2006 in Review: Aetna

After a rocky beginning, Aetna (NYSE: AET) was able to get back on track and finish the year strong, just like other major health insurance companies including UnitedHealth Group (NYSE: UNH) and CIGNA (NYSE: CI).

In the first quarter, Aetna reported operating EPS of $0.64, a 31% increase over the prior year's Q1. Medical membership increased more than expected, and the company raised its full-year 2006 guidance to a number that was 23% more than its 2005 operating EPS. The bad news was that the company's medical cost ratio had increased, and this was enough to send the stock down 20% on the news.

After the second-quarter results were released, the stock did the same thing. This time it fell close to 25% over a couple of days. The medical cost ratio, or MCR, again increased as the company ran into a higher than expected amount of large claims. It also lowered its medical enrollment targets.

On the positive side, the company repurchased 21.2 million shares at a cost of $840 million during the second quarter. Aetna also reported operating EPS that topped its previous Q2 operating EPS by 23%. Aetna CEO Ronald A. Williams said, "Our MCR, although higher, continues to be very competitive within our industry. And the flexibility of our operating model and active management allow us to meet challenges in the health-care environment and still deliver positive results."

In the third quarter, the medical cost ratio improved and Aetna posted operating EPS of $0.78. The company bought additional shares for $973 million for 27.4 million shares. It also decided to lay off 2% of its workforce during the quarter to try to rein in administrative costs.

The company's strong Q3 numbers enabled management to increase its full-year forecast for operating EPS to $2.83 from $2.77 to $2.79. Aetna will report its Q4 results early next year. Williams said, "We believe that 2007 will be yet another year of increasing profitability and growth for Aetna. We project our operating earnings per share to increase by 15% to $3.26."

Overall, Aetna's stock price has been down this year. Despite being faced with a rising medical cost ratio and the negative press after it lost a laptop containing data on 38,000 customers in the spring, Aetna has experienced improved investor sentiment. The share repurchases were a huge plus, as was controlling the medical cost ratio in Q3.

So what will 2007 hold? Here's where Motley Fool CAPS community members stand:

CAPS summary	Data
Total Bulls	133
Total Bears	11
Bull Ratio	12:1
Bear Ratio	0.1:1

You can see that the majority of CAPS players think that Aetna, which has a rating of four stars, is on the right track. CAPS player CosmoFool706 believes Aetna stacks up well against its peers, saying: "Aetna continues to be undervalued in comparison to its more glamorous competitors like WellPoint and UnitedHealth."

I would expect to see a better year for Aetna. The Democratic takeover of Congress has proven to be a non-issue for major insurers because their stock prices have rebounded to where they were before the elections. Aetna appears to have its medical cost ratio in check, and the company's pricing power and year-over-year membership growth should prove to be beneficial to shareholders.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy .