Aetna profit rises, helped by low claim costs

(Reuters) - Health insurer Aetna (AET.N) posted a sharply higher quarterly profit as its members' low use of health services kept claim costs down and encouraged investors about its outlook, sending its shares up 3.3 percent.

Although Aetna's fourth-quarter profit met Wall Street's target, analysts said the company's operations were actually stronger because results were hurt by higher-than-expected taxes.

"The earnings quality in the quarter was a little stronger than the headline looks," Jefferies & Co analyst David Windley said.

Aetna executives also told analysts on a conference call that they had not yet seen a significant increase in use in healthcare utilization, but the No. 3 U.S. health insurer is pricing its plans for a rebound in 2012.

Health insurers have benefited from low claim costs as Americans have delayed doctor visits and medical procedures to save money in the weak economy. Wall Street has been worried that an increase in use of health services will eat into insurer profits by driving higher-than-expected claims.

Aetna said its medical costs increased 5.5 percent in 2011, after the company initially projected they would rise about 8 percent.

"It's been incredibly low," Aetna Chief Financial Officer Joseph Zubretsky said of the utilization in an interview. "We just think that at some point in time, as the consumer gains confidence, there's a reversion to the mean. So we just think it's prudent to price the book of business that way."

Shares of rival health insurers also rose after Aetna's report. UnitedHealth Group Inc (UNH.N) and Humana Inc (HUM.N) were both up more than 2 percent.

Windley said the sector was also getting a boost from a U.S. government announcement touting the strength of the privately run plans under Medicare, the government health program for seniors. Premiums for such Medicare Advantage plans have fallen 7 percent on average over the past year, while enrollment has climbed about 10 percent, according to the government.

Health insurers are bullish on the Medicare Advantage opportunity, particularly as the post-war baby boom population becomes eligible, swelling the Medicare rolls.

"The Medicare Advantage opportunity in and of itself is quite attractive and if we just win our fair share then we can grow nicely," Zubretsky said.

EARNINGS POWER

Aetna's fourth-quarter net income rose to $372.6 million, or $1.02 per share, from $215.6 million, or 53 cents per share, a year earlier.

Excluding items, earnings of 97 cents per share matched the average estimate of analysts, according to Thomson Reuters I/B/E/S.

Higher-than-expected taxes and operating costs weighed down otherwise strong results, Goldman Sachs analyst Matthew Borsch said in a research note.

"The underlying earnings power was greater than we expected," Borsch said. "We calculate (fourth-quarter) EPS would have been 30 percent higher with in-line" operating costs and tax rates.

Revenue edged up to $8.57 billion from $8.54 billion a year earlier. Total membership stood at 18.46 million at the end of 2011, roughly unchanged from a year ago.

Aetna spent 80.7 percent of its premium revenue on medical claims in the quarter, well below the 83 percent it spent a year ago.

Aetna backed its forecast for earnings of about $5.00 per share, excluding items, which would be a slight decline from 2011. Analysts were looking for $5.09.

Aetna is the third major health insurer to post fourth-quarter results, following a negative market reaction to reports from larger rivals UnitedHealth and WellPoint Inc (WLP.N). UnitedHealth issued a cautious 2012 forecast, while WellPoint's quarterly profit fell short of Wall Street's target due to high claims in a Medicare plan in California.

At its investor meeting in December, Aetna said it was well positioned to increase revenue 5 percent a year, on average, over the next few years, driven by growth in its Medicare plans for the elderly and commercial plans for employers.

Aetna shares rose 3.3 percent, or $1.47, to $45.17 in midday trading on the New York Stock Exchange. Through Tuesday, Aetna's shares have risen about 4 percent this year, outperforming UnitedHealth and WellPoint.

(Reporting By Lewis Krauskopf in New York; Editing by Derek Caney and Maureen Bavdek)