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Aetna Lags Est, Reaffirms Outlook

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U.S. health insurer Aetna Inc. (AET - Free Report) reported its fourth quarter 2012 earnings of 94 cents per share a couple of pennies shy of the Zacks Consensus Estimate of 96 cents per share. Earnings also decreased 3% year over year.

The lower-than-expected earnings of the company were the result of higher operating expense partly offset by revenue growth.
For FY12, operating income came in at $5.13 per share, in line with the Zacks Consensus Estimate of $5.13 per share, but down 1% year over year.

Aetna’s total revenue for the reported quarter grew 5% year over year to $8.96 billion, led by higher Health Care premiums in each of the company’s Commercial, Medicare as well as Medicaid businesses. Reported revenue was higher than the Zacks Consensus Estimate of $8.93 billion.

For FY12 revenue was $35.5 billion, up 6.0% year over year.

Operating expenses were $1.92 billion, up 5.0% year over year. Operating expense ratio was 19.4 % compared with 21.4% in the prior-year quarter.

Pre-tax operating margin was 6.5 % for the reported quarter, down 122 basis points year over year.

Segmental Performance

Aetna’s Health Care segment recorded revenues of $8.29 billion, up 4.3% year over year. Total premium increased 3.0% year over year to $5.3 billion.

Total medical membership increased by 64,000 sequentially to 18.242 million following the acquisition of Genworth Financial's Medicare Supplement business.

The company’s Group Insurance revenues climbed 9.5% year over year to $534.7 million. The segment’s operating earnings increased by 63% year over year to $45.3 million.

At Large Case Pensions, revenues increased by 25.5% year over year to $131.0 million and operating earnings increased by 4.3% year over year to $4.4 million.

2013 Guidance

Aetna reiterated FY13 projected operating earnings per share of a minumum of $5.40

Our Take

Though the quarter results came in lower than our expectations, the company performed well on a full year basis. Strong growth in membership to more than 18.2 million medical members increased revenues by approximately 6% over 2011 and effective reduction in operating expense ratio.

We expect favorable performance from Aetna going forward. The company has made considerable investments in products and technology, with intention to extend its core health business and also to capitalize on exciting new consumer and provider opportunities emerging in the marketplace.

Aetna's strong operating results and significant capital generation will allow it to make further investments. We expect the company to continue performing well in 2013 backed by the performance of the Medicaid and Medicare segments, fast growing health services segment and a strong balance sheet.

Performance of Other Health Insurers

UnitedHealth Group Inc. (UNH - Free Report) , as always, was the first to report the results. The company reported earnings of $1.20 per share, in line with the Zacks Consensus Estimate of $1.20 per share. Earnings, however, increased 2.6% on a year-over-year basis.

WellPoint Inc. reported earnings of $1.03 per share, beating the Zacks Consensus Estimate of 95 cents.

However, Health Net Inc. , earnings of 36 cents per share lagged a penny behind the Zacks Consensus Estimate.

Aetna currently retains a Zacks Rank #3 (Hold).

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