Health insurer Aetna Inc. AET reported second-quarter 2015 earnings of $2.05 per share, way ahead of the Zacks Consensus Estimate of $1.84 per share. Earnings were up 21% year over year.
Better-than-expected earnings were primarily backed by higher underwriting margins at Aetna's Health Care and Large Case Pensions business, partially offset by an increase in operating expenses.
Behind the Headlines
Aetna’s operating revenues of $15.1 billion missed the Zacks Consensus Estimate of $15.4 billion, but increased 4% year over year. The increase in operating revenues was the result of higher Health Care premium yields as well as membership growth in Aetna's Government business, partially offset by membership losses in Aetna's middle-market Commercial Insured products.
The operating expense ratio increased 70 basis points year over year to 18.3%, primarily due to higher investment spending that outpaced an increase in operating revenue.
Pretax operating margin was 8.7% for the second quarter compared with 7.6% in the year-ago quarter.
Aetna ended the quarter with medical membership of 23.7 million, representing a 2.5% year-over-year increase. Growth in Commercial Insured and Government products led to the increase in enrollment.
Segmental Performance
Aetna’s Health Care segment recorded revenues of $14.4 billion, up 5% year over year, due primarily to higher premium yields as well as membership growth in the Government business. The growth was partially offset by membership losses in Aetna's middle-market Commercial Insured products.
Operating earnings increased 21.2% from the year-ago quarter to $708 million.
Aetna’s Group Insurance revenues climbed 0.4% year over year to $628.9 million. Operating earnings decreased 26.1% year over year to $44.8 million due to lower underwriting margins in Aetna's Life and Long-term Care products as well as lower net investment income.
At Large Case Pensions, revenues decreased 3.1% year over year to $90.3 million. Operating earnings increased 15% year over year to $6.2 million.
Capital Deployment
Aetna repurchased shares worth $100 million during the quarter.
2015 Guidance Raised
Inspired by strong results, Aetna upped its projection for operating earnings per share to at least $7.40 from the earlier guidance of $7.20–$7.40. This is the third time that the 2015 earnings projection has been raised.
Our Take
On the strength of portfolio diversification, continued progress in integrating the Coventry business, pricing discipline and solid execution, the company remains well poised for the long run. Given its solid performance, the company has raised its earnings expectation.
We also anticipate that the company will gain in terms of membership enrollment in its Commercial and Government businesses. Strong capital management will also drive the bottom line.
During the quarter, the company announced the acquisition of Humana Inc. HUM. The combination of the two majors should be synergistic, as the new entity will command the position of the second-largest managed care company in the U.S.
Aetna carries a Zacks Rank #3 (Hold).
Peer Performance
The bottom line at Cigna Corp. CI and UnitedHealth Group Inc. UNH outperformed the respective Zacks Consensus Estimate in the second quarter.
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