Are Employment Woes Hurting Aetna’s Business?

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Next year is expected to be a difficult one for healthcare providers like Aetna (NYSE:AET) and UnitedHealth (NYSE:UNH). During the company’s annual Investor Conference, Aetna gave lower-than-expected guidance for 2013 based on its expectations that growing medical costs and weaker enrollment numbers will affect its business.

Why was Aetna’s 2013 Guidance Below Estimates?

Average analyst estimates compiled by Bloomberg forecast that the insurer would report earnings of $5.52 per share and a revenue of $38.91 billion for 2013. However, on Tuesday, Aetna announced in a filing that the company anticipated earnings of $5.40 per share and a revenue of $38.6 billion, which represents an increase of 9 percent year-over-year.

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In the presentation the company prepared for Wednesday’s conference, Aetna stated that its “commercial medical cost trend” is expected to increase by 6.5 percent in 2013, the same growth figure reported for 2012, while enrollment is anticipated to increase slightly by 200,000 new members.

Aetna is not the only carrier predicting weaker earnings for next year. Last month, UnitedHealth, the country’s largest insurer, and Cigna (NYSE:CI), the fourth largest insurer, gave profit estimates that were below analysts’ expectations. Like Aetna, both carriers cited weak employment growth in the U.S. as the reason for their forecasts.

However, BMO Capital Markets analyst Dave Shove wrote in a note to clients seen by Bloomberg that Aetna’s guidance was slightly conservative. “Despite ongoing proof of slowing growth” Aetna expects that medical costs will increase by the same percentage as this year, said Shove in the note.

CHEAT SHEET Analysis: Trends Support the Industry in which Aetna Operates

One of the core components of our CHEAT SHEET Investing Framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.” But the reverse is also true. In this case, Aetna’s full-year guidance for next year illustrates the effect that limited employment gains could have on its business. The company, like many other insurers, does not expect employment to grow significantly next year, and so the economic climate will make it difficult for Aetna and UnitedHealth to add new members.

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