Aetna's 3rd quarter is shy of estimates Slumping stock falls another 10.5% after announcement

Insurance

September 30, 1997|By BLOOMBERG NEWS

HARTFORD, Conn. -- Aetna Inc. said it will take a charge of up to $105 million in the third quarter because of higher managed health care costs, causing earnings to fall short of estimates.

The insurance and health care services company's shares fell 10.5 percent after the announcement, and are down about 31 percent since August on mounting concerns about rising medical costs and competition.

The news reflects the troubles that Aetna is having expanding into the managed health care business, particularly in integrating its $8.2 billion purchase of U.S. Healthcare Corp. At the same time, increased competition in the managed care, or health maintenance organization, industry is making it difficult for companies to increase prices to cover rising costs.

"The industry is under severe price pressures because of competition," said Ira Zuckerman, an analyst at Nutmeg Securities. "They aren't the only ones suffering."

The company's shares fell $8.50 yesterday to $81 in trading of 7.3 million shares, about five times the average daily volume in the past three months. The shares are down from a 52-week high of $118.125 in August.

Aetna, the biggest managed health care company in the United States, said it expects to earn 95 cents to $1.10 a share in the quarter -- below an average estimate of $1.31 a share in a recent survey of 11 analysts by IBES International Inc. "Recently, it became clear that HMO medical costs in this and prior periods were higher than we originally estimated," said Richard Huber, chief executive and president. "This new information has affected our outlook for the third and fourth quarters."

Some analysts said that, until now, Aetna didn't indicate that it was having any difficulty swallowing U.S. Healthcare.

"Aetna wasn't forthright with investors and that cuts into their credibility," said Cathy Seifert, an analyst with Standard & Poor's equity group. "Right now, I don't have any sense of when they will get things turned around."

Huber said the company is also suffering from a higher level of unpaid medical claims in this and prior quarters, for which it expects to take a charge of $75 million to $105 million. Unpaid claims consist of insurance claims it has received, but hasn't paid, and claims for which it expects to be billed at higher-than-expected costs.

Also contributing is the cost of system integration, consolidating service centers and personnel training related to the U.S. Healthcare purchase.

"It's going to take us a little longer than expected to complete the integration," Huber said. "We have instituted a series of measures to better analyze and manage unpaid claims and to improve claims handling, which should help better control costs," he said.

It will be the second straight disappointing quarter for Aetna. The company's shares tumbled $14.25 to $102.75 after its second-quarter earnings report in early August signaled industry competition was mounting.

The company's purchase of U.S. Healthcare in July 1996 was part of a strategy to take advantage of the fast-growing managed care business. As part of that strategy, last year Aetna sold its slow growth property and casualty unit to Travelers Group Inc. for $4 billion.

Soon thereafter, Aetna said it would cut its work force by 13 percent, or 4,400 people, and take charges of $307 million.

Pub Date: 9/30/97

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