By Lewis Krauskopf
NEW YORK (Reuters) - Health insurer Aetna Inc
The surprise forecast from the No 3. U.S. health insurer, supported by operating cost cuts and share buybacks, comes after rivals such as UnitedHealth Group Inc
"They're the first managed care company to guide up" for 2011, said David Heupel, a portfolio manager with Thrivent Investment Management, which holds Aetna shares. "It's a very surprising turn of events."
Aetna, which also posted a slightly higher-than-expected quarterly profit, forecast 2011 operating earnings, excluding items, of $3.70 per share to $3.80 per share. Analysts were looking for $3.27.
Aetna's forecast equates to slightly higher operating earnings per share in 2011 than the $3.68 per share it reported for 2010.
Aetna said moves to lower operating costs, changes to its pension plan and a lower share count from share buybacks are helping 2011 per-share results. Those positive factors are countering projected drops in membership and investment income, among other negative pressures.
The industry faces new spending rules this year from the healthcare overhaul law that may cut into profits and is factoring in a rebound in use of medical services after Americans avoided procedures in 2010 to save money.
"We're very pleased with our outlook," Chief Financial Officer Joseph Zubretsky said in an interview.
"The caution is that it's still a very difficult economy; employers have a lot of cost pressure; you're never exactly sure about a resurgence in utilization," the CFO said.
Even as other insurers have projected lower 2011 profit, many analysts have deemed those forecasts to be conservative.
"The overall take is that reform is not as bad as everybody has been fearing and there are ways to mitigate the headwinds from reform and enjoy nice year-over-year EPS growth," Sanford Bernstein analyst Ana Gupte said. "They're guiding obviously conservatively ... so there must be upside to the number."
With regard to the new U.S. rules, Zubretsky said: "We think we have our arms around them and know how they'll emerge financially, but there's risk to that as well."
Aetna shares were up $3.13, or 9.4 percent, to $36.40 in late morning trading on the New York Stock Exchange, after climbing as high as $38.08 earlier in the session -- their highest level in more than two years.
Shares of rival insurers, which have outperformed the broader market substantially in 2011, were mixed after Aetna's report. UnitedHealth shares were off 1.2 percent, while shares of WellPoint Inc
INDUSTRY'S HIGHEST DIVIDEND
Aetna said it increased its cash dividend to 15 cents per share per quarter, equating to an annual payout of 60 cents -- up substantially from its previous payout of 4 cents per year.
The move follows a similarly sharp dividend increase from UnitedHealth last year [ID:nN26188186]. Wall Street has speculated that the largest insurers could return more cash to shareholders.
Citigroup analyst Carl McDonald noted Aetna's dividend yield of 1.8 percent was slightly better than UnitedHealth's 1.2 percent yield. McDonald said he expects WellPoint to institute a dividend yield of 2 percent later this month.
"Aetna now has the highest dividend in the managed care sector, and should attract long-only money from dividend only funds and spark multiple expansion," Gupte said in a research note.
Despite the new use for the company's capital, Zubretsky said the higher dividend will "not inhibit in any way our ability to execute M&A."
Aetna said fourth-quarter profit rose 30 percent to $215.6 million, or 53 cents per share, from $165.9 million, or 38 cents per share, a year earlier.
Excluding items, earnings of 63 cents per share topped analysts' estimates by 1 cent, according to Thomson Reuters
I/B/E/S.
Revenue slipped more than 2 percent to $8.54 billion.
Rival health insurers have beaten analyst forecasts more significantly for the fourth quarter. Wells Fargo analyst Peter Costa said he suspected Aetna decided to boost operating expenses in the quarter as the company repositions under new Chief Executive Officer Mark Bertolini and for its new pharmacy benefit deal with CVS Caremark Corp
Bertolini, who ascended to the CEO job at the end of last year, wants to diversify the health insurer into information technology and international markets.
(Reporting by Lewis Krauskopf; Editing by Gerald E. McCormick, Dave Zimmerman)
