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Aetna (NYSE: AET). Jonathan Goh. Apr 22, 2008. Diversified Healthcare Benefits Traditional and consumer-directed health insurance Medical Pharmacy Dental Behavioral Health. Customers Employers Individual Groups College Students Part-time/Hourly Workers Government Units Labor Groups. - PowerPoint PPT Presentation
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Aetna (NYSE: AET)
Jonathan GohApr 22, 2008
Company Overview
Diversified Healthcare Benefits Traditional and
consumer-directed health insurance Medical Pharmacy Dental Behavioral Health
Customers Employers Individual Groups College Students Part-time/Hourly
Workers Government Units Labor Groups
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Business Segments
Healthcare Small, mid-size, large
multi-site national employers
Point of Service (POS) Preferred Provider
Organizations (PPO) Health Maintenance
Organization (HMO) Indemnity plans
Group Insurance Life Disability Long-term Care
Large Case Pensions Retirement Products Annuity Products
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Revenue Streams
Primarily from premiums earned on insured products Assume majority of financial risk Employer Groups / Employees self-select Government Units – MedicAid & MedicCare
Fees – administrative services contracts (ASC)
Investments
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Revenue Streams
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Investment Portfolio
As of December 31, 2007 Debt and Equity - $15 billion
Average A+ Rating Mortgage Loans - $1.5 billion
Mostly Agency Backed AAA loans Short Term Investments - $1.3 billion
No material losses from sub-prime Does not hold any CDOs, CLOs and SIVs
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
2007 in Review
Strong growth in Healthcare medical membership 1.4m in 2007 (including acquisitions) 0.7m in 2006
Acquisitions - $613 million Share repurchase
2007 – 33 million shares for $1.6 billion 2006 – 60 million shares for $2.3 billion
Debt Issuance 2007 - $700 million of senior notes 2006 - $2 billion of senior notes
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Outlook for 2008
Strong healthcare membership growth Retirement market
Reducing lower margin and maturing market Level Group Insurance sales Run-off of Large Case Pensions
Capital Redeployment Continue to seek acquisitions Share repurchase
$1.5 billion 5 year revolving credit facility with 21 banks; JPMorgan as administrative agent
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Shareholders
Over 50% institutional shareholders Legg Mason – 7% State Street Corp – 6% Capital Research Global Investment
Good ownership base No incumbent shareholder
Source: Bloomberg, accessed on Apr 21, 2008
Industry Trends
Strong decline in commercial employer-based health plans
More directed to Consumer Consumer-Directed Health Fund (Aetna) Online management of choices
Constrained Public Care MedicCare MedicAid
Strengths and Competitive Advantage New markets and products drive top-level
growth Manages financial risks better than peers Organic Growth
Online medical management system - CareEngine Greater Flexibility and Choice in design features Larger physician networks
Acquisitions Schaller Anderson – Entry into the MedicAid
market GoodHealth Worldwide Limited – Expand
HealthCare Product Offerings
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Weaknesses and Risks
Declining employer-based insurance membership
Higher Deductibles and Lower-margins Federal and state legislative and
regulatory reforms Advances in pharmaceutical and medical
technology Cost and effectiveness
Industry consolidation and increased competitiveness
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Industry Analysis
Mid-March 2008 WellPoint (NYSE: WLP)
Cut full year earnings by about $0.50 per share Tumbled more than 28% Attributed to rising health care costs & investment
losses Flu epidemic 2 Top executives leave
Both WellPoint and UNH experienced declines in membership enrolment
Aetna only insurer that did not lose membership
Source:Britt, R. et. al., “Health insurers take a dive on WellPoint's warning”, MarketWatch, Mar 11, 2008
Industry Analysis
Source: Yahoo Finance, AET Charts <http://finance.yahoo.com/charts?s=AET#chart8:symbol=aet;range=ytd;compare=unh+wlp+^gspc;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined>
Valuation
2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E TV
Net Income 1,442 1,760 2,453 2,587 2,796 1,763 2,098 2,514 2,794 2,944% Change YOY 22% 39% 5% 8% -37% 19% 20% 11% 5%
+Depreciation and Amort 149 182 204 270 322 312 366 412 476 526
% Change YOY 22% 12% 32% 19% -3% 18% 12% 16% 11%+Changes in Net Working Cap 109 (1,481) (11,616) 166 638 (145) 18 (111) 18
% Change YOY 0% -1457% 684% -101% 285% -123% -113% -703% -117%+Capital Expenditure (211) (190) (272) (291) (400) (287) (380) (461) (521) (525)
% Change YOY -10% 43% 7% 38% -28% 33% 21% 13% 1%=Free Cash Flow 1,861 905 (9,050) 2,883 2,426 1,940 2,483 2,638 2,963
% Change YOY -51% -1100% -132% -16% -20% 28% 6% 12%
PV FCF 2,193 1,585 1,835 1,762 1,789PV TV 24,204
Sustainable Growth Rate 3%
Source: Historical Financial Data from Form 10-K, Aetna, Inc (Feb 9, 2008)
Valuation
Cost of Capital Capital Structure
Current 10-Year Treasury 3.71% MV Equity 20,927 % Equity 86.96%Historical Market Return 12.30% MV Debt 3,138 % Debt 13.04%Historical T Bill 3.80% MV Assets 24,065Beta 0.9574Cost of Equity 11.85%Cost of Debt 3.65% Source: Bloomberg (Apr 21, 2008)Tax Rate 34.52% Source: Bloomberg (Apr 21, 2008)Cost of Capital 10.61%
Value of Operations 33,369
Non-Operating Assets (Cash, etc) 1,254Non-Equity Claims 3,138Value of Equity 28,977
Number of Shares 496.6 Source: Bloomberg (Apr 21, 2008)Intrinsic Value 58.35
+10% 64.19
-10% 52.52
Source: Historical Financial Data from Form 10-K, Aetna, Inc (Feb 9, 2008)
Selected data from Bloomberg, Accessed on Apr 21, 2008
Sensitivity Analysis
58.35 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%
9.00% 66.94 71.58 77.00 83.41 91.09 100.4910.00% 57.16 60.55 64.43 68.91 74.14 80.3110.61% 57.16 60.55 64.43 68.91 74.14 80.3111.00% 49.56 52.13 55.02 58.29 62.04 66.3612.00% 43.49 45.48 47.70 50.18 52.97 56.1313.00% 38.53 40.12 41.86 43.79 45.93 48.3214.00% 34.41 35.69 37.09 38.61 40.30 42.16
Market Comps and Peer Valuations
Aetna, Inc S&P500
Current P/E (ttm) 12.13 Current P/E (ttm) 17.67
Forward P/E (1yr) 9.28 Forward P/E (1/yr) 14.86
Current EPS (ttm) 3.47 Peer Group
Last Close $42.14 Current P/E (ttm) 15.96
Implied Earnings
$4.54 Discount to Peer
24%
Earnings Growth
31%
52 Week Range 39.02-60.00
Historical P/E (5 yrs)
15.21
Discount 20%
Dividend Yield 0.10%Source: Market data from Bloomberg, Accessed on Apr 21, 2008
Investment Thesis
Deeply undervalued because of industry implosion Intrinsic Value of $52 - $64 Return on Equity – 15-20%
Well positioned amongst competitors Optimistic consumer targeted member growth
Employee Retirement/MedicAid/MedicCare
Higher accreditation Fortune’s Most Admired Healthcare (2008)
Lower risk investment assets
Note for Future Analysts
Reported $0.92 EPS for 2008Q1 Earnings Inline with estimates and projections Up 14% from prior year - $0.82 Lowered second quarter target Raised enrollment targets for 2008
Analyze future outlook of healthcare insurance industry Aetna’s position amongst competitors Ability to gain enrolment in the consumer-targeted
market and maintain sustainable competitive advantage
Ability to manage financial risk and healthcare costs
Questions?
Appendices andSupporting Material
Definition of Terms
Medicare Health insurance programs for
people aged 65 or older people under 65 but with disabilities people of all ages with End-Stage Renal Disease
Medicaid Low income individuals and families who
cannot afford medical care Pays the hospital bills directly State administered program
Source: US Department of Health and Services <http://www.cms.hhs.gov/MedicaidGenInfo/>
Summary of Expansions
Expanding our individual and small group marketing into additional states
Expanding our capabilities to serve Government and labor customers
Expanding our Medicaid offerings to a total of 10 states, mostly through acquisition
Expanding our capabilities to serve retirees, particularly through our relationships with AARP and the HR Policy Association and our enhanced individual and group Medicare offerings; and
Expanding our expatriate offerings and global capabilities and reach, also through acquisition.
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Snapshot of Total Membership
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Group Insurance
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Medical Benefit Ratio
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Investment Securities
Source: Form 10-K Aetna, Inc (Feb 9, 2008)
Market Share
Source: OneSource Business Browser; AET Analyst Report, Mar 20, 2008, Oppenheimer & Co, Inc