Aetna Inc. (AET), the third-biggest health insurer by sales, dropped the most in three years after first-quarter profit missed analyst estimates.
Aetna slipped 8.2 percent to $45.31 at the close in New York, for its steepest one-day decline since April 2009. The Hartford, Connecticut-based insurer today reported earnings excluding one-time items that were 6 cents lower than the $1.40 average of 16 analyst estimates compiled by Bloomberg, and a full-year profit forecast below estimates.
Aetna said it spent 81.5 percent of premiums on member care, up from 79.2 percent a year earlier. It also booked nothing for saving on medical costs in prior quarters, revenue that has typically boosted insurers in recent years. The company said it saw signs that a slowdown in medical spending among U.S. consumers might be coming to an end.
“We think it mostly reflects industry trends that are and will impact others as we move through 2012,” said Matthew Borsch, a Goldman Sachs Group Inc. analyst in New York, in a note to clients. Aetna’s reliance on selling plans to cost- conscious private employers means “the longer-term growth outlook is less robust” for them than other insurers, he said.
The company reaffirmed a full-year profit prediction of $5 a share, below the $5.15 average of 18 analysts’ estimates.
UnitedHealth Group Inc. (UNH), the biggest U.S. health plan by sales, recorded $530 million in “reserve development” from prior quarters last week, helping it beat estimates. For Aetna, the lack of such payments was “the elephant in the room,” said Jason Gurda, a Leerink Swann & Co. analyst in New York.
“We’ve seen consistently for the entire industry that the medical-cost trend has come in below expectations, and it’s unclear why Aetna would be different.”
Insurers have reported lower-than-expected medical costs the last two years, as Americans cut back on health care to save money. Aetna simply did a better job of predicting costs in the fourth quarter of 2011, after months in which spending came in under projections, said Chief Financial Officer Joseph Zubretsky. As a result, there were no reserves left over to add to first-quarter earnings, he said.
“At some point, it has to flatten, bottom out, and begin to increase again, all of which was in line with our forecasts,” Zubretsky said by telephone. “We just believe the consumer has been retrenched for two years and that some element of that will come back into the marketplace.”
‘Fundamentals Are Strong’
Aetna’s “fundamentals are strong” based on the first quarter, he said. The company had a 9.4 percent profit margin, at the high end of its prior forecast, and revenue rose over the year-earlier period for the first time since December 2009. “Those are all good numbers,” the CFO said.
First-quarter net income dropped 13 percent to $511 million, or $1.43 a share, Aetna said in a statement. Revenue climbed 6.2 percent to $8.86 billion from a year earlier.
The revenue beat analysts’ estimates while the medical costs were only slightly higher, said Chris Rigg, a Susquehanna Financial Group analyst, said by telephone.
“That suggests to us the company’s outlook for the full year still remains achievable,” Rigg said. “There’s nothing that says the wheels are off the wagon here.”
Aetna shares had gained 27 percent in the 12 months before today.
Enrollment in Aetna’s medical plans rose to 17.9 million people, from 17.8 million a year earlier. The company said it expected to add 300,000 more members by year’s end.
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