Aetna’s first-quarter net income fell 4 per cent as acquisition-related costs and rising health care expenses more than offset government business gains for the health insurer.
But earnings still topped analysts’ expectations, the company raised its 2013 forecast and said it expects more growth on top of that once it closes the acquisition of fellow insurer Coventry Health Care.
Shares of the Hartford, Conn., company reached their highest price in more than five years in Tuesday morning trading after the company announced results.
Aetna recorded $24.6 million in after-tax costs in the first quarter tied to the Coventry acquisition. But the insurer expects a healthy return from the $5.7 billion investment.
Coventry serves customers in two markets primed for growth. It administers Medicaid, the state and federally funded program that covers the needy and disabled people, and it offers Medicare Advantage plans. Those are subsidized versions of the federal government’s Medicare program for the elderly and also disabled people.
Aetna aims to close the deal by the middle of this year, a few months before millions of people are expected to become eligible for expanded Medicaid coverage under the health care overhaul. The acquisition also is expected to strengthen Aetna’s Medicare business as interest in these plans is growing in part because baby boomers are aging.
Aetna Chairman and CEO Mark Bertolini told analysts Tuesday morning that the company has the necessary state regulatory backing to close the deal, but it still needs approval from the U.S. Department of Justice. Once it closes, Aetna expects that Coventry will help its earnings modestly this year, add about 45 cents per share to next year’s adjusted earnings and twice that total in 2015.
Aetna Inc. is the nation’s third-largest health insurer, trailing only UnitedHealth Group Inc. and WellPoint Inc. in enrolment. Health insurance is Aetna’s main product, but the company also sells dental, group life and disability coverage.
In the first quarter, Aetna earned $490.1 million, down from $511 million last year. Earnings per share climbed to $1.48 this year from $1.43 last year because the company has fewer shares outstanding this year.
Adjusted earnings totalled $1.50 per share, not counting items like capital gains. That beat average analyst expectations for earnings of $1.38 per share, according to FactSet.
Operating revenue, which also excludes capital gains and interest income, climbed 7 per cent to $9.51 billion. That was short of analyst expectations for $9.56 billion.
Health care costs, or the amount Aetna paid in medical claims, jumped 9 per cent to $6.38 billion in the quarter. That is, by far, the company’s largest expense. Aetna officials said higher prices were the main factor behind that jump, not more people using health care.
The insurer also recorded a larger gain of $325 million in this year’s quarter because claims left over from previous quarters came in lower than expected, and it could release money it had held in reserve. It recorded a gain of $169 million in last year’s quarter.
Enrolment climbed 2 per cent to 18.3 million versus a year ago, largely on gains in the company’s Medicare business, which also includes supplemental coverage for people with Medicare.
Aetna now expects 2013 earnings to range between $5.50 and $5.60 per share, up from its previous forecast for at least $5.40. Analysts expected $5.53 per share.
Citi analyst Carl McDonald said in a research note that higher guidance was still too low, in part because it doesn’t include Coventry’s results, which he expects to add at least 20 cents per share.
Aetna joined WellPoint and another insurer, Health Net Inc., in beating analyst expectations for the first quarter and raising its 2013 earnings forecast.
Aetna’s shares rose almost 4 per cent, or $2.20, to $58.36 in midday trading Tuesday after rising as high as $58.39 earlier in the session. That was its highest level since late 2007, according to FactSet. The company’s stock price rose 10 per cent last year to close 2012 at $46.31, and the shares have already gained another 25 per cent so far this year.