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AET AT A GLANCE

P/E ► 8.10 AVG EV/EBITDA ► 6.14 AVG ROA ► 4.3% AVG ROE ► 15.2% AVG Debt to Equity ► 3.30 AVG Current Ratio ► 0   Interest Coverage Ratio ► 9.96 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginEbitIncome Before TaxesNet Income from Continuing OpsInterest CoverageOperating Expenses

Aetna Inc. (NYSE: AET) is the third largest diversified healthcare provider serving over 36.5 million people in the United States.^{[1] [2]} Based in Hartford, Connecticut, Aetna sells a wide range of health and life insurance products categorized as health, dental, pharmacy, group life, disability, and long-term care. In FY2008, 93% of Aetna's revenue came from its sale of Health Care, both on a private and employer-funded basis; however as unemployment rises, Health Care and other insurance plans suffer from membership attrition, thereby reducing total revenue.^[3].

Aetna's greatest challenge has been to maintain a profitable membership in light of increasing unemployment and rumors of U.S. health care reform.^[4] However, troubles related to membership are not new and are rooted earlier than the 2008 crisis; as such, Aetna has responded with a concerted acquisition campaign and in FY2007 Aenta completed two acquisitions for approximately $613 million. Despite this, membership growth decreased by 65% between 2007 and 2008.^[3]

Similarly, though Aetna's revenue grew by by $3.8 billion in FY 2008 as a result of increased premium rates, Aetna's capital has dropped by approximately $480 million in FY 2008 as credit lines were hit by deteriorating global economic conditions and as debt securities lost value.^[3] Failing debt securities accounted for nearly a fourth of this loss.^[3] Aetna's greatest challenges still come from its attempt to expand profitable membership, its losses related to debt, and changing levels of governmental involvement in health care.

[edit] Business Overview

Aetna sells health insurance to over 36.5 million people in the United States, making it the third largest national healthcare provider.^[3] 78% of Aetna's revenue comes from the health care premiums it charges its customers.^[5] The remainder comes from pension management fees and from investment income.^[5] Aetna operates its business in three markets: health care, life insurance, and large case pensions.^[5] In 2007, AET acquired Schaller Anderson and Goodhealth Worldwide in an effort to expand its largest market, its Health Care product line.^[6][7] Aetna's revenue increased by $3.4 billion in 2008 and $2.5 billion in 2007 as a result of these acquisitions and increased premium rates.^[3]

[edit] Business Financials

Aetna's revenue has grown by 23% from FY 2006 to FY 2008, with a 12% increase between 2007 and 2008.^[3] This growth in revenue is a result of acquiring Broadspire Disability, Schaller Anderson, Incorporated, and Goodhealth Worldwide (Bermuda) Limited. ^[8], but also a result of increased premium rates first initiated in 2007.^[3] Operating expenses, on the other hand, increased by 14% between 2007 and 2008 as a result of the costs of integrating these acquisitions.^[9]. Additionally, Aetna's net realized capital has decreased with these acquisitions from $24.1 million in FY 2006, to a loss of $47.9 million in FY 2007, to a $482 million loss in FY 2008.^[10][3] The 2008 economic downturn strained credit lines thereby contributing to the 2008 25% drop in net income.

This graph shows both revenue and net income for Aetna over the past three available years. Profit margin is superimposed to offer a visual of its trend over this time frame. ^[10][3]

Aetna reported an increase in revenue by 11% to $8,619.5 million for the first quarter (ending March 31st, 2008), an increase from $7,797.2 million in Q1 2008. Operating earnings, however, dropped by 6% from $469.6 million in 2008 to $442.6 in Q1 2009. These figures stem from increased revenue earned from health care premiums, increased facility services fees, as well as only a 1% change in net income from $431.6 million in Q1 2008 to $437.8 million in Q1 2009.^[11]

[edit] Business Segments

Aetna conducts its business in three areas: health care, group insurance, and large case pensions. Each segment is distinct and offers separate products and services.^[5]

• Health Care- The Health Care segment offers medical, dental and vision plans, and pharmacy benefits management offered on both an Insured basis and an employer-funded basis. Health Care also provides Medicare and Medicaid services and products.^[5]
• Group Insurance- The Group Insurance segment covers group life insurance products, including basic group term life insurance, voluntary or supplemental programs, group universal life, and accidental death and dismemberment coverage.^[5]
• Large Case Pensions- The Large Case Pensions segment covers retirement products for tax qualified pension plans.^[5]

This graph is a breakdown of Aetna's revenue by operation. Aetna operates in three markets: Health Care, Group Insurance, and Large Case Pensions.^[12][3]

[edit] Trends and Forces

[edit] Rising Unemployment in 2008-2009 has led to a Decrease in Health Care Enrollment with Subsequent Losses in Membership.

The 2008 economic crisis has impacted unemployment rates in both 2008 and 2009, with unemployment rates reaching a high of 8.5%-- the highest it has been in a quarter-century.^[13] As unemployment increases, laid off workers lose access to employer-based health care. This subsequent decrease in health care expenditure impacts health care providers and the health care industry at large by decreasing their membership.^[14] As a result, Aetna has seen a decrease in growth in net income and operating earnings, especially in its Health Care market. Net income fell by 33% in FY 2008 and Health Care saw a 6% decrease in earnings growth.^[3] Such losses are amplified by the fact that Aetna relies heavily on its Health Care market, with 93% of Aetna's revenue coming from this business segment. This pattern of operational decline is directly correlated with decreasing employment levels in the U.S..^[15]

[edit] U.S. Health Care Reform Threatens to Alter Medicare and Medicaid Policies, Lending to Increased Costs and Market Volatility

Increased legislative activity at the national and state levels during 2008 has threatened to alter the manner in which Aetna offers Medicare and Medicaid coverage. A July 2008 Medicare funding bill passed by the U.S. Congress decreased the amount payable to health care companies, thereby directly impacting revenue streams.^[16] The passing of this legislation led to a 13% decrease in Aetna's share price.^[17] The Obama Administration has signaled its desire to pass similar legislation in 2009, further placing the cost of Medicare and Medicaid coverage on the health care provider.^[18] Moreover, stimulus packages have outlined cuts for the health care industry at large, lending to volatility in Aetna's stocks.^[19]

[edit] Strained Credit Lines Have Hit Debt Securities Impacting Aetna's Income and Capital Values.

The 2008 economic crisis resulted in strained credit lines across many industries, leading to numerous debt-related problems for many companies. Aetna incurred a loss of $482 million caused primarily by losses associated with its debt-securities.^[3] As the recession in the United States deepens, speculation over debt payment has led to further economic losses and market volatility.^[20] The value of Aetna's holdings decreased by $1.1 billion between 2007 and 2008.^[21] Though a problem across the entire industry, Aetna still has $14 billion in debt and other related security holdings that are at risk for future losses.^[22]

[edit] Competition

Aetna differentiates itself from other players in the industry by offering improved communications to customers, especially those purchasing employer-based health care. ^[23] Aetna offers information management services to its customers in all areas, especially in the Health Care market.

[edit] Aetna's Main Competitors

• UnitedHealth Group (UNH)-- UnitedHealth Group is a diversified health care company that operates in four segments: Health Care Services, OptumHealth, Ingenix and Prescription Solutions.^[24]
• CIGNA Corporation (CI)-- CIGNA is an investor-owned health care company based in the U.S. and operates in five business segments: HealthCare; Disability and Life; International; Run-off Reinsurance, and Other Operations.^[25]
• WellPoint Health Networks (WLP)-- WellPoint is a health benefits company that is licensed by the Blue Cross and Blue Shield Association. ^[26]

Italic text

[edit] References

1. ↑ AET 2009 10-K; Part 1: Business, Page 1
2. ↑ AET Google Finance Profile
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13 3.14} AET 2008 10-K; Overview, Page 2
4. ↑ Shares Rise on Aetna Acquisition Rumor
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} AET 2007 Financial Annual Report; Consolidated Statements of Income, Page 41
6. ↑ Aetna Completes Acquisition of Goodhealth Worldwide
7. ↑ Aetna Completes Acquisition Of Schaller Anderson
8. ↑ AET 2007 Financial Annual Report; Notes to Consolidated Financial Statements, Page 54
9. ↑ AET 2008 Annual Report, Page 44
10. ↑ ^{10.0 10.1 10.2}
11. ↑ 2009 Q1 Earnings Release
12. ↑ AET 2007 Financial Report; Selected Comments on Financial Data, Page 76
13. ↑ Unemployment Hits 8.5%; 663,000 More Jobs Lost
14. ↑ Unemployment, Health Care Spending Affect Mortality
15. ↑ Unemployment, Health Care Spending Affect Mortality
16. ↑ Medicare Update: July 2008
17. ↑ AET Google Finance Profile
18. ↑ White House Summit in Denial on Regulating Health Care Costs
19. ↑ Market Goes Down, Biotech and Health Care Lead the Way
20. ↑ U.S. Debt and Financial Crisis
21. ↑ AET 2008 Annual Report; Selected Financial Data Page 58
22. ↑ Global Financial Crisis: Collateralized Debt Obligations
23. ↑ Aetna Launches New National Advertising Campaign
24. ↑ ^{24.0 24.1} UNH Google Finance Profile Page
25. ↑ ^{25.0 25.1} CI Google Finance Profile Page
26. ↑ ^{26.0 26.1} WLP Google Finance Profile Page