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Tickers in this Article: AET, UNH, WLP, CI
Aetna (NYSE:AET), the third largest health insurer behind competitors Wellpoint (NYSE:WLP) and United Health Group (NYSE:UNH), reported results for the fourth quarter 2009 on Friday, ending what it called "a very challenging 2009".

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Missed Expectations
The company reported earnings of 38 cents per share in the fourth quarter of 2009 versus 42 cents per share a year ago. Consensus expectations were for 42 cents per share, a negative surprise of 9.5%. Revenues were reported at $8.76 billion, an increase of 13% versus consensus estimates of $8.65 billion. Membership grew 7% over 2008 levels to 18.9 million people. This report deviated from its competitors' UNH, WLP and Cigna (NYSE:CI) fourth-quarter reports, each of which met or beat consensus expectations but also had membership losses. (For related reading, check out Investing in Health Insurance Companies.)

Down But Headed Up
Aetna reported lower margins in the important commercial book of business due to a "significant increase in commercial medical costs which was partially offset by an increase in health care premiums." The company reported a medical benefit ratio (MBR) for the commercial business of 85% compared to 80.6% a year ago. The MBR is a measure of profitability; it is calculated as the cost of medical care as a percentage of premium revenue. Aetna states that the increase in this important measure was due to higher claims, the higher than expected cost of treatment for H1N1 flu and increased participation in COBRA benefits, all of which exceeded underwriting assumptions of costs versus premiums collected. The report, however, did hint at a healthier book of business which should benefit 2010 MBR; premium revenues grew by 9%resulting from rate increases on renewed contracts and new membership. And despite the margin erosion and earnings miss, the company produced very strong operating cash flow of $632.5 million. (For related reading, check out Zooming In On Net Operating Income.)

For the full year 2009, earnings per share increased by one cent to $2.84, primarily resulting from a lower share count as its profit fell 8% to $1.28 billion due to having a book of business where medical costs exceeded the premiums collected. Bottom Line
Aetna formally established 2010 operating profit guidance of $2.55 to $2.65 per share and it expects the 2010 operating margin to be lower than 2009 due to continued pricing pressures and Medicare Advantage reimbursement cuts. However, the company guides to a commercial MBR to improve by 50 bps over 2009's 84.5% and the premium yield to exceed the medical cost trend. The CEO and Chairman, Ron Williams, stated: "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."

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