Aetna Costs Outpacing Increases

Health insurer Aetna Inc. (AET - Analyst Report) reported 2Q08 net income of $480.5M (up 6.5% year-over-year), or adjusted EPS of $0.94, compared with net income and EPS of $451.3M and $0.85 in 2Q07.

We are encouraged by increases in total revenue, which were driven by the strong medical membership growth (+646,000 members during 1H08) and a 17% year-over-year increase in premiums. However, the medical loss ratio of the commercial risk group increased 70 bps, on a sequential basis, suggesting medical cost trends are currently outpacing premium rate increases. We retain a Hold rating at current levels.

Aetna’s solid cash position provides the company with significant flexibility to either improve earnings through continued share repurchases or to pursue further strategic acquisitions. The company’s cash position should be enhanced through the payment of the remaining balance of a tax refund for the settlement of its tax returns pertaining to the years 1991 through 2001 ($666M of the $740M paid in 2004).

In addition, the company’s acquisition of ActiveHealth should strengthen its competitive position among national employers. New initiatives under which Aetna will provide products and services and individual health insurance for AARP members ages 50-64, under a seven-year agreement, bode well for membership growth.

Read the full analyst report on AET