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Updated from 8:56 a.m. EST

Shares of



tumbled 14%, even though it seemingly smashed earnings expectations for the fourth quarter by 8 cents.

But Wall Street had sharply lowered its estimates for the biggest U.S. managed-care company last week after Aetna cut back its forecast for the quarter following a review of its financial statements by the

Securities and Exchange Commission


The company's earnings were also buoyed by a lower tax rate and a one-time capital gain, raising flags on Wall Street about Aetna's operating earnings.

Aetna's stock was down 7 15/16 to 47 13/16 around midday Tuesday. (It closed down 9 3/4, or 17.5%, at 46.)

The company, which is based in Hartford, Conn., said Tuesday that for the fourth quarter ended Dec. 31 its earnings rose 30%, to $173 million, or $1.18 a diluted share, from $144.5 million, or 91 cents a share, a year earlier. The company attributed the gains to faster-than-expected growth in membership in its health maintenance organization.

Revenue, including net realized capital gains or losses, rose 35% to $7.75 billion from $5.76 billion a year ago, mainly because of last year's acquisition of

Prudential HealthCare

, Aetna said.

Analysts surveyed by

First Call/Thomson Financial

had projected earnings of $1.10 a share in the latest quarter. But many analysts decreased their estimates a week ago after Aetna announced the impact of the SEC review. Because of the review, the company said it expected fourth-quarter earnings would be reduced by about $10 million after tax. The SEC also mandated that earnings for all of 1998 and the first three quarters of 1999 be restated.

The company's tax rate also fell to 31% this quarter from 38% to 40% the past few quarters. "All of the amount by which the company exceeded earnings was produced by the low tax rate," said Lori Price, an analyst at

CIBC World Markets

. "If you exclude that rate, earnings would have been in line or disappointed by a penny." She rates Aetna a hold and her firm has done no underwriting for the company.

For the

Aetna U.S. Healthcare

managed-care unit, which posted a 12.6% increase in operating earnings over year-ago figures, "the quality of earnings was very weak," Price said. "Deterioration of medical cost trends on the Pru side was expected," she added, referring to the acquired Prudential unit, "but there was higher-than-expected erosion in Aetna's core plans."

Excluding Prudential HealthCare, margins declined significantly, with the commercial medical loss ratio rising to 83.1% from 82.6% and the


medical loss ratio surging to 95.3% from 90.9%. The medical loss ratio at Pru was 87.9% for commercial plans and 98.2% for Medicare-risk plans.

"The company has been asking for higher pricing, but not high enough pricing, given what cost trends are today," Price commented.

Even so, Aetna U.S. Healthcare's commercial HMO membership, excluding Prudential, grew 3.1% from the third quarter and 12% from the end of 1998. Including Prudential's 5.1 million members, total health membership totaled 21 million at the end of 1999.

The non-health business experienced a weak quarter internationally.

Aetna International

reported operating earnings in the fourth quarter, before year 2000 costs, of $52.7 million, compared to $45 million a year earlier. However, the increase includes a $33 million capital gain from the sale of its holding in a Brazilian affiliate.

Without that gain, operating earnings would have declined significantly because of losses in Brazil, the lack of earnings from the Canadian operation which was divested in October and the impact of the earthquake in Taiwan.

"That's beginning to turn around," Price said of the non-health business, "and will likely be resolved over the next few quarters."

Goldman Sachs

also downgraded the company Tuesday morning to market performer from market outperformer.