Health insurer Aetna Inc. AET reported fourth-quarter 2015 earnings of $1.37 per share comfortably beating the Zacks Consensus Estimate of $1.21. Earnings were also up 12.3% year over year.
The upside was primarily driven by higher underwriting margins, and higher fees and other revenues in Aetna's Health Care segment, partially offset by an increase in general and administrative expenses.
Full-Year Highlights
Full-year 2015 operating earnings were $7.71 per share, up 15% year over year and ahead of the Zacks Consensus Estimate of $7.55.
Full-year operating revenues were $60.3 billion, up 4% year over year.
Behind the Headlines
Aetna’s operating revenues of $15.1 billion beat the Zacks Consensus Estimate of $14.9 billion, and increased 2% year over year. Revenue growth was primarily led by membership growth in Aetna's Government business as well as higher Health Care premium yields. This was partially offset by membership losses in Aetna's group Commercial Insured products.
Total expenses were $3.2 billion, 4.2% higher year over year, primarily due to higher employee related costs and increased investment spend to support Aetna's growth initiatives that outdid the increase in operating revenue.
The operating expense ratio was 20.5%, up 80 basis points year over year.
Fourth-quarter pretax operating margin was 6%, up 50 basis points year over year.
Aetna ended the quarter with medical memberships of 23.5 million, down 0.3% year over year. Lower memberships in Commercial business were responsible for the deterioration.
The effective tax rate was 45% for the fourth quarter of 2015, down 140 basis points year over year.
Segmental Performance
Aetna’s Health Care segment recorded operating revenues of $14.4 billion, up 2.1% year over year, primarily on the back of increased premium yields and membership growth in the Government business. This was somewhat offset by membership losses in Aetna’s Commercial insurance business.
Operating earnings increased 10% from the year-ago quarter to $492.8 million.
Aetna’s Group Insurance operating revenues were up by just 0.4% year over year to $618.3 million. Operating earnings increased 1.9% year over year to $21.7 million.
At Large Case Pensions, operating revenues plummeted 23% year over year to $67.5 million due to a decline in investment income. Operating earnings were also down by 23% to $4.3 million.
2016 Guidance
Aetna guided for earnings per share of “at least $7.75” for 2016.
Our Take
Aetna has impressed investors by posting earnings ahead of its own estimates. The company made a strong exit from the year 2015 and has exhibited strength in its diversified business profile.
The company is in the process of acquiring Humana Inc. HUM, which will most likely be through by the second half of 2016. The combination of the two majors should be synergistic going ahead, as the new entity will command the position of the second-largest managed care company in the U.S.
Other Stocks
Aetna carries a Zacks Rank #3 (Hold). Among the other players in the industry, UnitedHealth Group Inc. UNH posted a positive earnings surprise of 2.2%. Another player, Anthem Inc. ANTM missed earnings by 7.3%.
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