Aetna Inc (AET.N) signaled that health claim costs may be on the verge of rising as its quarterly profit missed Wall Street's target, sending shares of the No. 3 U.S. health insurer down more than 8 percent.
Health insurers largely posted higher-than-expected earnings in 2011 because of Americans' low use of medical services in the weak economy, leading their shares to far outperform the broader stock market.
But Aetna executives said on Thursday that they were seeing a stabilization in medical claims costs after deceleration that helped profits for the past year.
"Are we seeing a turn in healthcare cost utilization?" said Tim Nelson, a senior healthcare analyst with Nuveen Asset Management. "That's what Aetna investors are worried about, that's what managed care investors are worried about."
Shares of rival health insurers were down modestly after Aetna's report. WellPoint Inc WLP.N and Cigna Corp (CI.N) fell more than 1.2 percent, while UnitedHealth Group Inc (UNH.N) slipped nearly 1 percent.
Aetna, whose shares had outperformed rivals this year, is the first major health insurer to miss earnings estimates for the first quarter, after UnitedHealth and WellPoint posted higher-than-expected profits.
While UnitedHealth and WellPoint also raised their respective earnings forecasts for 2012, Aetna merely backed its outlook.
"They missed and they reiterated guidance, and what the Street was expecting was a beat and a guidance raise," Nelson said. Investors with wide-ranging sector portfolios "are going to sell on that kind of result."
In the past year, Aetna was able to recognize gains from the money it sets aside to cover medical claims, when actual claims submitted turned out to be lower than the company had forecast.
Analysts were expecting that trend to continue in the first quarter of 2012, but Aetna said it did not benefit from any such gains during the period.
"We do not see trend decelerating any further," Aetna Chief Executive Officer Mark Bertolini said of medical claims costs on a conference call. "From a utilization standpoint, we don't see anything that is alarming in the marketplace."
For 2012, the executives said the company was keeping its current projection for medical claim costs, which calls for a slight increase over the year before. They noted it was very early in the year to draw many conclusions and that the company had so far reserved appropriately.
"We did predict and forecast an increase in utilization into 2012," Aetna Chief Financial Officer Joseph Zubretsky said in an interview. "We saw nothing in the first quarter that would allow us or steer us to change that forecast."
Aetna shares were down 8.2 percent at $45.33 on Thursday afternoon on the New York Stock Exchange. Through Wednesday, Aetna shares had risen about 17 percent this year, compared with a 14 percent rise for the Morgan Stanley Healthcare index .HMO of health insurers.
Aetna's first-quarter net income fell to $511 million, or $1.43 per share, from $586 million or $1.50 per share a year earlier.
Excluding items, earnings of $1.34 a share missed the analysts' average estimate by 6 cents, according to Thomson Reuters I/B/E/S.
Revenue rose 6 percent to $8.92 billion.
"The main issue that people are having with this quarter is they missed consensus slightly and some of what they're saying about their reserves for medical costs is confusing," said Sarah James, an analyst with Wedbush Securities.
In the interview, Zubretsky said investors should take note of Aetna's revenue increase and strong profit margins.
"What I would tell people to be focused on is the quality of the operating metrics underlying our first-quarter result," he said.
Aetna spent 81.5 percent of premium revenue on medical claims, up from 79.2 percent a year earlier. Its operating expenses rose nearly 7 percent.
Aetna's membership stood at 17.92 million at the end of March, up 0.6 percent from a year ago. The company expects enrollment to swell to 18.2 million by year-end.
The insurer still expects operating earnings per share of about $5.00 for 2012. Analysts are looking for $5.15.
(Reporting By Lewis Krauskopf in New York; Editing by Lisa Von Ahn, Gerald E. McCormick and Matthew Lewis)