Oct. 25 (Bloomberg) -- Aetna Inc., the third-largest U.S. health insurer, beat analysts' profit estimates as management held down medical costs and added customers. The company raised its annual forecast and its shares rose to a record.

Third-quarter net income rose 4.3 percent to $496.7 million, or 95 cents a share, the Hartford, Connecticut-based company said today in a statement. Profit topped the 92-cent average estimate of analysts in a Bloomberg survey.

Aetna reduced the share of premium revenue spent on medical care to 79.4 percent from 81.5 percent in the second quarter, beating the estimate of CIBC World Markets analyst Carl McDonald. Investors see the ratio as an indicator of future profit. The number of customers in health plans rose 8 percent after Aetna acquired an Arizona-based insurer.

``They focused on expanding sales efforts in new markets with lower-than-average medical costs,'' such as small and mid- sized cities, said Brian Wright, an analyst with Jefferies & Co. in New York, in a telephone interview. ``It's showing up in the results.''

Aetna jumped $3.09, or 5.8 percent, to $55.99 at 4:07 p.m. in New York Stock Exchange composite trading, the biggest gain in a year, after reaching a record $56.37 during the day. The stock settled at the highest closing price since shares were issued in 2000, when Aetna's 157-year-old parent company sold its financial services unit and spun off the health insurance business.

The stock is the second-best performer, behind Humana Inc., in the six-memberStandard & Poor's 500 Managed Health Care Index, rising 30 percent this year. Humana, which reports results on Oct. 29, rose 4.7 percent today.

CFO Comments

The percentage of total premium revenue used for medical costs rose from 78.8 percent a year earlier, while coming in lower than the 80.7 percent estimated by CIBC's McDonald, who is in New York. When the ratio rises, medical inflation may crimp earnings and force premiums higher, while declines may suggest lower health inflation or that the company is collecting higher premiums.

``We have accurately forecast the medical cost trend, helped our customers manage it and successfully priced for it,'' said Aetna Chief Financial Officer Joe Zubretsky in a telephone interview. ``We never claimed to be the lowest-cost product on the street.''

UnitedHealth Group Inc., the largest U.S. health insurance provider, last week reported a decline in the medical cost ratio to 79.5 percent in the third quarter from 81.1 percent a year earlier and 80.3 percent in the second quarter. WellPoint Inc., the second-largest insurer, yesterday said its ratio rose to 81.8 percent in the quarter from 81.3 percent a year earlier.

Increased Forecasts

Aetna's third-quarter earnings compared with $476.4 million, or 85 cents, a year earlier. Revenue rose 11 percent to $6.96 billion.

The company increased its 2007 forecast of ``operating'' earnings, which exclude items such as capital gains or losses, to $3.48 a share from the previous projection of as much as $3.42. Analysts surveyed by Bloomberg expected $3.42, according to the average of 16 estimates.

In the fourth quarter, the company projected 87 cents a share on that basis, in line with the average estimate of analysts surveyed by Bloomberg. Aetna said earnings will reach $4 a share in 2008, higher than the $3.90 average estimate of analysts.

Total health plan membership increased by 1.23 million, to 16.6 million, Aetna reported. Aetna raised its enrollment forecast for the full year from no more than 600,000 to at least 600,000, excluding 773,000 customers added in the last few months through acquisitions. In 2008, Aetna will add at least 650,000 health plan members, Zubretsky said.

`New Markets'

``I like what they've done getting into new markets,'' said Matt Perry, an analyst with Wachovia Securities in New York, in a telephone interview before the earnings report. ``Aetna is the best positioned of the larger managed-care companies.''

The $535 million acquisition in August of Schaller Anderson Inc., a Phoenix-based company with Medicaid contracts in eight states, contributed 618,000 new members. The move prepares Aetna to develop products for its biggest untapped market, the 47 million Americans who don't have health benefits, said Aaron Vaughn, an analyst with Edward D. Jones & Co. in St. Louis.

With fewer U.S. employers providing health insurance for workers, Aetna is developing other new markets, including individuals and college students. This month the company bought Goodhealth Worldwide Global Ltd., which serves more than 55,000 wealthy individuals and expatriate Americans.

Competing With Cigna

Goodhealth, sold for an undisclosed price by Primary Group UK Ltd., in Hamilton, Bermuda, will compete with a similar unit of Cigna Corp.

Aetna's enrollment in U.S. Medicare-sponsored health plans for the elderly increased to 191,000, a 54 percent gain from a year earlier, the company said.

Medicare Advantage plans, in which enrollees receive extra benefits such as lower out-of-pocket expenses, are typically the most profitable, generating about $1,500 a year in gross margin for each beneficiary, according to CIBC's McDonald. Gross margins represent revenue minus the cost of goods or services sold.

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: October 25, 2007 16:40 EDT