On the surface, at least, the latest numbers from Aetna (NYSE: AET ) didn't look too great. The large health insurer reported fourth quarter and full-year results today that didn't impress Wall Street. Shares opened nearly 5% lower before bouncing back to limit losses to a little over 1%.
Aetna announced net income during the fourth quarter of $190 million on $8.95 billion in revenue. The good news is that the revenue total was up 5% compared to the same quarter in 2011. What's the bad news? Earnings were down 49% -- nearly half the level from the prior year.
For the full year, the picture looked a little better but still wasn't great. Earnings for all of 2012 came in at $1.65 billion, with revenue at $35.54 billion. Revenue was up by 6% over 2011. Earnings, though, fell by 17% for the entire year. The dismal fourth-quarter results hurt.
Analysts were expecting earnings of $0.96 per share for the quarter. Aetna delivered $0.56 per share. This was down 8% versus 2011, which isn't as bad as it could have been due to a $1.4 billion share buyback last year.
Behind the numbers
Aetna's CEO Mark Bertolini called these results a "solid fourth-quarter performance." His company missed analyst estimates by more than 40%, earnings dropped by nearly half compared to the prior year, but the performance was solid? Is that just chutzpah or were things really better than they appeared?
Let's first look at what's behind Aetna's numbers. The biggest factor causing the earnings drop-off was increased medical expenses. Medical costs were higher by 9.3% in the fourth quarter and were up by 9.6% for the entire year.
There also were several smaller items that took their toll on the bottom line. During the fourth quarter, $78 million was paid to settle litigation. More than $32 million went to paying off debt earlier than scheduled. Aetna also paid $24.1 million in severance costs. If we back these and other special-item costs out, the company's earnings per share would have been around $0.94 per share, still lower than the average analyst estimate. However, with these adjustments factored in, Bertolini's statement doesn't seem unreasonable.
Before we get ahead of ourselves in praising Aetna's management, it only makes sense to examine how the company compared to its peers. UnitedHealth Group (NYSE: UNH ) grew revenue by 11% during the fourth quarter year-over-year, while net earnings fell by 1.1%. For the full year of 2012, UnitedHealth increased revenue by 9% and earnings by 8%.
WellPoint's (NYSE: ANTM ) revenue edged up by 0.6% in the fourth quarter and by 1.4% for the full year. Adjusted for special items, the company's earnings were 4% higher in fourth quarter than in the same quarter of 2011. For the full year, WellPoint's adjusted earnings came in 8% higher than the prior year.
Revenue for HealthNet (NYSE: HNT ) for the fourth quarter was up 4.4% compared to 2011. Earnings during the quarter plunged more than 90% from the prior year, although one-time events accounted for a significant portion of the decline. HealthNet's revenue for all of 2012 dropped by 1.2% versus 2011. 2012 earnings jumped 68%, largely from gains from discontinued operations.
Aetna's performance during the fourth quarter outshines that of HealthNet. However, the company didn't do as well as rivals UnitedHealth and WellPoint. UnitedHealth won by boosting revenue. WellPoint did a better job at controlling costs.
Solid to liquid
Aetna reaffirmed its operating earnings guidance for 2013 of at least $5.40 per share. That projection reflects a 5.2% improvement over last year. It's not awe-inspiring, but at least the numbers are headed in the right direction.
Shares are up more than 35% since August. I'm not a real fan of the stock for now, though. Earnings growth should be fair but not spectacular. Aetna's dividend yield of 1.6% isn't anything to get excited about. I wouldn't argue with CEO Bertolini's case that the company's fourth quarter was solid. When it comes to Aetna's shares, though, my view is to stay liquid.
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