By Manojna Maddipatla

(Reuters) -U.S. health insurer Anthem Inc on Wednesday issued a conservative annual profit forecast and warned that the highly contagious Omicron variant was likely to drive up treatment, vaccination and testing costs in the first quarter.

Since the start of the pandemic, profits of health insurers have come under pressure as huge costs related to direct COVID-19 treatment and tests cancel out any advantage gained from lower expenses due to delays in elective procedures.

“We anticipate another year in which the overall cost of care will track above normalized levels driven by COVID-related treatment, vaccination and testing costs,” Chief Financial Officer John Gallina said.

Anthem shares fell about 1.3% in early morning trading after the insurer forecast 2022 adjusted profit of at least $28.25 per share, below market expectation of $28.65, according to Refinitiv data and in line with its preliminary guidance.

The company’s comments on medical costs combined with a largely in-line fourth quarter are weighing on Anthem’s stock, Credit Suisse analyst A.J. Rice said.

“I don’t see anything that really changes our perspective on the stock. Anthem is one of the preferred names in managed care right now. This (stock move) will be short lived.”

In contrast, rival UnitedHealth Group had last week predicted softer blow this year from the pandemic on expectation that added costs related to the Omicron surge would be offset by delays in non-urgent healthcare procedures.

Anthem said it expects annual benefit expense ratio – the percentage of premiums paid for medical services – to be between 87.5% and 88.5%. The midpoint is above analysts’ estimate of 87.50%.

The lower the ratio, the better it is for a health insurer as it indicates a tight rein on costs. For Anthem, it was 87.5% in 2021, mainly due to rise in costs related to COVID-related care.

(Reporting by Manojna Maddipatla in Bengaluru; Editing by Arun Koyyur)