Health insurance company Aetna Inc. (AET) on Friday reported a decrease in fourth quarter net income, hurt by higher medical costs, despite an increase in revenues. Operating earnings plunged 60% from last year, missing Street view by two cents. Further, the company provided an operating earnings forecast for the full year 2010, which is below current consensus.
For the fourth quarter, Aetna's net earnings were $165.9 million or $0.38 per share as compared with $194.7 million or $0.42 per share in the prior-year period. The company noted that the quarter's net income included $28.6 million of net realized capital gains as well as other items.
Operating earnings for the latest quarter dropped 60% to $178.6 million from $448.3 million in the fourth quarter of 2008. On a per share basis, operating earnings were $0.40 versus $0.96 last year. On average, 17 analysts polled by Thomson Reuters expected Aetna to earn $0.42 per share for the quarter. Analysts' estimates typically exclude special items.
The sharp decline in operating earnings reflects lower commercial underwriting margin, lower operating earnings in group insurance business and a rise in pension expense partially offset by the impact of lower number of outstanding shares.
Quarterly revenues grew 9% to $8.76 billion from $7.76 billion in the fourth quarter of fiscal 2009, reflecting a 9% increase in premium revenue and a 2% rise in fees and other revenues. The company noted that revenues for the quarter exclude net realized capital gains and an other item. The growth also reflects a higher level of membership and premium rate increases. Analysts expected Aetna to generate revenues of $8.65 billion for the quarter.
Health care premiums advanced to $7.13 billion from $6.51 billion last year, fees and other revenues were $874.3 million compared to $823.8 million in the fourth quarter of 2008. Net investment income was $265.0 million versus $178.3 million in the prior year, while other premiums edged down to $460.0 million from $461.6 million in the corresponding period last year. In the quarter, Aetna had a net realized capital gain of $28.6 million as compared with a loss of $218.5 million in the previous year.
The Hartford, Connecticut-based company operates mainly in three segments: Health Care, Group Insurance and Large Case Pensions.
Health care division, which provides insured and self-insured medical, pharmacy, dental and behavioral health products and services, generated revenues of $8.09 billion versus $7.35 billion last year. Operating profit plummeted to $261.6 million from $436.0 million a year ago, reflecting a 14% growth in medical costs partially offset by a 9% rise in premiums. The segment's net income fell to $232.4 million from $326.8 million in the prior-year period.
At group insurance business, which includes group life, disability and long-term care products, revenues rose to $525.5 million from $338.4 million in the same quarter previous year. The segment reported an operating loss of $14.1 million as compared to a profit of $17.7 million in the prior year, primarily due to an approximately $50 million rise in the company's long-term disability reserves. Net income for the quarter was $1.3 million versus a loss of $106.1 million in the 2008 fourth quarter.
Large case pensions unit, which manages a variety of discontinued and other retirement and savings products, generated revenues of $142.3 million compared to $69.9 million in the corresponding period prior year. Operating earnings fell to $8.6 million from $12.0 million reported last year, reflecting run-off mode of this business. The segment reported net earnings of $9.7 million compared with a net loss of $8.6 million in the year-earlier quarter.
Aetna had earlier announced a reduction of 625 positions and some office relocations to align its cost structure with the company's membership outlook for 2010. At that time, chief executive officer Ronald Williams said, "The economic downturn has had a significant impact on our customers. In addition, we must prepare for the impact that health care reform and regulatory changes may have on our business."
During the three-month period, total operating costs were $1.80 billion versus $1.52 billion a year ago, reflecting a previously disclosed increase in financing component of pension expense. Health care costs rose to $6.09 billion from $5.33 billion in the prior year. Selling expenses for the period were $313.4 million compared to $288.0 million in same quarter last year, while general and administrative costs fell to $477.8 million from $1.23 billion in the year-earlier quarter.
In the preceding third quarter, Aetna reported a net income of $326.2 million, up 18% from $277.3 million in the previous-year period. On a per share basis, earnings grew 26% to $0.73 from $0.58 in the same quarter last year. Quarterly revenues, excluding net realized capital gains, rose 9% to $8.70 billion from $7.98 billion in the third quarter of 2008.
For fiscal 2009, the company's net earnings were $1.28 billion as compared with $1.38 billion in the year-earlier period. However, on a per share basis, earnings rose slightly to $2.84 from $2.83 last year. Full year revenues grew 10% to $34.77 billion from $30.95 billion in full year 2008. Analysts expected the company to earn $2.76 per share on revenues of $34.63 billion for the year.
Looking ahead to fiscal 2010, Aetna estimates operating earnings to be between $2.55 and $2.65 per share. Analysts currently expect the company to earn $2.83 per share for the year. The company added that, given the ongoing challenges it anticipates to face, it sees 2010 as a repositioning year that will not fully reflect the earnings potential of its business.
Going forward, Williams said, "Entering 2010, a weak economy and high unemployment levels remain challenging, but we continue to implement strategic initiatives and actions that will help build positive momentum and give us confidence for the long-term future."
Among Aetna's rivals, Cigna Corp. (CI) on February 4 reported a profit for the fourth quarter, compared to a net loss last year, as stability in equity markets led to its Run-off Reinsurance business turning to a profit versus a hefty loss last year. The Philadelphia, Pennsylvania-based company's attributable net income was $330 million or $1.19 per share as compared to a net loss of $209 million or $0.77 per share in the prior year, and revenues dropped to $4.64 billion from $4.82 billion in the previous year.
Another peer, WellPoint Inc. (WLP) on January 27 reported a surge in fourth-quarter profit, helped by a gain from sale of its NextRx pharmacy benefit management subsidiaries to Express Scripts, Inc. (ESRX). The Indianapolis, Indiana-based company's fourth quarter net income jumped to $2.74 billion or $5.95 per share from $331.4 million or $0.65 per share last year, and total revenues increased over 26% to $19.05 billion from $15.07 billion a year ago.
Yet another competitor, UnitedHealth Group Inc. (UNH) on January 21 posted a higher profit for the fourth quarter, reflecting strong performance from its health services businesses and public and senior health benefits programs. The Minnetonka, Minnesota-based company's fourth-quarter net profit was $944 million or $0.81 per share, compared to $726 million or $0.60 per share in the year-ago quarter, and total revenues advanced to $21.8 billion from $20.5 billion last year.
AET is currently trading on the New York Stock Exchange at $29.81 per share, up $0.58 or 1.98%, on a volume of 2.31 million shares. In the past 52-week period, the stock has been trading in a range of $18.66 to $34.91.
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