Aetna Beats on Q3 Earnings as Revenues Improve, Guides Up

Health insurer Aetna Inc. (AET) reported third-quarter 2014 earnings of $1.79 per share, way ahead of the Zacks Consensus Estimate of $1.58. Earnings also grew 11% year over year. Aetna’s better-than-expected earnings came on the back of higher underwriting margins in the Health Care and Group Insurance business, partly offset by increased investment expenditure to expand its Government business.

Aetna’s total revenue for the reported quarter grew 13% year over year to $14.7 billion, led by an increase in membership in Health Care business and pricing effects. Reported revenues also surpassed the Zacks Consensus Estimate $14.6 billion.

The operating expense ratio increased 90 basis points year over year to 18.2%, primarily due to payment of fees under the health care reform and increased investment expenditure on Government business growth.

Pre-tax operating margin decreased 10 basis points year over year to 7.8%.

Aetna ended the reported quarter with Medical membership of 23.6 million, representing a year-over-year increase of 1.4 million. Growth in Commercial Insured and Government products led to the increase in enrollment.

Segmental Performance

Aetna’s Health Care segment recorded revenues of $14.0 billion, up 14% year over year. Operating earnings remained almost unchanged at $625.6 million from the year-ago quarter, since higher underwriting contribution in both Government and Commercial businesses was offset by increased investment in Government business.

Aetna’s Group Insurance revenues climbed 8% year over year to $621.4 million. Operating earnings more than doubled year over year to $47.9 million, led by higher margins in the Life Insurance business.

At Large Case Pensions, revenues decreased 24.1% year over year to $86.3 million, mainly due to the termination of an existing contract with a customer which led to the discontinuation of certain services. Operating earnings decreased 21% year over year to $4.9 million.

Share Repurchase

In the reported quarter, Aetna spent $255 million to buy back shares.

Earnings Guidance

Following solid earnings, management raised its earnings guidance for 2014 to $6.60 to $6.70 from $6.45 to $6.60.

Our Take

Aetna’s impressive third-quarter reinforces our confidence in the company which has raised its earnings outlook for the fourth time this year. We expect the company to maintain its earnings trend given its diversified portfolio, continued progress in integrating the Coventry business, pricing discipline and solid execution. We also anticipate that the company will gain on membership enrollment in its Commercial and Government businesses. Strong capital management will also drive the bottom line.

Other Players

Another insurer major, UnitedHealth Group Inc. (UNH) reported third-quarter earnings ahead of the Zacks Consensus Estimate. We expect Cigna Corp. (CI) to present a positive earnings surprise when it reports its earnings on Oct 30, given its combination of Zacks Rank #3 (Hold) and +0.55% Earnings ESP.

Zacks Rank

Aetna also carries a Zacks Rank #3. A better-ranked player is Health Net Inc. (HNT). This stock carries a Zacks Rank #2 (Buy).