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AET AT A GLANCE

P/E ► 8.84 AVG EV/EBITDA ► 16.6 HIGH ROA ► 4.2% AVG ROE ► 13.9% AVG Debt to Equity ► 3.00 AVG Current Ratio ► 0   Interest Coverage Ratio ► 3.70 AVG

 

 

 

 

 

 

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.

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]

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 revenue of $8.66 billion in Q2 (ending 6-30-09), an increase of 10% from the previous year. Operating earnings, however, decreased 28% from $940 million in 2008 to $680 million in 2009. These results did not match the company expectations, as increased medical costs (beyond what the company had initially projected) drove down margins.^[11]

In the face of these depressed earnings, Aetna lowered its 2009 projections to a far more conservative outlook than it had previously. Aetna now projects its operating earnings-per-share to reach between $2.75 and $2.90, down from its original outlook of $3.85 to $3.95. In addition, in response to the rising healthcare costs, Aetna plans to raise its prices on commercial health plans.^[12]

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.^[13][3]

Divestiture of Pharmacy Benefit Management Segment

According to the Wall Street Journal, Aetna is shopping its 11.2 million member pharmacy benefit management (PBM) segment, with potential buyers including CVS Caremark Corporation and MedcoHealth Solutions.^[14] PBM's administer prescription drug benefits for employers and health plans through mail-order pharmacies. Analysts have speculated that PBM divestitures will rise due to the fact that Wall Street tends to value independent PBMs higher than PBM's owned by large health insurance corporations.^[15] In April 2009, Express Scripts acquired competitor Wellpoint's PBM business for $4.7 billion.^[16] A report released by Citi Investment Research valued Aetna's PBM business at $2.2 billion.^[17]

Trends and Forces

Healthcare reform will impact many aspects Aetna's business

Potential healthcare reforms vetted by the Obama Administration and currently under review in Congress would remake the structure of the American health-care system. Aetna stands to both benefit and be hurt by the new healthcare reform proposals. One one hand, expansion of Medicaid to tens of millions of currently uninsured Americans would drive revenue growth for Aetna. On the other hand, increased taxes and publicly-driven competition in the health insurance market would hurt Aetna's bottom line. It is important to note, however, that nothing has been set in stone with regard to a final healthcare reform bill, and there can only be speculation of what form healthcare reform will eventually take.

One feature of the healthcare reform proposal is a government-run insurance program. Such a program would grab market share from private insurance companies, thus hurting the bottom line of companies such as Aetna. However, this facet of the healthcare reform bill is a point of controversy that received criticism from Republicans and some moderate Democrats. In the face of this opposition, President Obama has stated that he would be willing to accept a proposal that included non-profit health insurance cooperatives instead of a government-run program.^[18] While cooperatives, in which consumers band together to form insurance groups (somewhat like a credit union),^[19] would introduce competition into the health insurance market, their fragmented nature in relation to a government-run program would make them a much less formidable competitive force against private health insurers. Another hot-topic issue involves the question of whether the government will tax health care benefits provided by employers.^[20] Such a tax would likely adversely affect health insurance companies, as the added consumer costs would eat away at margins.

Aetna would benefit, however, from the expansion of Medicaid to the tens of millions uninsured Americans. Aetna’s Medicaid services program enrolls almost one million members.^[21] Expanding the pool of citizens who qualify for Medicaid coverage would benefit WellPoint’s Medicaid program.

On September 8, details emerged regarding a healthcare reform proposal from Sen. Max Baucus that included $6 billion in annual fees to health insurance providers and a tax on high-end "luxury" health plans.^[22] In addition to substantially impacting the bottom line of Aetna, these fees would force higher premiums on health insurers, which could adversely affect market share in the face of public competition.

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.^[23] 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.^[24] 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..^[25]

Rising healthcare costs put pressure on earnings

Rising healthcare cost is a major concern for health insurance companies, and trends show healthcare costs for U.S. businesses rising 9% in 2010. These rising medical costs combine with the recession and increased unemployment to create a "tug-of-war" between the need to raise premiums and the downtrend on enrollment and willingness of consumers and business to pay high premiums.^[26] These competing pressures are having the overall effect of lowering Aetna's revenues and margins. Aetna's ability to mitigate the negative effects of rising healthcare and unemployment will be critical to it's ability to maintain strong earnings and compete in the health insurance industry.

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.^[27] The value of Aetna's holdings decreased by $1.1 billion between 2007 and 2008.^[28] 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.^[29]

Competition

Aetna differentiates itself from other players in the industry by offering improved communications to customers, especially those purchasing employer-based health care. ^[30] Aetna offers information management services to its customers in all areas, especially in the Health Care market.

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.^[31]
• 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.^[32]
• WellPoint Health Networks (WLP)-- WellPoint is a health benefits company that is licensed by the Blue Cross and Blue Shield Association. ^[33]

Italic text

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. ↑ Aetna 2009 Q2 Earnings
12. ↑ Aetna's Big Guidance Cut Offers Chance To Regain Confidence
13. ↑ AET 2007 Financial Report; Selected Comments on Financial Data, Page 76
14. ↑ Aetna Shops Its PBM Arm Amid Sector's Consolidation
15. ↑ Five facts about pharmacy benefit managers
16. ↑ Drug Benefit Unit in $4.7 Billion Deal
17. ↑ Express Scripts buys PBM from WellPoint
18. ↑ Obama may drop U.S.-run health plan
19. ↑ What are Nonprofit Health Insurance Cooperatives?
20. ↑ Raising taxes at center of health care reform debate
21. ↑ Aetna Reports Second Quarter 2009 Results
22. ↑ Health insurers, others hit as reform ramps up
23. ↑ Unemployment Hits 8.5%; 663,000 More Jobs Lost
24. ↑ Unemployment, Health Care Spending Affect Mortality
25. ↑ Unemployment, Health Care Spending Affect Mortality
26. ↑ Healthcare costs for U.S. companies seen rising 9 percent: survey
27. ↑ U.S. Debt and Financial Crisis
28. ↑ AET 2008 Annual Report; Selected Financial Data Page 58
29. ↑ Global Financial Crisis: Collateralized Debt Obligations
30. ↑ Aetna Launches New National Advertising Campaign
31. ↑ ^{31.0 31.1} UNH Google Finance Profile Page
32. ↑ ^{32.0 32.1} CI Google Finance Profile Page
33. ↑ ^{33.0 33.1} WLP Google Finance Profile Page