Aetna 3Q profit falls on investment losses

INDIANAPOLIS - Investment losses nearly chopped Aetna's third-quarter profit in half, and the managed care company said shaky financial markets create uncertainty for next year as well.

But analysts and company leaders say Hartford, Conn.-based Aetna Inc.'s business and investment portfolio of more than $18 billion remains sound.

Aetna said Wednesday its third-quarter earnings dropped 44 percent to $277.3 million, or 58 cents per share, compared with $496.7 million, or 95 cents per share, in the same quarter last year. Revenue rose 9.5 percent to $7.62 billion from $6.96 billion.

After-tax capital losses of $232 million were the main driver behind the drop.

"This is the worst credit environment in the past 100 years, so we've taken a few lumps in the portfolio," said Aetna Chief Financial Officer Joe Zubretsky. "But it's still a well-diversified portfolio. We have the ability to hold these assets for the long term ... so we will manage through this."

Aetna's adjusted earnings amounted to $1.12 per share, excluding capital losses of 48 cents per share and a 6 cents per share allowance recorded against a reinsurance recoverable from a unit of Lehman Brothers Holdings.

Analysts, who normally exclude items, expected a profit of $1.12 per share on higher revenue of $7.92 billion, according to a poll by Thomson Reuters.

Company shares fell 8.1 percent, or $2.25, to $25.55 Wednesday.

Oppenheimer analyst Carl McDonald said in a note to investors the results were "not exactly what we were looking for."

"Still, it shouldn't go unnoticed that Aetna's fundamental business continues to perform well," he wrote.

Goldman Sachs analyst Matthew Borsch said in a separate note that investors "should be relieved that the balance sheet and liquidity more than withstood the stress test, with investment impairments at the lower end of our model."

The majority of the company's revenue came from commercial health care premiums, which rose 8 percent to $5.09 billion. Medicare premiums nearly doubled to $1.21 billion, and Medicaid premiums rose 72 percent to $154.3 million.

Overall membership grew 1 percent to 17.7 million, with gains in the commercial and Medicaid enrollment offsetting a decline in Medicare membership.

But the insurer reduced its full-year operating earnings guidance to between $3.90 and $3.95 per share, after reaffirming in July that it expected $4 per share for 2008. Analysts polled by Thomson Reuters expect $4 per share, on average.

"(The reduction) is the direct result of the turbulent investment environment, rather than health care underwriting performance," Aetna CEO Ronald A. Williams said.

The company also said operating earnings per share will increase next year between 3 percent and 5 percent over 2008. But Williams and Zubretsky said uncertain created by the economy and capital markets prevented them from providing more details.

Next year, Aetna may have to account for pension investment losses incurred this year due to the market. It also may have to deal with more companies reducing or dropping benefits and an increase in claims with patients using their health care benefits before they lose them with a layoff.

But Zubretsky also noted that the insurer is still repurchasing shares and retaining dividends from subsidiaries.

"The real key here is did you have to alter your capital plan that creates shareholder value based on the investment environment, and the answer is no," he said.

Aetna joined fellow managed-care companies Humana Inc., Coventry Health Care Inc. and UnitedHealth Group Inc. in reporting double-digit profit decreases for the quarter.

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AP Business Writer Damian J. Troise in New York contributed to this report.

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