Insurer Aetna reports 2nd-quarter profit of $491 million on lower health care costs

Aetna posts higher 2Q profit up 42 percent

LOS ANGELES — Health insurer Aetna Inc. says its second-quarter profit rose 42 percent, as the percentage of premiums the company spent on medical care fell versus a year ago.

The insurer said late Tuesday it earned $491 million, or $1.14 a share, in the three months ended June 30. That compares with net income of $346.6 million, or 77 cents a share, in the same period last year.

Aetna earned $450.2 million, or $1.05 a share, excluding one-time items. The company also raised its forecast for its 2010 operating earnings.

Total second-quarter revenue fell to $8.54 billion from $8.67 billion, in part due to a drop in premium revenue from lower commercial insured membership.

Analyst polled by Thomson Reuters forecast a profit of 74 cents per share on revenue of $8.49 billion. Analyst estimates usually exclude one-time costs and gains.

Health insurance is Aetna’s main product, but it also sells dental, group life and disability coverage.

Aetna credited its earnings increase on a higher commercial underwriting margin from favorable prior-quarter reserve development and improved performance.

The company, based in Hartford, Conn., reported $127.6 million in gains from favorable reserve development compared to a loss of $42.3 million a year ago. Most of the gains came from its commercial insurance business.

Last year, Aetna struggled with costs that rose faster than it expected when it set prices, due in part to the slumping economy. That caused it to reprice a big portion of its commercial insurance.

In the second quarter, the insurer spent 81.8 percent of its premium revenue on medical care, down from 86.8 percent. It spent 80.1 percent of its premium revenue on medical care for its commercial insurance business, down from 85.9 percent.

Major health insurers struggled last year with costs and enrollment losses tied to the recession, as employers cut jobs and reduced the number of people covered by their insurance. But companies have shown signs this year that trend may be slowing.

UnitedHealth Group Inc. said last week its 2010 second-quarter net income rose 31 percent from a year ago, as costs and enrollment came in better than expected.

The health care reform law passed earlier this year will require insurers to spend at least 85 percent of their premium revenue on medical care for large group coverage and 80 percent for individual and small group coverage. But details of that law have yet to be ironed out, and its impact on insurer bottom lines is uncertain.

Aetna is the third largest commercial health insurer based on enrollment, trailing WellPoint Inc. and UnitedHealth Group.

It had 18.6 million total members at the end of June, down from about 19.1 million members in June 2009. Compared to a year ago, commercial enrollment fell by 632,000 because of high unemployment. The company gained some Medicare and Medicaid members.

The company said it expects full-year operating results per share to range between $3.05 and $3.15. That’s up from prior guidance of a range of $2.75 to $2.85 per share.

Meanwhile, Aetna said Tuesday it has signed a 12-year deal with CVS Caremark to provide pharmacy benefit management services.

Financial details of the agreement were not disclosed.

Under the terms of the deal, CVS will serve roughly 9.7 million Aetna pharmacy benefit management members and administer about $9.5 billion in annual drug spending.

Aetna shares fell 36 cents to $28 in aftermarket trading after shedding 22 cents to $28.36 during the regular session.