Aetna Drops Guidance 30 Cents

FY09 EPS guidance revised downwards

Aetna (AET - Analyst Report) announced yesterday that it was revising its 2009 operating earnings per share guidance from a range of $3.85 to $3.95 to a range of $3.55 to $3.70. The primary drivers of the revised guidance according to management were: a continuation of higher projected Commercial medical costs; and lower projected 2009 Medicare revenue, reflecting an updated view of the risk profile of the Medicare book of business.

On a call to analysts, Aetna's chief financial officer, Joseph Zubretsky, added that the problem wasn't so much the result of more members seeking medical care but that those who did were receiving more tests and treatments.

Aetna, Inc. is one the largest (in terms of members), and most diversified health insurers in the U.S. The company recently reported 1Q09 net income of $437.8M (up 1% y/y), or EPS of $0.96, compared with net income and EPS of $431.6M and $0.92 respectively in 1Q08. A highlight of the result was a 9% y/y increase in medical membership. Notwithstanding the higher-than-projected medical costs in commercial products, we regarded the quarter’s financial results to be broadly inline with our expectations.

Nonetheless, the revised guidance is consistent with the higher 1Q09 consolidated medical loss ratio of 83% (up 120bps sequentially) and points to potential issues of premium pricing mismatch. Our view on the stock remains unchanged with a Hold rating at current levels.