* Q3 EPS ex items of 69 cents vs 66-cent Wall St view
* Reserves for paying claims sees as positive sign
* Sees FY EPS at $2.75, low end of prior view
* Calls 2010 a “repositioning year”
* Shares rise 7 percent (Recasts, adds analyst, CFO comments)
By Lewis Krauskopf
NEW YORK, Oct 29 (Reuters) - Health insurer Aetna Inc AET.N posted an 18 percent increase in third-quarter net income on better returns from its investments and gave indications it had a firm grip on medical cost problems that plagued the company earlier this year.
Shares of the No. 3 U.S. health insurer, which have underperformed those of rivals this year, rose 7 percent as its quarterly profit also topped analyst expectations.
Even as Aetna projected a weak fourth-quarter hit by high flu-related medical costs, Aetna’s level of reserves to pay claims left investors more confident about its outlook.
“They took a leap forward in improving sentiment on the quality of the company’s outlook and their balance sheet and I think that’s critical for the stock,” said David Heupel, a portfolio manager with Thrivent Investment Management.
“We’ve been concerned about their reserve levels and they moved in the right direction in this quarter.”
Aetna called 2010 a “repositioning year,” although it deferred giving a specific forecast until early next year. It expects to shed as many as 650,000 members in the first quarter as it takes actions to strengthen its pricing.
“Given the fact they’re able to get ahead of this rising cost trend and be more conservative in pricing for 2010 it should enable earnings to stabilize and even potentially expand in 2010,” Edward Jones analyst Steve Shubitz said.
Third-quarter net income rose to $326.2 million, or 73 cents per share, from $277.3 million, or 58 cents per share, a year earlier, when Aetna realized huge investment losses stemming from the credit crisis.
Excluding items, earnings of 69 cents per share were 3 cents ahead of the analysts’ average estimate, according to Thomson Reuters I/B/E/S.
Revenue rose 14 percent to $8.72 billion.
Aetna follows large insurers WellPoint WLP.N and UnitedHealth Group Inc (UNH.N) in posting a better-than-expected third-quarter profit.
But shares of U.S. health insurers are trading at rock-bottom valuations over concerns a health system overhaul under debate in Congress will dramatically undercut their business.
Aetna’s enrollment stood at 19.03 million at the end of September, up 8 percent from a year earlier, but down slightly from the end of June.
In its commercial plans serving employers, the company spent 85.6 percent of its premium revenue on medical costs, compared with 80.3 percent a year earlier. Aetna had targeted a range of 84 percent to 85 percent for the second half of 2009.
Aetna saw high costs from the H1N1 flu and Cobra insurance for Americans who lost their jobs. WellPoint cited those factors on Wednesday in projecting higher medical expenses for the year.
But in a positive sign for Aetna, it reported about $30 million was left over from prior periods after being set aside to pay claims, indicating a conservative reserve position.
“We certainly believe we understand the new view of medical cost trend and are pricing to it appropriately,” Chief Financial Officer Joseph Zubretsky said in an interview. “That is the essence of this business.”
Aetna forecast full-year operating earnings of $2.75 per share. In July, it forecast a range of $2.75 to $2.90. Analysts looked for $2.86.
The new profit forecast represents a reduction of as much as 30 percent from the initial 2009 forecast for Aetna, which had already lowered its outlook twice during the year.
Aetna shares rose $1.76 to $27.08 in morning trading on the New York Stock Exchange. Through Wednesday, Aetna shares had fallen 11 percent this year, making it the worst performer among large health insurance stocks. (Reporting by Lewis Krauskopf; Editing by Maureen Bavdek and Derek Caney)