Aetna Inc. (AET) reported third quarter earnings per share of 69 cents, beating the Zacks Consensus Estimate of 66 cents. However, earnings declined 38% compared to $1.12 reported in the prior-year period due to a lower commercial underwriting margin, an increase in pension expenses partially offset by the lower number of shares outstanding year-over-year.
Revenues during the quarter increased 9% to $8.72 billion compared to $8 billion in the third quarter of 2008, driven by a 9% increase in premium revenues and a 5% increase in fees and other revenue.
Total medical membership rose 7.3% to 19 million at the end of the reported quarter compared to the year-ago period, but declined 25,000 sequentially. The same trend was witnessed in case of pharmacy and dental membership as well, both of which declined sequentially by 79,000 to 11.155 million and 386, 000 to 14.183 million, respectively.
The three business segments of Aetna – Health Care, Group Insurance and Large Case Pensions recorded robust revenue growth compared to the prior-year period. They recorded revenues of $8 billion (up 9.4%), $528.2 million (up 3.3%) and $138.4 million (up 11.6%), respectively.
The three sub-divisions of Health Care – Commercial, Medicare and Medicaid recorded an increase in premium by 6.5%, 18.5% and 57.6%, respectively. However, Health Care costs increased considerably during the quarter. Given the situation, medical benefit ratio (MBR) — which measures the proportion of premiums received by the company that is used to pay patient medical claims — increased by 470 basis points for the three groups taken together. Commercial MBR increased the most (530 basis points) year over year to 85.6%.
The huge increase in Commercial MBR was primarily due to greater-than-anticipated 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 lose their jobs.
Aetna projects full-year 2009 operating earnings per share of $2.75. Earlier, while announcing the second-quarter results, the company had expected operating earnings in the range of $2.75 to $2.90 per share. However, we believe increased medical costs have forced the company to project earnings at the lowest level of its previously issued guidance.
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