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Earnings Preview: Can Aetna beat on 2Q?

Tom Murphy, AP Business Writer

Investors want to see whether Aetna Inc. can turn in a strong second-quarter performance of its own Tuesday following good results from the country's other biggest health insurers.

WHAT TO WATCH FOR: The Hartford, Conn., company is the third-largest health insurer based on enrollment. The two companies ahead of it — UnitedHealth Group Inc. and WellPoint Inc. — have already reported second-quarter earnings that trounced expectations. Their recent performances gave a boost to other health insurance stocks, but Aetna shares already had a lot of momentum — it's up about 42 percent in 2013.

Investors have gobbled up health insurance shares this year. Analysts say they're growing more comfortable with the health care overhaul's impact on the sector.

The federal law aims to expand insurance coverage to millions of people over the next few years. Much of that growth starts next year, when the state and federally funded Medicaid program for the poor and disabled people expands and customers start using income-based subsidies to buy individual coverage through insurance exchanges.

That represents a wave of new business for health insurers, but investors have been wary of how fees and coverage restrictions imposed by the massive law will affect the sector.

However, WellPoint CEO Joseph Swedish told analysts on Wednesday that the exchanges and the Medicaid expansion could help the insurer grow. He said WellPoint's annual revenue could reach $90 billion by 2016 from the $71 billion it expects this year.

Aetna closed on a growth opportunity of its own in May, when it bought fellow health insurer Coventry Health Care Inc. for $6.9 billion. After completing the deal, it raised its forecast for full-year adjusted earnings to $5.70 to $5.85 per share from $5.50 to $5.60 per share.

Analysts will be looking for more insight into how that deal is affecting the company. The acquisition will help Aetna build its presence in Medicaid and the federally backed Medicare program.

Analysts also will want more insight into how the cost of providing coverage is changing for the insurer. Aetna and other health insurers have said the amount they pay in medical claims continues to climb mostly due to price increases, not from more people using health care. Medical costs are a health insurer's largest expense.

WHY IT MATTERS: Aetna provides health insurance for more than 18 million people. It also sells dental, group life and disability coverage.

WHAT'S EXPECTED: Analysts expect, on average, earnings of $1.40 per share on $11.9 billion in revenue, according to FactSet.

LAST YEAR'S QUARTER: Aetna's net income fell nearly 15 percent, largely because the insurer recorded a big gain from lower-than-expected leftover claims in the previous year's quarter. Profit came to $457.6 million, or $1.32 per share, as revenue climbed 6 percent to $8.84 billion.