Aetna Feels Good About 2008

Aetna (AET) presented a brighter picture of the health insurance business than its competitors have in its first quarter report. AET said that in the quarter net income fell 0.7% but because of a share buy back program, earnings per share were up 4.9% on a 14% increase in operating earnings, which exclude net realized capital losses. On March 31, there were 484.8 million shares outstanding, down from 496.3 million at the end of 2007 and 512.3 million a year earlier. Total revenues rose 16%. AET closed April 25 at $43.91. Aetna's news release offered the following highlights:

• Operating earnings were $0.92 per share, a 14 percent increase over the prior-year quarter, in line with the Thomson/First Call mean of $0.92 per share
• Net income was $0.85 per share, a 5 percent increase over the prior-year quarter
• Medical membership increased by 614,000 to 17.5 million
• Commercial Medical Benefit Ratio was 79.8 percent
• Guidance: Full-year 2008 operating earnings per share projected to be $4.00

The company's low medical expense ratio reflects Aetna's policy of pricing a bit above the market, according to a report at wsj.com. However rising medical claims increased the medical benefit ratios to a less profitable 81.3% from 80.7% a year ago.

Like UnitedHealth Group (UNH) and Wellpoint (WLP) did in their conference calls, AET made it clear that it is pricing for profitability regardless of market conditions, which appear to be pretty good for AET. During AET's conference call, it said that while pricing continues by its publicly-owned competitors continues to be firm, it is noticing the beginning of some softness in pricing by key tax-exempt competitors. The company said hospitals' pricing has been stable. About 15% of the company's contracts with hospitals are still open for 2008 and less than a third of its contracts are open for 2009.

In other words, it appears the company is not very vulnerable to unexpected price increases from its hospital contractors. AET is seeing flat hospital utilization while some competitors are seeing increases.

In its news release, Aetna said:

"We are pleased to report very solid first quarter results that saw operating earnings in line with expectations, along with strong revenue growth driven by solid membership gains," said Ronald A. Williams, chairman and CEO. "We continue to perform and grow in this challenging industry environment. The critical elements of our success have been an experienced team, a sound business strategy rooted in innovation and effectiveness, and the management of health care quality and cost through disciplined focus and execution [...] We are winning in the marketplace, as demonstrated by the consistent membership growth we have shown over several quarters while adhering to our disciplined approach to profitability, and exemplified by the recent announcement of our agreement with Bank of America for 2009. Our goal is to make Aetna the preferred company in our industry."

"Our focus remains on executing our strategy to drive profitable growth," said Joseph M. Zubretsky, executive vice president and CFO. "We demonstrated this in the first quarter in the following ways: strong top-line growth, resulting from solid membership increases and disciplined pricing actions; strong underwriting discipline and medical cost management that led to a Commercial Medical Benefit Ratio of 79.8 percent; and effective management of capital and its accretive deployment."

"Given these results, we feel confident in reaffirming our full-year 2008 operating earnings guidance of $4.00 per share," Zubretsky said. "In addition, we project medical membership growth to be in the range of 850,000 to 900,000 members, a 50,000 member increase over our prior guidance."

During AET's conference call with analysts, Zubretsky said:

We also project at least 15% healthcare revenue growth, medical cost trend of 7.5% plus or minus 50 basis points, a premium yield that is in line with medical cost trend, a commercial medical benefit ratio of less than 80% with a total medical benefit ratio of below 81.5% and operating expense ratio showing an approximate 50 basis point improvement year-over-year. A pre-tax operating margin that is lower than 2007 primarily due to the above average growth in Medicare, particularly group private fee for service and operating earnings per share of $4 or growth of approximately 15%.

The big question for health insurers is whether they can maintain their prices and margins in a weakening economy without undermining their long-term market shares. Insurance premiums tend to go through periodic cycles, and consumers are dealing with rising fuel and food prices as well as rising insurance premiums while slumping housing prices are reducing their wealth. Meanwhile, the political environment for health insurers is a little better because Congressional Democrats are saying that the country won't be able to afford massive new health spending programs or health insurance reforms next year.

AET is slightly above its bearish point and figure price objective of $42. Its daily chart is turning bullish but its weekly chart is still bearish. Daily charts for AET and other managed care companies are here. Close competitors and allied companies include Amerigroup (AGP), Cigna (CI), Coventry (CVH), Health Net (HNT), Humana (HUM), UnitedHealth (UNH) and Wellpoint (WLP).

Full disclosure: I don't own AET or any health insurers' stocks.

Comments

[TexasFamily]

Aetna sent me a letter canceling my coverage with no explanation or how to appeal. I will make sure this letter and my situation gets to Michael Moore and all media outlets so that maybe the shareholders can know more about Aetna's daily operations.