Aetna profit misses views, but turnaround seen

NEW YORK (Reuters) - U.S. health insurer Aetna Inc (AET.N) offered signs on Friday that it was moving toward a turnaround next year, overshadowing a disappointing quarterly profit and 2010 forecast.

The No. 3 U.S. health insurer reported better-than-expected results in its commercial plans serving employers. Aetna projected that this year it would spend less of that business' premiums on medical costs, a measure closely watched by Wall Street.

Shares of Aetna rose 1.3 percent, while those of its rivals fell on a generally down day for the market.

The fourth-quarter report closes a difficult 2009 for Aetna, which had previously advised investors that 2010 would be a "repositioning year."

"The picture provided...was that they've hit bottom, 2010 is conservative. There are no more shoes to drop and we should look for improvement in 2011," said Sanford Bernstein analyst Ana Gupte.

A main part of Aetna's repositioning this year is pricing its commercial plans to reflect the increased medical costs that dragged down results in 2009, Chief Financial Officer Joseph Zubretsky said in a telephone interview.

Despite the higher pricing, Aetna expects to lose only 350,000 members in the first quarter from its total of about 19 million, fewer than previously expected and what Zubretsky called a "tremendous result."

"We're feeling both the balance sheet and the underwriting margin profile of the business are very, very strong," Zubretsky said.

Aetna's fourth-quarter net income fell 15 percent to $165.9 million, or 38 cents per share, from $194.7 million, or 42 cents per share, a year earlier, when it booked investment losses and various charges.

Excluding special items, earnings dropped to 40 cents per share from 96 cents. Analysts on average expected 42 cents, according to Thomson Reuters I/B/E/S.

Revenue rose about 13 percent to $8.76 billion.

SIGNS OF IMPROVEMENT IN COMMERCIAL BUSINESS

The quarterly earnings miss stemmed from Aetna's life, disability and long-term care products business, known as its group business, which Wall Street sees as far less important than its main health plans.

Aetna said it had to boost its disability reserves by about $50 million, in part to handle longer disability claim durations, which led to an operating loss of $14.1 million for the group business, compared with year-earlier earnings of $17.7 million.

Aetna said it was also hit by higher costs for pensions for its employees.

But its commercial plans topped targets, heartening analysts.

"The pricing actions I think are taking hold, and that's certainly a positive thing," Edward Jones analyst Steve Shubitz said.

In its commercial health plans, Aetna spent 85 percent of premium revenue on medical costs, compared with 80.6 percent a year earlier. However, the ratio came in lower than Aetna's previous projection of 86.5 percent.

The cost spike reflected more people in Cobra plans for out-of-work Americans, who tend to use more medical services, and a general increase in claims per member. Costs from the H1N1 flu were lower than earlier projections.

"To us, fourth-quarter results show clear signs of strengthening in core operating results with healthcare earnings 18 percent above our model," Goldman Sachs analyst Matthew Borsch said in a research note.

The company forecast operating earnings per share of $2.55 to $2.65 for 2010, missing analysts' forecasts of $2.83 and coming in below the $2.75 reported for 2009.

Aetna warned last month that 2010 earnings were likely to be modestly lower than in 2009. At the time, it said its business of providing administrative services to employer customers faced competitive pressures and that lower Medicare reimbursement would hurt margins.

Other large insurers are also projecting a difficult 2010 as high unemployment weighs on their membership.

Zubretsky, in a statement, said he viewed 2010 as not fully reflecting Aetna's earnings potential.

"We do believe that we are in a multi-year process of expanding our pretax operating margins," the CFO said in the interview.

Aetna had taken down its 2009 profit forecast by as much as 30 percent from its initial view for the year, in part because of higher-than-projected medical costs.

Shares of Aetna rose 39 cents to $29.62 in morning trading on the New York Stock Exchange, while the S&P Managed Health Care index .GSPHMO fell 0.8 percent.

Despite a generally positive reporting season, shares of health insurers have been volatile based on developments involving U.S. healthcare reform legislation, whose prospects remain uncertain.

(Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn, Dave Zimmerman, Leslie Gevirtz)