Insurer Aetna's 1Q profit, 2011 forecast grow

AP News
Posted: Apr 28, 2011 1:13 PM
Insurer Aetna's 1Q profit, 2011 forecast grow

Aetna Inc. said Thursday its first-quarter net income rose 4 percent, as it became the fourth big health insurer in the past week to report better-than-expected earnings and raise its 2011 earnings forecast.

Health care costs fell for the Hartford, Conn., company, and it recorded a $174-million gain because claims left over from previous quarters came in below expectations due to lower-than-projected care use.

Several health insurers have said slower-than-expected growth in health care use _ caused in part by bad weather _ has helped them in recent quarters. Aetna is the third largest commercial health insurer behind WellPoint and UnitedHealth. Both companies and Humana Inc. have already reported first-quarter results that topped Wall Street expectations and raised their 2011 earnings forecasts.

Managed care companies had set a high bar for first-quarter earnings and guidance increases, but Aetna's results exceed "even our recently heightened expectations," Leerink Swann analyst Jason Gurda said in a research note.

The company's share price, which has already risen about 30 percent so far this year, climbed nearly 5 percent, or $1.81, in midday trading to $41.62.

The insurer surprised analysts with a big increase to its full-year earnings forecast. Aetna now expects 2011 adjusted earnings to range between $4.20 and $4.30 per share. That's up from its forecast in February of between $3.70 and $3.80 per share and much higher than analyst expectations of $3.73 per share.

That February forecast also was much higher than what analysts were expecting at the time.

"A lot of investors thought they would have a harder time beating already high expectations," Bernstein analyst Ana Gupte said.

Aetna raised its forecast by a large margin because company leaders were waiting for first-quarter numbers to tell them how their new pricing was working out. The insurer has had to change prices for some of its health insurance after premiums came in too low for claims.

"You need to feel confident that you can give investors a realistic look at what's going to happen for the balance of the year," Chief Financial Officer Joe Zubretsky said.

Aetna earned $586 million, or $1.50 per share, in the three months that ended March 31. That's up from $562.6 million, or $1.28 per share, a year ago. Revenue fell 3 percent to $8.39 billion.

Adjusted earnings, which exclude one-time items, were $1.43 per share.

Analysts surveyed by FactSet forecast, on average, earnings of 96 cents per share on $8.32 billion in revenue. They normally exclude one-time items from their estimates.

Aetna said health care costs, which are essentially the amount it pays in medical claims, fell 6 percent in the first quarter to $5.35 billion.

Medical membership fell to 17.8 million people from 18.7 million in last year's first quarter, as it saw losses mainly in its commercial business, which includes employer-sponsored group coverage and individual plans.

The insurer also said Thursday it will spend about $600 million to buy Prodigy Health Group, a privately held company that administers self-funded health plans for companies with between 100 and 5,000 employees. In self-funded plans, the employer pays the claims and assumes the risk.

Insurers have been buying back shares, offering dividends or considering acquisitions after piling up cash from strong financial performances in recent quarters. Aetna, like several competitors, also is paying a new or bigger dividend to shareholders. The company will make its first quarterly payment of 15 cents per share on Friday.

The steady cash flow from larger dividends can make a company's stock more attractive to investors. Aside from Aetna, shares of UnitedHealth, WellPoint and Humana _ all of which increased or started dividends _ have risen nearly 30 percent or more in 2011.

Some of that gain also has come in the past week, as earnings reports eased investor worry about the impact of a new health care overhaul requirement. Insurers entered 2011 facing a new rule that essentially requires them to pay out a minimum percentage of premiums on medical claims or issue rebates to consumers.

Gupte, the Bernstein analyst, said there was no historical precedent for how something like this would affect the companies.

"This was a litmus test of the reform impact," she said.