Aetna Beats, Raises Outlook - Analyst Blog

Health insurer Aetna Inc.'s (  ">AET  ) third quarter operating earnings of 84 cents per share were quite ahead of the Zacks Consensus Estimate of 67 cents. The company had earned 64 cents in the prior-year quarter. Better-than-expected results stemmed from higher commercial underwriting margin due to lower utilization, partially offset by lower commercial insured membership.

However, including prior-year development reserves, earnings came in at $1.00 per share, substantially up 45% year over year. The higher earnings were due to a favorable development of $68.6 million, compared with $21.1 million in the prior-year quarter.

The third largest commercial health insurer reported total revenue of $8.5 billion, ahead of the Zacks Consensus Estimate of $8.3 billion, but down 3% on a year-over-year basis. This was due primarily to a decline in Health Care premium revenues from lower commercial insured membership, as well as a decline from the mix of business, partially offset by premium rate increases.

Total operating expenses were down 1.3% year over year to $1.6 billion due to lower health care costs as well as lower selling and administrative and general expenses. Net investment income of $248.2 million was down 5.8%.

Aetna spent a total of $526 million in buying back 17.8 million of shares during the quarter.

Segmental Performance

Aetna's Health Care segment recorded revenues of $7.8 billion, down 2.5% year over year. Total premium collected declined 2.8% year over year to $6.9 billion due to a 5.1% decline in commercial business, partially offset by increases of 3.3% and 17.6% in Medicare and Medicaid business, respectively. Total medical membership declined 499,000 year over year to 18.5 million.

The Group Insurance segment also saw a 5.0% year over year decline in revenues to $501.7 million. Operating earnings of $34.6 million were, however, up 3.9%.

The Large Case Pensions segment also witnessed a 10.8% year-over-year decline in revenues to $123.4 million. Operating earnings also declined 16.4% to $5.6 million.

After posting better-than-expected results for the first three quarters of 2010, Aetna is increasing its earnings expectations for the third time. The company now projects full-year 2010 operating earnings of $3.60 per share, up from the prior estimate range of $3.05 − $3.15.

The results reflect that Aetna has benefited from lower medical utilization and favorable reserve development in the current quarter. However, the minimum Medical Benefit Ratio (MBR), which would be implemented in 2011, will drain the bottom line, though the extent of this is still unknown. Also, the company is facing a decline in enrollment because of the high unemployment level persisting in the country.

Though year-till-date results have been favorable over the medium term, we hold a cautious outlook on Aetna as the Health Care Reform Act unfurls. Thus, we rate the company as "Neutral" for the long term.

Aetna carries a Zacks #2 Rank, which translates into a "Buy" recommendation over the short term (1−3 months)