Aetna to Restate Earnings

The move comes after an SEC review.
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Updated from 9:41 a.m. EST

Aetna

(AET)

, the largest health insurance company in the U.S., announced Tuesday that it would restate its earnings for all of 1998 and the first three quarters of 1999 due to the completion of a review by the

Securities and Exchange Commission

.

Shares of Hartford-based Aetna were up 3 5/16, or 6%, to 56 9/16 in afternoon trading because of "the end of the uncertainty overhanging the company," said analyst Todd Richter of

Banc of America Securities

. He rates Aetna a market performer and his firm has done no recent underwriting for the company.

"It never helps to have an SEC review hanging over your head," said analyst John Rex of

Bear Stearns

. He rates Aetna an attractive and his firm has done no recent underwriting for the company.

Last October, Aetna disclosed the SEC review, which reviewed public filings related to the company's acquisitions and divestitures. It covered filings from 1998 and 1999 including financial statements from 1996 through Sept. 30, 1999.

Because Aetna entered into a long-term agreement with

Magellan Health Services

(MGL)

after selling

Human Affairs International

to it in December 1997, Aetna has agreed to reclassify its operating income to capital gains. Operating earnings for 1998 will be reduced by about $39 million after tax, with a $39 million capital gain reflected in the third quarter of 1999.

Operating earnings for the first three quarters of 1999 will each be reduced by about $10 million after tax and the company expects the same to occur in the fourth quarter of 1999.

Future amounts earned by Aetna from the agreement, which ends in 2002, will be reflected as capital gains.

The restatements will reduce 1999 first- and second-quarter net income by about $10 million, or 7 cents a share, and increase third-quarter net income by about $30 million, or 20 cents a share. There is no effect on 1998 net income.

Aetna also agreed to accounting changes at

Prudential HealthCare

, which it bought in 1999. The changes will increase third-quarter 1999 operating earnings by less than $1 million and will likely result in a $7 million after-tax reduction in operating earnings for the fourth quarter of 1999, according to the company.

"The review was resolved as expected," said Richter. "There is no impact on the company's cash earnings or growth rate. It's just a matter of moving money around from one bucket to another."

"It was not as bad as the worst-case scenario," said Rex, who added that if the SEC had completely disagreed with Aetna's accounting, the charge could have been as high as $1 a share. He, like many Wall Street analysts, has revised his fourth-quarter 1999 and year 2000 estimates, reducing the former by 12 cents and the latter by 28 cents.

Currently, the

First Call/Thomson Financial

consensus estimate for the fourth quarter is $1.20, while the estimate for the year 2000 is $5.43. Aetna will release its fourth-quarter earnings on Feb. 8.