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Aetna Inc. (AET - Analyst Report) reported third-quarter 2013 earnings of $1.50 per share, down 3 cents per share from the Zacks Consensus Estimate of $1.53 per share. Earnings were also down 3.2% year over year.

Including one-time items net income came in at $1.38 per share, down 6% year over year.

Aetna’s total revenue for the reported quarter grew 46% year over year to $13.0 billion, led by strong performance in Commercial and Medicaid businesses. Reported revenue was slightly higher than the Zacks Consensus Estimate of $12.9 billion.

Higher health care costs drove operating expenses up 40.5% year over year to $2.3 billion. Operating expense ratio was 17.3% compared with 18.3% in the prior-year quarter.

Pre-tax operating margin was 7.9% for the reported quarter, down 230 basis points year over year.

Segmental Performance

Inclusion of Coventry revenue as well as growth in Medicare membership drove 49% year over year revenue growth in Aetna’s Health Care segment which recorded revenues of $12.3 billion.

Total medical membership was 22.152 million as of Sep 30, 2013. This signifies a yearly increase of 3.97 million members.

Operating earnings increased by 10.2% year over year to $585.8 million, due to earnings accretion from Coventry, partially offset by lower underwriting margins in its Medicare business.

Aetna’s Group Insurance revenues climbed 9% year over year to $577.7 million. The segment’s operating earnings decreased by 33% year over year to $19.7 million reflecting lower underwriting margin in Life business, due to the acquisition of Coventry partially offset by lower underwriting margins primarily in Medicare business.

At Large Case Pensions, revenues slipped 8.5% year over year to $113.7 million. Operating earnings increased by 68% year over year to $6.2 million.

Share Repurchase Update

In the reported quarter, Aetna spent $333 million to buyback 5.2 million shares.

Our Take

Though Aetna missed the earnings expectations, overall results painted a favorable picture of the company’s operating profitability. Revenues were up, as also number of members served by the company.  However, medical cost rose more than the increase in revenue which adversely affected bottom line results.

Aetna currently retains a Zacks Rank #2 (Buy). Other players Centene Corp. (CNC - Snapshot Report), and Magellan Health Services Inc. (MGLN - Snapshot Report) with Zacks Rank #2 (Buy) reported third quarter earnings ahead of the Zacks Consensus Estimates, while CIGNA Corp. (CI - Analyst Report) also with similar rank is due to release its third quarter earnings on Oct 31st.

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