2nd UPDATE: Aetna 4Q Profit Up 30%, Dividend Raised; Strong View

Aetna Inc. (AET) posted a 30% increase in fourth-quarter profit, offered a far better-than-expected 2011 forecast and significantly raised its dividend as the health insurer benefited from people's lighter-than-usual use of medical services and new pricing on its health plans.

Unlike some of its large peers, Aetna expects an increase in 2011 earnings per share, in spite of additional expenses hitting the industry from the new U.S. health-coverage overhaul, a related shrinking of underwriting margins, ongoing enrollment declines, lower interest income and a likely acceleration in patients' demand for medical care. Aetna does expect lower operating earnings this year on a dollar basis.

Favorable terms in Aetna's contracts with providers such as hospitals, the pricing of health plans to an "appropriate margin," and a lower hit from costs tied to unemployed enrollees on Cobra insurance are expected to boost this year's profit, executives said. Aetna now also expects that the benefits of its pharmacy benefit outsourcing contract with CVS Caremark Corp. (CVS) will outpace transitional expenses this year and contribute modestly to operating EPS.

In addition, Aetna expects recent changes in its pension plan, share buybacks and tight management of overhead expenses to help earnings this year, Chief Financial Officer Joseph Zubretsky said.

Both the fourth-quarter results and 2011 view exceeded Street views, with Aetna projecting full-year earnings per share of $3.70 to $3.80, compared with analysts' average estimate of $3.27.

The news recently lifted Aetna shares more than 9%, or $3.09, to $36.36. Earlier the stock surpassed $38 for the first time since October 2008.

Aetna's board instituted a quarterly dividend of 15 cents a share, versus its previous 4-cent annual payout. The move will cost an additional $225.9 million a year.

"These results reflect strong operating fundamentals across all aspects of our business," Aetna Chairman Ronald Williams, who is leaving the company in April, said. The dividend increase, he added on a conference call, "will still allow us to make ongoing investments in our core business, maintain a robust share repurchase program, and pursue our strategic diversification initiatives."

The 2011 outlook assumes a first-quarter decline in medical membership of 680,000, bringing total medical membership to 17.8 million at the end of the first quarter, in line with prior guidance, Zubretsky said. Membership is projected to be flat the rest of the year.

The 2011 forecast also assumes higher growth in medical costs as the industry expects demand to return to normal levels, offset by continued improvements in contracts with providers and fewer costs associated with Cobra insurance, President and Chief Executive Mark Bertolini said.

Aetna attributed fourth-quarter and 2010 results to higher commercial underwriting margins driven by management steps to appropriately price plans, members' lower utilization of services and a lower share count, partly offset by a decline in commercial health-plan enrollment.

Aetna reported a profit of $215.6 million, or 53 cents a share, up from $165.9 million, or 38 cents a share, a year earlier. Excluding restructuring-related costs, capital gains impacts and other items, earnings climbed to 63 cents from 40 cents. Revenue, excluding capital gains, decreased 2% to $8.51 billion as premium revenue dropped 3.3%. Analysts polled by Thomson Reuters most recently forecast earnings of 62 cents on revenue of $8.4 billion.

Total medical membership was 18.5 million at year's end, falling 60,000 sequentially.

Aetna reported that its total medical loss ratio, or the amount of premiums used to pay patient medical costs, declined to 83% from 85.4% a year earlier. The company's 2010 commercial MLR was 80.6%, and Aetna projects the figure will land near 82% in 2011. Last year, the commercial MLR was helped by recognition of claims reserves that didn't have to be used in prior periods, a favorable factor the company doesn't expect will recur in 2011.

"Given that Aetna guided well below the Street last year, the much stronger 2011 guidance comes as a positive surprise to us," Deutsche Bank analyst Scott Fidel said.

Goldman Sachs analyst Matthew Borsch said the 2011 guidance suggests Aetna is seeing less of a hit from overhaul mandates than he expected.

Analysts noted that overhead expenses pressed on fourth-quarter results. Aetna spent $32 million last year on implementing overhaul regulations, $40 million on establishing the CVS Caremark relationship and $30 million on preparing for changes going into effect in 2013 in the diagnostic coding system used in billing in the U.S.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; dinah.brin@dowjones.com

-Tess Stynes contributed to this story.

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