Aetna Sheds Light on FY11 Earnings - Analyst Blog

During its recently held conference call, health insurer Aetna Inc. (AET) announced that it would be tweaking its fiscal 2011 earnings per share (EPS) guidance upward from the current range of $4.60 to $4.70. The announcement was enough to send the company’s share up by 5.44% in yesterday’s trading.

Management’s decision to raise its 2011 EPS guidance is based on continued lower utilization witnessed in the months of July and August. Also, year till date results were helped by lower medical costs as more and more people are shying away from physicians and hospital visits due to higher co-payments and deductibles.

Lower medical use has proven to be a tailwind that would translate into higher earnings for the health insurance companies. This is reinforced by the fact that Aetna’s peers, UnitedHealth Group Inc. (UNH), CIGNA Corp. (CI) and WellPoint Inc. (WLP), also saw a surge in their respective share prices following Aetna’s announcement.

Medical utilization, an important metric for health insurer, which measures the number of health services used by enrollees, remained subdued throughout 2010, and the same trend was seen year till date in 2011. Analysts and insurance companies hold a mixed opinion about medical utilization. While the insurance companies predict utilization levels to revert back to normal levels at the beginning of next year, some analyst believe that the trend is here to stay, with less people flocking to hospital as they will have to pay more in the form of higher co-payments and higher deductibles. 

Aetna will provide the estimate figure with more details during its third quarter conference calls. The company also disclosed that it has bought back $350 million of shares during the ongoing third quarter. The earnings will, however, be adversely affected by low investment income amid the continuing low interest rate environment.

On member ship growth, the third largest insurer, Aetna said that it expects growth in its Medicare and large-group commercial risk business, which will be partially offset by membership declines in the company’s administrative services only contracts. 

Overall, we believe Aetna is in a great shape to deliver earnings outperformance. A solid balance sheet, in-target range of debt and adequate liquidity are other positives for the company. Its deployment of capital for numerous acquisitions will gear it fully for the changed environment after the full implementation of the Health Care law.

AETNA INC-NEW (AET): Free Stock Analysis Report

CIGNA CORP (CI): Free Stock Analysis Report

UNITEDHEALTH GP (UNH): Free Stock Analysis Report

WELLPOINT INC (WLP): Free Stock Analysis Report

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