Health insurance giant Aetna Inc. disclosed yesterday that the Securities and Exchange Commission is reviewing its accounting practices in relation to some recent acquisitions, including the company's $1 billion purchase of Prudential Insurance Co. of America's health-care unit.
At the same time, Aetna reported a 27 percent rise in earnings despite problems it has been having integrating the money-losing Prudential business into its own. Aetna's stock dipped 7.7 percent late last month when officials told analysts that losses at the Prudential unit were running at $200 million a year.
Aetna officials, though, expressed confidence yesterday that they would be able to get the Prudential situation under control, and several analysts agreed.
Arun Kumar, head of Standard & Poor's Corp.'s health research group, called Aetna's results "overall quite strong." He said that it was difficult to gauge the magnitude of either the SEC review or the Prudential situation but "we expect Aetna to institute fairly strong measures to improve the operating performance of Prudential. It's unlikely Aetna would let Prudential drag it down for any length of time."
One concern for analysts is that Aetna is entitled to receive a stream of payments from Prudential to help cover any shortfalls from the unit, but that those payments might run out before the unit is turned around.
In fact, the accounting treatment of those payments is an issue in the SEC review.
Under terms of the acquisition deal, Aetna is to provide administrative services to Prudential and be paid for them. Also, if the medical loss ratio on the health business Aetna acquired from Prudential exceeds a certain target, Prudential is to pay for a majority of that excess.
The company has treated those payments as fee income, a treatment that might be challenged. If another treatment were to be required, however, the actual cash flows would not be affected, a spokeswoman said.
Aetna's vice chairman and chief financial officer, Alan Weber, said the SEC review covers all the company's public filings, and he suggested that it is routine.
"We believe our accounting is appropriate," Weber said. "To put it in a context, we and other companies are generally reviewed every three years or so. We were last reviewed in 1996, so there we are."
Weber said that with the payments the Prudential unit has been making money, and operating losses are shrinking. The payments end about the end of next year, he said, and "by the beginning of 2001 we plan to be earning money in that business in its own right."
"We actually are very pleased with how Prudential is turning out," Weber said.