health Group from New York City-based Prodigy Health Holdings for a consideration of $600 million. The acquisition is expected to close in the second half of 2011 pending regulatory approval.
Prodigy Health Group is the largest independent third party administrator of self-funded health care plans. The acquisition will be neutral to 2011 earnings but accretive to 2012 earnings.
Our Take
Aetna remains poised to perform better due to its pricing, new product designs and strong financial position.
Also, a considerable amount of cash flow allows Aetna to invest in new growth opportunities. The Prodigy Health Group acquisition complements the company’s strategic investments. Also, the acquisition will help the company to diversify its offerings as well as add new revenue generating avenues.
We maintain our Neutral recommendation on Aetna. The quantitative Zacks #2 Rank (short-term ‘Buy’ rating) indicates upward pressure on the stock over the near term.
AETNA INC-NEW (AET): Free Stock Analysis Report
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