Aetna Inc. (AET), the third-biggest U.S. health insurer, said third-quarter profit rose, defying analyst predictions for a decline, as the company boosted revenue from premiums and medical costs stayed stable.
Earnings excluding one-time costs climbed to $1.55 a share, 21 cents above the average estimate of 19 analysts tracked by Bloomberg. Full-year profit is now expected to be about $5.10 a share, at the top end of Aetna’s previous forecast, the Hartford, Connecticut-based carrier said today in a statement.
Chief Executive Officer Mark Bertolini announced the $5.6 billion purchase of Coventry Health Care Inc. (CVH) on Aug. 20, as Aetna expands into growing markets for government-backed Medicare and Medicaid plans. The insurers’ third-quarter surprise was driven largely by lower-than-expected medical costs in plans for private employers, said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York, in a note to clients.
The quarter’s results “should offer further relief to managed care investors,” following last week’s higher earnings from UnitedHealth Group Inc. (UNH), the biggest U.S. insurer, Gupte said. “Managed care fundamentals particularly within the commercial risk market are solid.”
Aetna gained 1.1 percent to $44.43 at the close in New York. The company’s shares have increased 5.3 percent this year.
UnitedHealth, based in Minnetonka, Minnesota, beat analysts’ estimates and raised its 2012 profit forecast on Oct. 16, citing moderating costs and rising enrollment. That followed a week after the company said it would pay $4.9 billion for a 90 percent stake in Amil Participacoes SA (AMIL3), Brazil’s largest managed-care provider.
While Aetna may expand into domestic insurance outside the U.S., for now it sees a better bet in selling information technology and other services that help emerging countries modernize their health systems, Joseph Zubretsky, the company’s chief financial officer, said in a telephone interview.
“Our future lies more in health-care services and health information technology than merely just in the insurance business,” he said. “Job one is to help foreign governments build out the health-care infrastructure of the future.”
Aetna already offers coverage for expatriate workers outside the U.S. It’s more active currently in the Middle East and Asia than Latin America, Zubretsky said.
“We have a lot of motivation and desire to grow overseas,” he said. “The meaningful revenue that we’ll get out of this is not in our strategic planning horizon. It’s beyond that. But we feel compelled to begin making the investment.”
Aetna expects earnings per share to rise in 2013, pushed by growing revenue from Medicare, the U.S.-backed program for the elderly and disabled, and Medicaid, the state-federal program for the poor, Zubretsky told analysts on a conference call earlier in the day. The company will give more details at a Dec. 12 conference, he said.
While government business grows, profits may be squeezed for the private-employer plans that make up the bulk of its membership, the CFO said. Some contracts will require the company to account for low medical costs this year by holding down premiums in 2013. And enrollment will be limited by the “lack of employment growth” in the U.S., Zubretsky said.
Third-quarter net income rose 1.8 percent to $499.2 million, or $1.47 a share, from $490.4 million, or $1.30, a year earlier. Revenue increased to $8.92 billion from $8.48 billion, helped by a 7 percent increase in customer premiums.
The company had 18.17 million people in medical plans at the end of the quarter, less than the 18.23 million a year earlier. The enrollment did grow from this year’s second quarter, and the company said it had already reached the goal it set for membership at the beginning of 2012.
The insurer spent 80.7 percent of the premiums it collected on medical care for members. That, too, was up from 78.9 percent a year earlier while still an improvement over the second quarter.
Aetna has been able to attract new customers this year without undercutting its profit margins, said Dave Shove, a BMO Capital Markets analyst in New York.
“Management has placed an emphasis on lowering costs and keeping margin intact, rather than chasing members with price,” Shove said in a note to clients yesterday.
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