Aetna’s Stock Sinks 20% on Cost Worries

Worried that medical costs will increase steeply after months of modest growth, investors sent shares of health insurers tumbling Thursday -- led by giant Aetna Inc., which plummeted 20%.

Some analysts, however, said health insurers continued to be profitable and that Thursday’s loss of investor confidence, which compounded weeks of declines in share prices, should not spur companies to make drastic changes or hike premiums to increase profit margins.

The Hartford, Conn.-based company reported that first-quarter earnings rose 3.2% to $401.7 million, or 68 cents a share, from $389.3 million, or 64 cents, a year earlier. Excluding one-time items, profit was 64 cents a share, up from 49 cents a year earlier and a penny more than analysts’ expectations.

Nonetheless, Aetna’s shares dropped $9.43 to $37, erasing more than $5 billion in market value. The drop had a ripple effect on other large insurers such as Indianapolis-based WellPoint Inc., whose shares declined 4.2%, and Woodland Hills-based Health Net Inc., which lost 6.5%.

Analysts attributed most of the sell-off in Aetna shares to an increase in the company’s “loss ratio” for medical, dental and other health insurance products. The ratio -- the amount paid by Aetna for covered services divided by the amount of premiums collected -- was 79.4%, up from 74.6%.

Citigroup analyst Charles Boorady cited the ratio among other factors in downgrading Aetna’s stock from a “buy” to a “sell.” Boorady also said there was evidence that the company was pricing premiums low to attract new customers.

Aetna reported it increased its membership in medical plans by 663,000 to 15.4 million. The company has 1.2 million members in California.

Ronald A. Williams, Aetna’s chief executive and president, sounded an upbeat note in a statement Thursday, saying the company “continues to deliver superior financial results.” Aetna increased its per-share earnings forecast for the full year to $2.74 to $2.76 from $2.71 to $2.74.

Aetna’s strong profit performance mirrored those of its competitors.

WellPoint, the No. 1 U.S. health insurer, Wednesday posted a 20% jump in first-quarter earnings. Last week, UnitedHealth Group Inc. reported that profit rose 21%.

Despite the strong profits, shares in these companies have been on a steady decline in recent weeks. Analysts say investors are concerned the companies cannot maintain the trend, a worry that was underscored by Aetna’s first-quarter loss ratio.

But Paul J. Newsome, a securities analyst with A.G. Edwards & Sons, said Aetna and the rest of the field would continue to be profitable. Overall, the rate of inflation for medical costs has dropped from about 12% a year ago to about 8%, Newsome said.

“These are very profitable companies that are typically very well run and there is constant need for their products,” he said. “I don’t think they will change the way they run their businesses” because of their share prices.

And some applauded the higher spending on medical care reported by Aetna.

“The fact that medical loss ratio is going up is a good thing -- it means more healthcare for patients,” said Jack Lewin, chief executive of the California Medical Assn. “Shareholders need to understand that spending more of the premium on patient care is a good thing in the long run, to maintain a good relationship with patients and doctors.”

Aetna also announced two retirements Thursday: Chairman John W. Rowe, 61, will step down Oct. 1, and Williams, 56, will replace him; Chief Financial Officer Alan Bennett, 55, plans to retire in the first quarter of 2007. Bennett has been finance chief since 2001.