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Aetna falls on cost fears
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February 8, 2000: 4:09 p.m. ET
U.S. health insurer posts sharp jump in 4Q profit, but investors are unconvinced
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - Aetna Inc. posted a sharp jump in fourth-quarter earnings that easily beat analysts' lowered expectations Tuesday, but investors blistered the company's stock on concerns that its medical costs are rising too quickly.
The Hartford, Conn.-based company, the nation's largest health insurer, posted quarterly operating earnings of $173 million, or $1.18 per share, including Year 2000-related costs.
That easily exceeded the $144.5 million, or 91 cents per share, Aetna earned a year earlier when one-time items and net realized capital gains were excluded, and also topped the consensus analyst estimate of $1.10 per share, as compiled by research firm First Call Corp.
Analysts lowered their consensus estimate by 10 cents per share last week, when Aetna said it would amend its quarterly financial statements for all of 1998 and the first three quarters of 1999 after a lengthy review of its balance sheets by the U.S. Securities and Exchange Commission.
But while Aetna easily managed to top the revised estimate, investors remained unconvinced.
Aetna (AET: Research, Estimates) shares traded down 9-3/4, or nearly 18 percent, at 46 just prior to the closing bell Tuesday after Goldman Sachs lowered its rating on the company's stock and several other analysts raised warning flags on Aetna's 2001 growth prospects.
Analysts were concerned about Aetna's rising medical costs, which pushed Aetna U.S. Healthcare's commercial HMO medical loss ratio 50 basis points to 83.1 percent and pushed its Medicare HMO medical loss ratio up nearly 450 basis points to 95.3 percent.
"I don't think anyone would have believed that we would see erosion in Aetna's health care plans, but that's what happened," said Lori Price, an HMO analyst with CIBC World Markets.
Price cautioned the rise in the medical loss ratios -- essentially the difference between the growth in medical premiums and medical costs -- could be just a one-time event for Aetna, given it was just forced to restate several quarters.
But other analysts didn't wait to find out. Goldman Sachs analyst Charles Boorady downgraded the company's stock to market perform from market outperform, and lowered his 2001 earnings outlook to $3.85 per share.
The current 2001 First Call consensus estimate for Aetna is for a profit of $5.17 per share.
Joyce Oberdorf, an Aetna spokeswoman, attributed the rise in medical costs to a number of factors, including Medicare prior-period claims coming in later and higher than the company expected.
"We have certainly factored in the higher medical costs going forward," Oberdorf said. "We believe our conservative posture now is warranted and justified."
But analysts also were concerned that the only reason Aetna managed to top the Street's fourth-quarter projection was a sharp decline in income taxes paid, contributing a 9 cents per share improvement in operating earnings. There also was a sharp decline in the company's operating earnings from overseas, which were hurt by heavy losses in Brazil due to the economic recession there and higher taxes and pricing regulations.
Oberdorf said that despite these trends, the company is still expecting earnings per share growth of 16 to 18 percent next year, which would exceed the current First Call consensus estimate.
As for the drop in Aetna's stock value Tuesday, Oberdorf acknowledged the medical costs and Brazilian problems caught analysts off-guard, "and I do not think they like to be surprised."
But while analysts generally believed Aetna's cost concerns were not indicative of an industry-wide problem, investors traded several other managed-care stocks down Tuesday, including United HealthCare (UNH: Research, Estimates), which fell 2-3/16 to 56 by late afternoon, and Cigna Corp. (CI: Research, Estimates), which lost 1-5/8 to 74-5/8.
Healthcare, financial services rise
Including one-time costs and gains, Aetna's net income for the quarter was $134.5 million, or 92 cents per diluted share, down significantly from the $231.8 million, or $1.50 per share, the company earned a year earlier.
Revenue for the quarter jumped 34.6 percent to $7.75 billion.
Earnings of Aetna's hallmark U.S. Healthcare division rose nearly 13 percent as the company received a boost from its acquisition of Prudential HealthCare and higher HMO membership.
Meanwhile, Aetna Financial Services profit jumped 19 percent as a strong performance in U.S. equity markets fueled a 32 percent increase in assets under management.
For the full year, Aetna earned $676.4 million, or $4.44 per share, excluding one-time costs, up from $567 million, or $3.52 per share, the previous year.
Net income fell to $716.9 million, or $4.72 per diluted share, from $848.1 million, or $5.41 per share.
Overall revenue for the year climbed 28 percent to $26.5 billion. 
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Aetna U.S. Healthcare
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