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Updated from 5:43 p.m. EDT

Investors unloaded shares of health insurance provider



on Tuesday after the company warned second-quarter earnings will fail to meet Wall Street's expectations.

Aetna closed down 6 5/16, or 10.4%, at 59 11/16.

Based on about half of Aetna's second-quarter claims, including data from recently-acquired

Prudential HealthCare

, the company said earnings will be between 85 to 95 cents a share. Analysts polled by

First Call/Thomson Financial

had predicted $1.20 a share.

Hartford, Conn.-based Aetna attributed the projected shortfall to more people using their HMO plans and therefore raising HMO medical costs by as much as 10% to 12% in this year's second quarter vs. last year's, excluding Prudential. The company said it also encountered higher medical costs in its


HMO and

Prudential HealthCare HMO


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"At this point, no single reason has emerged; instead there are a number of causes, which vary in importance by region and market," Aetna Chairman and Chief Executive Officer William H. Donaldson said in a statement. "While our current-period information is not complete, we wanted to alert our shareholders to this rise in medical costs."

Analysts see Aetna's chief problems in the company itself. "I think, frankly, it's an Aetna problem more than it is an industry problem,"


analyst William McKeever said, citing an 8% industry rise in costs vs. Aetna's 10% to 12% rise.

Roberta Goodman, a

Merrill Lynch

analyst who rates Aetna neutral, said the struggle to integrate and turn around Prudential Healthcare while adapting to escalating costs and reigning aggressive methods strained the company. Furthermore, several members of senior management left without replacement. "So there are a number of factors that lead one to believe that hardly anyone was minding the store," Goodman said.

J.P. Morgan

analyst Weston Hicks, who has a buy rating on Aetna, described how the company "is transitioning from one of the most aggressive cost models to be, paraphrasing George Bush, a kindler, gentler HMO. The problem is when you doing that, costs accelerate."

Hicks noted, however, that the projected profit shortfall is hardly a fluke. Aetna has repeatedly posted disappointing earnings during the last few years, said Hicks. "This is just the latest chapter."

Goodman likewise said that although the relaxation of strong-arm tactics accounts for part of the projected earnings shortfall, Aetna also miscalculated expenses for the third and fourth quarters of 1999. "The company has underestimated too many costs in the past. They weren't pricing appropriately."

In response to the quarter's lower-than-expected earnings, Aetna said it planned to increase health plan premiums, beginning in the fourth quarter, and to re-evaluate products and customer with an eye toward maintaining or eliminating those who fail to meet financial or strategic targets.

Goodman said Aetna needs to replenish its management and institute better financial and operating controls to measure their cost appropriately. Hicks said should sell more than its ability to stifle costs. "


, I think, has the right business model. They have not sold the business based on medical cost control, but on breadth of service." Hicks and Goodman both said Aetna must price its product appropriately, and Goodman stressed the process will be a multiyear one.

Aetna's shares rose this year on expectations the company would sell all or part of its business. Shortly after Aetna's shares hit its lowest price in more than seven years - 38 1/2 in February - Dutch insurer

ING Groep

(ING) - Get ING Groep NV Report


Wellpoint Health Networks


offered to buy the company for $70 a share.

Aetna rejected that offer but may sell its financial services and international businesses to ING, in a deal likely to be worth nearly $8 billion. Aetna's U.S. health insurance unit, its primary business, would remain independent.

But without a deal on the table, analysts from

Salomon Smith Barney


Bear Stearns

downgraded Aetna today to neutral from, respectively, outperform and attractive.

Aetna will release second-quarter financial results on Aug. 4.