Aetna Inc. (AET) reported second-quarter 2014 earnings of $1.69 per share, beating the Zacks Consensus Estimate of $1.61 per share. Earnings also grew 4% year over year. Aetna’s better-than-expected earnings came on the back of higher underwriting margins in the Health Care business and accretion from the Coventry acquisition.
Aetna’s total revenue for the reported quarter grew 25% year over year to $14.5 billion, led by higher Health Care premiums from the acquisition of Coventry as well as growth in membership in Health Care business. Reported revenue also surpassed the Zacks Consensus Estimate $14 billion.
The operating expense ratio was relatively flat year over year at 17.6%. Operating ratio was unchanged as contribution to operating revenue from the acquisition of Coventry and continued execution of expense management were offset by inclusion of Health Care Reform mandated fees.
Pre-tax operating margin declined to 7.6% from 8.4% in the second quarter of 2013.
Aetna ended the reported quarter with Medical membership of 23.1 million, representing a sequential rise of 385,000. Growth in Commercial Insured and Government products as well as the inclusion of membership from the acquisition of the InterGlobal group led to the increase in enrollment.
Segmental Performance
Inclusion of Coventry revenues, pricing action undertaken by the company as well as growth in Medicare membership drove 26.7% year-over-year growth in Aetna’s Health Care segment, which recorded revenues of $13.8 billion. Operating earnings increased 1.3% year over year to $584.3 million on earnings accretion from Coventry along with higher underwriting margins in its Commercial as well as Government business.
Aetna’s Group Insurance revenues climbed 8% year over year to $626.4 million. Operating earnings doubled year over year to $60.6 million led by higher margins in the Life and Disability insurance business.
At Large Case Pensions, revenues decreased 12.3% year over year to $93.2 million. Operating earnings increased 42% year over year to $5.4 million.
Share Repurchase Update
In the reported quarter, Aetna spent $255 million in share repurchases.
Earnings Guidance Upped
Following solid earnings, management raised its earnings guidance for 2014 to $6.45 to $6.60 from $6.35 to $6.55.
The company also expects to generate revenues of at least $57 million compared with the earlier projection of $56 billion to $57 billion. Aetna also increased its year-end medical membership projection to approximately 23.4 million from more than 23 million.
Our Take
Aetna’s impressive second-quarter reinforces our confidence in the company which has raised its earnings outlook for the third 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 as well as Government business. The recently completed acquisition of InterGlobal is also expected to be accretive to earnings going forward. A strong capital management will also aid the bottom line.
Among other health insurers, UnitedHealth Group Inc. (UNH), Assurant Inc. (AIZ) and Centene Corp. (CNC) surpassed the respective Zacks Consensus Estimate.
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