This company analysis of Aetna US Health Care gives a brief account of its history sine 1850 as an Insurance company since transformed into a major Health Insurance Company
after its merger with another leading company of US Health Care in 1996. Its present membership is estimated at around 37.2 million. It has reported a revenue of $ 27,600 million in the year 2007 and it has been rated as the top company over all in its respective business sector. Its steady growth through acquisitions along with membership drive as a marketing strategy keeps the company as one of the top five leading health care insurance companies in the U.S. Due to the company’s strong debt equity ratio and consistent record of dividend payments, it provides a good opportunity for a conservative investor to make investment in its shares.
Aetna US Health care, a Fortune 100 global company, was originally in the insurance business selling individual health policies under the name and style of Aetna Insurance Company having established in 1850 at Hartford, Connecticut. In 1867, Aetna entered farm mortgage business which it continued till 1947. From 1960 to 1981, the company was expanding overseas acquiring Excelsior Life Insurance Company, Canada in 1960, Producer’s and Citizen’s Cooperative Assurance Company, Sydney, Australia in 1981 followed by a stream of ventures in Chile, England, Spain, Hong Kong, Taiwan, Indonesia, and Korea. The company discontinued its 91 year old health insurance business in 1991.
It merged with U.S.Health Care in 1996 after shedding its division of property-casualty operations to Travelers Insurance Group for $4 billion. The merged company subsequently acquired NYL Care Health Plans and Prudential Health Care with additional members to make up a total membership of around 21 million by 1999. Its financial services and international businesses were sold to ING in the year 2000 for $7.7 billion. With this, the company emerged as an independent health and group benefits company. (Nationmaster.com)
Company vision, goals and objectives.
Although the company has the traditions of health benefits operations for nearly 150 years, the merger between Aetna and U.S.Health care heralded a new era of ‘managed care’ in the company’s history. The focus was on ‘branding health services’ rather than simply adding a wide range of products and services.
The company had to face heavy odds against the criticism of ‘managed health care’ by the activists and politicians before achieving its goal of developing a brand oriented health services. Prior to merger, Aetna had been a publicly traded insurance company, while the U.S Health Care had already been a leader by virtue of innovative advertising, sales, and consumer oriented marketing and service. Thus the two giants from diverse fields merged to create a unique branded health service much against the ‘managed care bashing’.
Thus the goals and objectives are to make the company a premier health care benefits company by dint of branding and offering unparalleled products and services in the U.S. The company’s focus is on quality and access to care and the vision and mission is ‘to raising the Quality of Healthcare in America” The company hastens to add that this tagline of Raising the Quality of Healthcare in America is not a complete mission statement and not an end in itself. The company insists that it is only the most immediate goal. (Bashe, Hicks and Ziegnfuss, 2000 p 190-192)
Challenges faced by the health care industry in general are not only consolidation of exiting coverage of some 250 million Americans instead of denying them under the pretext of viability reasons but also roping in of the uninsured Americans into the system as testified by the CEO of Aetna, Ron Williams before the U.S Senate Committee recently while he presented the plans for health care reforms options. (findarticles.com)
Description of services provided Managed Health Care
The company under its ‘managed health care’ policy offers medical products such as point of service (’POS’), preferred provider organization(‘PPO’), health maintenance organization (HMO), indemnity benefit plans, health savings accounts (HSAs), Aetna Health Fund, consumer directed health plans, medical management, data analytics services, behavioral health plans, stop loss insurance and others.(Aetna Annual report 2007 p 7)
The company serves approximately 37.2 million members through a wide range of health insurance products and services through employers, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labor groups and expatriates. Before selling the products, the members undergo medical underwriting to facilitate risk assessment and grouping them in their respective group categories. (Business Wire 2008)
Place in the health care industry
Health insurance companies are rated under five categories. “AM Best Rating” AM Best rates a company for its financial strength as A++, B+ signifying financial strength and claims paying ability. The other categories are Net work, Customer service, Plans, and Rates. As far as AM Best Rating that is relevant here, Aetna has been rated “A” along with Blue Cross and Blue Shield as “A”, United Health Care as “A”, Humana One as “A-“, and United American as “A+”. Although United American is rated “A+”, the article concedes that it is not a comprehensive health insurance company but only an indemnity insurance company. (WebQuotes)
Health care sector in which the company operates Aetna has been categorized as the most admired Health Care company in the category of insurance and managed care. The company ranked second in the years 2006 and 2007 overtaking Wellpoint, United Health Group, Humana and Health Net.
This result followed a survey of some 622 companies in 65 industries in which Apple has been ranked first as a ‘top company overall’, while in health insurance and managed care sector, Aetna has been the ‘top company overall’ for the year 2008. (News Releases) Besides in the NYSE, Aetna’s shares ranked top among the managed care companies as on November 26, 2008. Aetna’s shares rose 4.3 % to $ 21, while CIGNA by 10.7% to $11.54, Coventry Heath Care by 3.3% to $ 11.73, Humana by 6.2% to $28.07, UnitedHealth by 8.7% to $20.73 and WellPoint by 6.5% to 33.93.(BuisnessWeek 2008)
Some of the notable financial highlights of the company are stated in the table below:
$ in millions except earning per share 2007 2006 2005 2004 2003 Revenue 27,599.6 25,145.7 22,491.9 19,904.1 17,976.4 Net Income 1831.0 1,701.7 1,573.3 2,154.8 892.9 Assets 50,724.7 47,626.4 44,433.3 42,214.1 41,018.2 Shareholders’ equity 10,038.4 9,145.1 10,188.7 9,161.8 7,992.0 Earnings per share (diluted) 3.47 2.99 2.60 3.43 1.41 Debt equity ratio for the last tow years: Total liabilities/shareholders’ equity
In millions $
2007: 3,269.2/10,038.4 = 0.33
2006: 2,487.3/9,145.1 = 0.27
Debt equity ratio is one of the strongest financial indicators of a business entity. In the above case the equity is more than three times in the year 2007 and four times in the year 2006. This shows that the company does not depend on outside borrowings for its operations as well as meeting its long term liabilities.
The company has got short time debts of $ 130.7 & $45 million for the years 2007 & 2006 respectively which the total debts stated above are inclusive of. In the years 2003 to 2005, the company had no short term debt at all. However the long term debt of $ 3,138.5, 2,442.3, 1,605.7, 1,609.7 and 1,613.7 for the years from 2007 to 2003, show that it has nearly doubled in the year 2007.
Generally the entity which avoids long term debt for the burden of payment of interest would be paying more dividends which would become permanent burden hindering company’s growth. In this case, the dividend declared per share has been $ 0.01 in 2003 to $0.04 in 2007. Though it has increased fourfold, it has paid only out of income earned during the years and not from the retained earnings. This indicates the company’s commitment to its long term growth.
Annual report for 2007 says that its membership grew by 1.4 million during the year. The company has been has been successful in its acquisitions time and again which help increase membership considerably in one stroke. The leaps in membership throughout its history have been one of the reasons for its sustained growth in spite of losses it incurred during the year 2002. Growth has been also due to increase in membership premiums during the year 2006 & 2007 which were resorted to avert losses as occurred in the past.
The company report says that its premium revenues consist of 78% of its total revenue and points to the risk of having to be vigilant in its pricing strategies. As their premiums are fixed for one year periods, they have to be all the more careful in pricing so as to avoid losses due to faulty pricing and competition. (Annual Report p 35)
The company also repurchased its common stock during the years 2006 & 2007 using its capital, approximately 33 million shares and 60 million shares at a cost of $ 1.7 billion and 2.3 billion respectively.
Comparison with other companies’ products
Since the company is in a highly competitive sector, it has been its continuous endeavor to differentiate its products in keeping with changes in consumer preferences. (Annual Report 2007, p 33)
Company’ report about its financial future.
The company’s strategy for 2008 is to increase its membership even more by enrolling new customers and cross-sell penetration through the existing membership. The growth is expected to be in both ASC and Insured medical members. However it does not expect growth in group insurance operations which will be maintained at the existing level. In 2008, it will incur increased interest expense due to increase in the average debt outstanding.
Whether this company is a good investment opportunity?
The brief analysis above would show that the company during its long history has faced very few set backs and its growth has been steady. It has been selected as the top company overall in health insurance sector for the year 2008. Going by the history of dividend declarations and net worth of the company, it can be concluded that it will be a safe investment opportunity for a new investor.
Aetna Annual Report 2007, Aetna Annual Report, Financial Report to Shareholders
Bashe Gil, Hicks J Nancy, Ziegenfuss. (2000) Branding Health Services: Defining Yourself in the Marketplace, Jones and Bartlett Publishers, p 190-192
Business Wire 2008 Aetna Offers ‘Virtual Health Fair, Products and Programs to More Than 800,000 â€˜Red Hattersâ€™” retrieved November 29, 2008 from< http://www.pr-inside.com/aetna-offers-virtual-health-fair-products-r923276.htm>
BusinessWeek, November 29, 2008, Final Glance: Managed Care companies, retrieved November 29, 2008 from < http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-200811251753APDIGITLFINANCE__Managed_Care_Final_>
Finddarticles.com, Aetna Chairman and CEO Ron Williams Presents Health Care Reform Options before U.S. Senate Finance Committee Business Wire. . FindArticles.com. retrieved. November 29, 2008 from <http://findarticles.com/p/articles/mi_m0EIN/is_2008_June_10/ai_n25492904>
Nationmaster.com, Encyclopedia>Aetna, retrieved November 29, 2008 from http://www.nationmaster.com/encyclopedia/Aetna
News Releases, Aetna Tops FORTUNE‘s List Of America‘s Most Admired Companies Among Health Care Insurers, retrieved November 29, 2008 from < http://www.aetna.com/news/newsReleases/2008/0304.html >
WebQuotes, Health - Comparison of Health Insurance Companies, retrieved November 29, 2008 from < http://www.iwebquotes.com/vurl/articles/5518/Health___Comparison_of_Health_Insurance_Companies.aspx>