Reprinted from HEALTH PLAN WEEK, the most reliable source of
objective business, financial and regulatory news of the health insurance
industry.
By Patrick
Connole, Managing Editor
February 8,
2016Volume 26Issue 5
Aetna Inc. on Feb. 1 beat earnings
projections of Wall Street analysts for the fourth quarter of 2015, mainly on
stronger medical loss ratios (MLR) and improvement in individual and
small-group segments as well as impressive growth in its government business.
Most headlines centered on Aetna CEO Mark Bertolini’s comments during an
earnings call in which he questioned the sustainability of Affordable Care Act
(ACA) exchanges, going more negative on the marketplaces than he had in prior
exhortations for the industry to hold steady in the face of deep losses in the
first two years of exchange trade in 2014 and 2015.
“Our individual commercial business
ended the year with improved results over our most recent outlook. However,
despite our improved finish, this business remained unprofitable in 2015, and
we continue to have serious concerns about the sustainability of the public
exchanges,” he said. “Specifically, we remain concerned about the overall
stability of the risk pool, including enforcement of standards related to
special election period enrollment, where CMS has made some recent changes, but
more needs to be done.” Bertolini also cited the lack of predictability and
full transparency of the risk-adjustment program, “which is key to long-term
program health, especially as the other two premium stabilization programs
expire in 2017; and newly proposed CMS regulations on network adequacy and
standardization of benefits that would limit our ability to offer affordable,
innovative on-exchange products.”
Still, Aetna did realize better
operating results from the ACA-related individual segment in the fourth quarter
than previously projected, driven by improved medical costs and risk-adjustment
estimates. “Based on these updated estimates, Aetna’s individual commercial
business generated full-year 2015 pre-tax operating losses of approximately 3%
to 4%, a disappointing result, but one we are increasingly confident we can
improve upon in 2016,” Bertolini said. The goal is to get to break-even for the
$3.5 billion block of individual business as soon as possible, he stressed.
Overall, Aetna said net income rose to
$320.8 million, or 91 cents per share, in the fourth quarter of 2015, from $232
million, or 65 cents per share, in the same period of 2014. Operating earnings
were $1.37 per share, beating the consensus estimate of $1.21 per share. For
the same period of 2014, the insurer had operating earnings of $1.22 per share.
Vishnu Lekraj, senior equities analyst
for Morningstar, Inc., tells HPW there were not many surprises in
Aetna’s results, but did note ACA-market developments. “They did a little
better on the exchange market than what people were expecting. But nothing is
going to develop until we see how the exchanges shake out as far total signups
and how well the M&A [Humana Inc. takeover] is progressing for them,” he
says.
Some more clarity did come on ACA
enrollment from the Obama administration on Feb. 4, however, when it said about
12.7 million people had signed up for coverage this year. That number is in the
range of the administration’s stated goal of between 11 million and 14.1
million enrollees. Still, the 12.7 million is only 1 million more than signed
up in 2015. And by the end of this year, the White House target is to have 10
million enrolled, accounting for dropouts throughout the year.
With all the discussion about health
insurer losses on exchanges (see brief, p. 7), and threats by the likes of
UnitedHealth Group to exit the marketplaces next year if things don’t improve (HPW
11/23/15, p. 1), there are voices defending exchanges. For instance, Peter
Lee, executive director of the Covered California exchange, put the onus on
insurers to shape up their strategies. “Plans on exchanges, whether in
California or outside, should be pricing to make a reasonable margin,” he tells
HPW sister publication Inside Health Insurance Exchanges. “Our
plans have reasonable margins in California. And most plans have had reasonable
margins nationally. If a plan doesn’t have the acumen or strategy to make it
work on an exchange, they shouldn’t be playing.”
Beyond ACA exchanges, analysts looked
to Aetna’s underwriting acumen as a big reason for its positive fourth quarter.
“Earnings per share was driven by better-than-expected underwriting margin
across both commercial and government programs,” said Matthew Borsch,
securities analyst for Goldman Sachs - Global Investment Research, in a Feb. 1
note. He said total MLR of 81.9% for the fourth quarter of 2015 was better than
the 82.7% consensus. Medicare and Medicaid MLR did even better, coming in at
82.6% for the fourth quarter of 2015 versus the Wall Street estimate for 84.5%.
Cigna Sees Uneven MLRs, but Beats
Street
Also reporting fourth-quarter 2015
earnings was Cigna Corp., which on Feb. 4 told investors it made more money
than Wall Street forecast for the final stanza of last year. Still, the insurer
said net income declined to $426 million, or $1.64 per share, in the fourth
quarter of 2015, from $467 million, or $1.77 per share, in the same period one
year earlier. But on an adjusted basis, net income was $1.87 per share,
eclipsing the average analyst estimate of $1.80 per share.
For this year, results are expected to
be hurt by an ongoing CMS suspension of Cigna’s Medicare Advantage marketing
and enrollment due to what the agency called “widespread and systemic failures”
in allowing members to access medical care (HPW 2/1/16, p. 7). Still,
Cigna dodged a bullet with CMS’s timing, since the Annual Election Period had
already completed by Jan. 21 when CMS levied the sanctions. Cigna put its 2016
profit forecast at $8.85 to $9.25 per share, well off the Wall Street estimate
for $9.30 per share.
Equities analysts said on the surface,
the performance by Cigna was “solid,” but a little digging put the results in a
lesser light. “Beneath the surface, the Medicare MLR was challenged a bit and
while reserves on a year-to-date basis continue to be solid, there appeared to
be a modest reduction in conservatism sequentially whereas peers have been
building reserve positions in 4Q15,” said Brian Wright, securities analyst for
Sterne Agee CRT in a Feb. 4 research note.
Cigna said its consolidated MLR was
81.4% for the fourth quarter, topping the Wall Street consensus estimates of
81.6% by 20 basis points; it also represented a 20 basis points improvement
from the same period of 2014. “The Commercial MLR at 80.4% was 90 basis points
better than the 81.3% consensus estimate. The results were better despite
continued high medical cost in the U.S. Individual business. The Government MLR
of 83.1% was 140 basis points worse than consensus estimates of 81.7%, due to
pressure in their Medicare Part D business,” he said.
Wright added that the pending Anthem,
Inc. acquisition of Cigna reduces the importance of slight “nuances” in Cigna’s
quarterly results. Separately, Wright said the expectation remains for the Anthem-Cigna
deal to close in the second half of this year.
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