Aetna Plus Coventry: A Game Changer

08/08/2013 7:00 am EST


This property and health insurer is one of the best-run companies in the managed care sector; its acquisition of Coventry is a game changer, says Geoffrey Seiler of

Aetna (AET) reported a big jump in its second-quarter net income, fueled by the closing of its acquisition of Coventry Health Care on May 7.

The nation's third-largest health insurer reported net income of $536 million, or $1.49 per share, in the three months that ended June 30, which was up by 21% from $457.6 million, or $1.32 per share, in last year's second quarter.

Operating income, which is the metric tracked by analysts, equaled $549 million, or $1.52 per share, up 16% from last year.

This was a solid quarter from Aetna, highlighted by much stronger-than-expected results from its Commercial and Medicaid segments. The rebound in the Medicaid medical benefits ratio (MBR) was particularly notable.

This offset some weakness in Medicare, where the MBR came in well above expectations, and in the Group business.

We think the bump in Medicare cost growth is likely a temporary phenomenon, as Aetna is keenly focused margin-over-membership. The Group business, meanwhile, is a small part of Aetna's overall business.

Guidance was strong, yet could prove conservative, as healthcare utilization levels still remain well below pre-recession levels.

As Coventry is more fully integrated, we would expect Aetna's underwriting discipline, and its added scale, to be reflected in lower costs and long-term profitable growth.

All in all, we still view Aetna as one of the best-run companies in the managed care industry. We like its diverse lines of business and the innovation of some of its efforts like its work with Accountable Care Organizations.

The deal with Coventry is a game changer, and positions Aetna well for the changing health insurance landscape, as a result of the Affordable Care Act (ACA). The quarter overall was a solid start to a new era with Coventry and the stock remains a Buy. We will boost our target from $69 to $77, which is about a 12 times multiple on 2014 EPS estimates of $6.39.

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