The private insurance industry’s core business involves providing medical risk protection in exchange for predetermined payments. Investors generally use a forward price-to-earnings (or PE) ratio to compare valuations and determine the best-performing private health insurance company.
The above graph shows that Humana (HUM) has consistently traded at a higher forward PE level compared to Aetna (AET). Aetna, however, has traded higher than other companies such as Anthem (ANTM) and Cigna (CI), between 6.2x and 12.5x. This is mainly due to the company’s successful business rebalancing strategy, active participation on public and private exchanges, and increasing focus towards health technology.
With the acquisition of Coventry Health in 2012, Aetna rebalanced its commercial-focused portfolio and increased its revenue exposure to the fast-growing government-sponsored segment. This segment involving Medicare and Medicaid enrollees derived about 38% of total revenues in 2014, an increase from 22% revenues in 2010. Coventry Health added about 4 million members, including Medicare, Medicaid, and commercial enrollees and 1.5 million prescription drug enrollments to Aetna’s member list.
Compared to other health insurance companies (XLV) in the US, in 2014, Aetna participated on public exchanges in a greater number of states. This gave the company the first-mover advantage, where customers of other companies also shifted to Aetna’s health plans. In 2014, Aetna enrolled about 0.6 million people, which is approximately a 20% share of the total exchange membership in Aetna’s participating states.
Aetna also expects to enroll approximately 0.8 million people through the public exchanges in the first quarter of 2015, which would make it the second or third largest national player in the public exchange business. The company also has a significant presence on private exchanges, which are operated by private organizations or other health insurance companies.
In 2014, Aetna enrolled about 0.13 million people. The company projects it will enroll 0.23 million people in 2015 through this platform. In 2014, Aetna also acquired bswift, which is an online private exchange to improve the buying experience of its customers.
In 2011, Aetna acquired Healthagen’s portfolio of products and services, which is focused on improving the payment models for the providers and consumer experience for the customers of the company. These products involve several data-analytics-based offerings to enable both price transparency and ease of buying for the customer.