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Tickers in this Article: AET, CVH, MOH
U.S. health insurer Aetna Inc.'s (AET) second quarter 2012 earnings of $1.31 cents per share missed the Zacks Consensus Estimate by 6 cents. Earnings declined 3% year over year. Better-than-expected earnings were attributed to revenue growth, higher underwriting margins and increased membership in the company's Medicare business.  Aetna's total revenue for the reported quarter grew 6% year over year to $8.83 billion, led by higher Health Care premiums and fees. Reported revenue was almost in line with the Zacks Consensus Estimate of $8.8 billion.

Operating expenses were $1.65 billion, up 3.4% year over year, due to higher health care costs and general and administrative expenses.

Operating expense ratio was 18.7% compared with 19.1% in the prior-year quarter.

Pre-tax operating margin was 8.9 % for the reported quarter, down 180 basis points year over year.

Segmental Performance

Aetna's Health Care segment recorded revenues of $8.19 billion, up 6.3% year over year. Total premium increased 3.4% year over year to $5.2 billion, primarily attributable to an increase in Medicare premium and higher Commercial premium yields.

Total medical membership increased by 114,000 sequentially to 18.03 million following the acquisition of Genworth Financial's Medicare Supplement business. Aetna is the third largest commercial health insurer, based on both enrollment and revenue, trailing WellPoint Inc. (WLP) and UnitedHealth Group Inc. (UNH).

The company's Group Insurance revenues were up 5.2% year over year to $525.7 million. The segment's operating earnings increased 3.6% year over year to $46.0 million.

At Large Case Pensions, revenues declined 8.6% year over year to $122.6 million and operating earnings declined 37% year over year to $3.9 million. 

The company repurchased shares worth $581 million during the reported quarter.

2012 Guidance Update

Following its better-than-expected performance, Aetna raised its 2012 earnings guidance to a range of $5.00 to $5.10 per share.

Our Take

Going forward, we expect Aetna to post favorable earnings every quarter. The company has made considerable investments in products and technology, with an intention to extend its core health business and also to capitalize on exciting new consumer and provider opportunities emerging in the marketplace.

Aetna's strong operating results and significant capital generation will allow it to make further investments. We expect the company to continue performing well in 2012 backed by the performance of the Medicaid and Medicare segments, fast growing health services segment and a strong balance sheet.

Last week, its peer Molina Healthcare Inc. (MOH) reported second-quarter 2012 net loss per share of 80 cents, in contrast to the Zacks Consensus Estimate of earnings of 4 cents as well as year-ago earnings of 38 cents. Another peer, Coventry Health Care Inc. (CVH) reported second-quarter 2012 operating earnings per share of 68 cents, higher than  the Zacks Consensus Estimate of 64 cents but lower than prior-year earnings of 83 cents.

Aetna currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.

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