News Column

Aetna Reports Second-Quarter 2014 Results

July 29, 2014

  • Second-quarter 2014 operating earnings per share (1)$1.69
  • Net income (2) per share $1.52
  • Medical membership increased in the second quarter of 2014 and totaled 23.1 million at June 30, 2014, a sequential increase of 385,000 members
  • Second-quarter 2014 operating revenue (3) was $14.5 billion, a 25 percent increase over the corresponding period in 2013
  • Aetna now projects full-year 2014 operating earnings per share of $6.45 to $6.60(4)

    HARTFORD, Conn.--(BUSINESS WIRE)-- Aetna (NYSE: AET) announced second-quarter 2014 operating earnings (1) of $610.0 million, or $1.69 per share, a per share increase of 4 percent over the second quarter of 2013. Net income (2) for the second quarter of 2014 was $548.8 million, or $1.52 per share. Net income for the quarter includes $0.17 per share of net charges, which are detailed in the Summary of Results table.

     
    Second-Quarter Financial Results at a Glance
    (Millions, except per share results)         2014     2013     Change
    Operating revenue (3)         $ 14,485.6     $ 11,559.4     25 %
    Total revenue 14,509.4 11,537.4 26 %
    Operating earnings (1) 610.0 582.6 5 %
    Net income (2) 548.8 536.0 2 %
     
    Per share results:
    Operating earnings (1) $ 1.69 $ 1.62 4 %
    Net income (2) 1.52 1.49 2 %
     
    Weighted average common shares - diluted           360.3       360.1      
     


    “Aetna reported solid results across multiple business lines this quarter, achieving record results for medical membership of 23.1 million members and operating revenues of $14.5 billion,” said Mark T. Bertolini, Aetna chairman, CEO and president. “Based on our second-quarter performance, we are raising our projection for full-year 2014 operating earnings per share to a range of $6.45 to $6.60 from our previous projection of $6.35 to $6.55 per share.

    “Our results speak to the strength of our diversified portfolio of businesses and our ability to succeed across many fronts. We also continue to experience moderate medical cost trends, and now project Aetna's standalone 2014 Commercial medical cost trend will be in the lower half of our projected range of 6 percent to 7 percent. Our year-to-date results give us increased confidence in our ability to achieve our targeted high single-digit pretax operating margin again in 2014,” said Bertolini.

    “We also continued to make headway in accelerating Coventry synergies into this year, and for the second time are increasing our 2014 operating earnings per share accretion projection,” said Shawn M. Guertin, Aetna executive vice president and CFO. “Based on our progress to date, and our current projections of operating expense savings, we are raising our 2014 Coventry accretion projection by $0.05 to $0.10 per share to a range of $0.55 to $0.60 per share. We continue to project $0.90 per share of accretion in 2015.

    “We are pleased with our second-quarter operating results, which were supported by strong operating revenue growth and cash flow, as well as solid operating margins. With this solid performance, we are increasing both our year-end medical membership projection to approximately 23.4 million members from the previous projection of more than 23 million and our full-year 2014 operating revenue projection to at least $57 billion from our previous range of $56 billion to $57 billion,” said Guertin.

    Total company results

  • Operating earnings (1) were $610.0 million for the second quarter of 2014 compared with $582.6 million for the second quarter of 2013. The increase in operating earnings is primarily due to the inclusion of approximately one additional month of Coventry financial results in 2014 as well as higher underwriting margins in our Group Insurance segment partially offset by the year-over-year decrease in favorable development of prior-period health care cost estimates in 2014.
  • Operating revenues (3)for the second quarter of 2014 were $14.5 billion compared with $11.6 billion for the second quarter of 2013. The 25 percent increase in operating revenues is primarily the result of higher Health Care premiums from approximately one additional month of revenue in 2014 from the Coventry acquisition, membership growth in our Health Care businesses and the effects of pricing actions designed to recover Health Care Reform mandated fees and taxes. Total revenue was $14.5 billion and $11.5 billion for the second quarters of 2014 and 2013, respectively.
  • Operating Expenses (1)were $2.5 billion for the second quarter of 2014. The operating expense ratio (5) was 17.6 percent and 17.7 percent for the second quarters of 2014 and 2013, respectively. The operating expense ratio was relatively flat as improvement from the operating revenue growth described above and continued execution of our expense initiatives, including execution on our Coventry-related cost synergies, were almost entirely offset by the inclusion of Health Care Reform mandated fees. The total company expense ratio was 17.9 percent and 18.2 percent for the second quarters of 2014 and 2013, respectively.
  • Pretax Operating Margin (6) was 7.6 percent for the second quarter of 2014 compared with 8.4 percent for the second quarter of 2013. The decrease in the pretax operating margin is primarily driven by a higher percentage of our 2014 operating revenue being derived from our Government business and our 2014 public exchange membership, partially offset by pricing actions designed to recover the income tax effects of the non-deductible Health Care Reform mandated health insurer fee. For the second quarter of 2014, the after-tax net income margin was 3.8 percent compared with 4.6 percent for the second quarter of 2013.
  • Effective tax rate for the second quarter of 2014 was 41 percent compared with 37 percent for the second quarter of 2013. The increase in the effective tax rate is primarily driven by the non-deductibility of the Health Care Reform mandated health insurer fee.
  • Share Repurchases totaled 3.3 million shares at a cost of $255 million for the second quarter of 2014.

    Health Care business results

    Health Care, which provides a full range of insured and self-insured medical, pharmacy, dental and behavioral health products and services, reported:

  • Operating earnings (1) of $584.3 million for the second quarter of 2014 compared with $592.1 million for the second quarter of 2013. Operating earnings were relatively flat in the second quarter of 2014 when compared to the second quarter of 2013 primarily as a result of the year-over-year decrease in favorable development of prior-period health care cost estimates in 2014 substantially offset by the inclusion of approximately one additional month of Coventry financial results in 2014.
  • Net income (2) was $521.1 million for the second quarter of 2014 compared with $466.3 million for the second quarter of 2013.
  • Operating revenues (3) of $13.8 billion for the second quarter of 2014 compared with $10.9 billion for the second quarter of 2013. The 27 percent increase is due primarily to the inclusion of approximately one additional month of revenue in 2014 from the Coventry acquisition and membership growth, in both our Commercial and Government businesses, as well as the effects of pricing actions designed to recover Health Care Reform mandated fees and taxes. Total revenue was $13.8 billion and $10.8 billion for the second quarters of 2014 and 2013, respectively.
  • Sequentially, second-quarter 2014 medical membership increased by 385,000 due to growth in our Commercial Insured and Government products as well as the inclusion of membership from our acquisition of the InterGlobal group.
  • Medical benefit ratios (MBRs) for the three and six months ended June 30, 2014 and 2013 were as follows:
                           
    Three Months EndedSix Months Ended
    June 30,June 30,
              2014   2013     2014   2013
    Commercial 80.6 %   79.1 % 78.9 %   79.0 %
    Government (7)         86.5 %   88.3 %     85.6 %   88.2 %
    Health Care         83.1 %   82.5 %     81.8 %   82.3 %
     

    Our second-quarter 2014 Commercial MBR increased primarily as a result of the year-over-year decrease in favorable development of prior-period health care cost estimates in 2014, costs associated with new hepatitis C treatments, and our 2014 public exchange membership, partially offset by higher premiums driven in part by pricing actions designed to recover Health Care Reform mandated fees and taxes. Our second-quarter 2014 Government MBR improved primarily from actions impacting revenue and medical costs designed to solve for the gap between Medicare premiums and medical costs and other expenses, including the health insurer fee.

  • In the second quarter of 2014, we experienced favorable development of prior-period health care cost estimates in both our Commercial and Government businesses, primarily attributable to 2014 performance.
  • Prior-years' health care costs payable estimates developed favorably by $531.9 million and $369.6 million during the first half of 2014 and 2013, respectively. The May 7, 2013 acquisition of Coventry significantly impacts the year-over-year comparability of prior years' development. This development is reported on a basis consistent with the prior years' development reported in the health care costs payable table in our annual audited financial statements and does not directly correspond to an increase in our 2014 operating results.

    Group Insurance business results

    Group Insurance, which includes group life, disability and long-term care products, reported:

  • Operating earnings (1) of $60.6 million for the second quarter of 2014 compared with $30.6 million for the second quarter of 2013, primarily due to higher underwriting margins, reflecting improved experience in our Life and Disability products. The second quarter of 2014 life underwriting margin is more consistent with historical experience than the second quarter of 2013.
  • Net income (2) of $61.4 million for the second quarter of 2014 compared with $60.3 million for the second quarter of 2013. Net income for the second quarter of 2013 included a $32.1 million after-tax benefit related to the settlement of a reinsurance recoverable.
  • Operating revenues (3) of $626.4 million for the second quarter of 2014, an 8 percent increase over $582.4 million for the second quarter of 2013. Total revenue was $627.7 million in the second quarter of 2014 and $587.1 million in the second quarter of 2013.

    Large Case Pensions business results

    Large Case Pensions, which manages a variety of discontinued and other retirement and savings products, primarily for qualified pension plans, reported:

  • Operating earnings (1) of $5.4 million for the second quarter of 2014 compared with $3.8 million for the second quarter of 2013.
  • Net income (2) of $6.6 million for the second quarter of 2014 compared with $57.5 million for the second quarter of 2013. Net income for the second quarter of 2013 included a $55.9 million after-tax benefit related to the reduction of reserves for anticipated future losses on discontinued products primarily due to favorable investment performance as well as favorable retirement experience compared to assumptions we previously made in estimating the reserve.

    Aetna's conference call to discuss second-quarter 2014 results will begin at 8:30 a.m. ET today. The public may access the conference call through a live audio webcast available on Aetna's Investor Information link on the Internet at www.aetna.com. Financial, statistical and other information, including GAAP reconciliations, related to the conference call also will be available on Aetna's Investor Information website.

    The conference call also can be accessed by dialing 1-888-318-7456 or +1-719-457-2600 for international callers. The company suggests participants dial in approximately 10 minutes before the call. The access code is 5816607. Individuals who dial in will be asked to identify themselves and their affiliations.

    A replay of the call may be accessed through Aetna's Investor Information link on the Internet at www.aetna.com or by dialing 1-888-203-1112, or +1-719-457-0820 for international callers. The replay access code is 5816607. Telephone replays will be available until 11 p.m. ET on August 12, 2014.

    About Aetna

    Aetna is one of the nation's leading diversified health care benefits companies, serving an estimated 45 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities, Medicaid health care management services, workers' compensation administrative services and health information technology products and services. Aetna's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups and expatriates. For more information, see www.aetna.com and the 2014 Aetna story about how Aetna is helping to build a healthier world.

     
    Consolidated Statements of Income
               
     
    For the Three MonthsFor the Six Months
    Ended June 30,Ended June 30,
    (Millions)         2014   2013     2014   2013
    Revenue:    
    Health care premiums $ 12,416.1 $ 9,701.3 $ 24,327.8 $ 17,487.1
    Other premiums 551.7 514.3 1,113.3 1,035.6
    Fees and other revenue 1,289.5 1,126.6 2,538.3 2,093.0
    Net investment income 228.3 225.0 472.5 460.1
    Net realized capital gains (losses)         23.8     (29.8 )     52.3   .5  
    Total revenue         14,509.4     11,537.4       28,504.2   21,076.3  
     
    Benefits and expenses:
    Health care costs 10,314.8 8,006.9 19,891.1 14,386.4
    Current and future benefits 525.6 539.1 1,104.3 1,098.4
    Operating expenses:
    Selling expenses 413.0 332.2 815.8 629.4
    General and administrative expenses         2,188.2     1,762.2       4,235.8   3,204.2  
    Total operating expenses 2,601.2 2,094.4 5,051.6 3,833.6
    Interest expense 81.3 83.5 166.9 161.3
    Amortization of other acquired intangible assets 61.9 51.8 124.1 84.2
    Loss on early extinguishment of long-term debt — — 91.9 —
    Reduction of reserve for anticipated future losses on
    discontinued products         —     (86.0 )     —   (86.0 )
    Total benefits and expenses         13,584.8     10,689.7       26,429.9   19,477.9  
     
    Income before income taxes 924.6 847.7 2,074.3 1,598.4
    Income taxes         377.4     314.5       857.7   574.3  
    Net income including non-controlling interests         547.2     533.2       1,216.6   1,024.1  
    Less: Net (loss) income attributable to non-controlling interests         (1.6 )   (2.8 )     2.3   (2.0 )
    Net income attributable to Aetna         $ 548.8     $ 536.0       $ 1,214.3   $ 1,026.1  
     
     
    Summary of Results
                   
     
    For the Three MonthsFor the Six Months
    Ended June 30,Ended June 30,
    (Millions)         2014   2013     2014   2013
    Operating earnings (1) $ 610.0 $ 582.6 $ 1,332.0 $ 1,099.1
    Transaction and integration-related costs, net of tax (36.3 ) (81.4 ) (78.2 ) (106.0 )
    Loss on early extinguishment of long-term debt, net of tax — — (59.7 ) —
    Release of litigation-related reserve, net of tax — — 67.0 —
    Reduction of reserve for anticipated future losses on
    discontinued products, net of tax — 55.9 — 55.9
    Reversal of allowance and gain on sale of reinsurance
    recoverable, net of tax — 32.1 — 32.1
    Amortization of other acquired intangible assets, net of tax (40.3 ) (33.6 ) (80.7 ) (54.7 )
    Net realized capital gains (losses), net of tax         15.4     (19.6 )     33.9     (.3 )
    Net income (2) (GAAP measure)         $ 548.8     $ 536.0       $ 1,214.3     $ 1,026.1  
     
    Weighted average common shares - basic         356.8     356.2       359.2     342.1  
     
    Weighted average common shares - diluted         360.3     360.1       362.6     345.6  
     
    Per Common Share                              
    Operating earnings (1) $ 1.69 $ 1.62 $ 3.67 $ 3.18
    Transaction and integration-related costs, net of tax (.10 ) (.23 ) (.22 ) (.30 )
    Loss on early extinguishment of long-term debt, net of tax — — (.16 ) —
    Release of litigation-related reserve, net of tax — — .19 —
    Reduction of reserve for anticipated future losses on
    discontinued products, net of tax — .16 — .16
    Reversal of allowance and gain on sale of reinsurance
    recoverable, net of tax — .09 — .09
    Amortization of other acquired intangible assets, net of tax (.11 ) (.10 ) (.22 ) (.16 )
    Net realized capital gains (losses), net of tax         .04     (.05 )   .09     —  
    Net income (2) (GAAP measure)         $ 1.52     $ 1.49     $ 3.35     $ 2.97  
     
     
    Segment Information (8)
                   
    For the Three MonthsFor the Six Months
    Ended June 30,Ended June 30,
    (Millions)         2014   2013     2014   2013
    Health Care:
    Operating revenue (3) (excludes net realized capital gains
    (losses) and an other item) $ 13,766.0 $ 10,870.7 $ 26,984.3 $ 19,665.4
    Interest income on proceeds of transaction-related debt — .6 — 2.5
    Net realized capital gains (losses)         20.6     (23.8 )     47.3     2.5  
    Total revenue (GAAP measure)         $ 13,786.6     $ 10,847.5       $ 27,031.6     $ 19,670.4  
     
    Commercial Medical Benefit Ratio:
    Premiums         $ 7,195.5     $ 6,068.0       $ 14,010.1     $ 11,282.0  
    Health care costs         $ 5,797.2     $ 4,797.5       $ 11,054.7     $ 8,912.6  
     
    Commercial MBR (GAAP measure) 80.6 % 79.1 % 78.9 % 79.0 %
     
    Government Medical Benefit Ratio:
    Premiums         $ 5,220.6     $ 3,633.3       $ 10,317.7     $ 6,205.1  
    Health care costs         $ 4,517.6     $ 3,209.4       $ 8,836.4     $ 5,473.8  
     
    Government MBR (7) (GAAP measure) 86.5 % 88.3 % 85.6 % 88.2 %
     
    Total Medical Benefit Ratio:
    Premiums         $ 12,416.1     $ 9,701.3       $ 24,327.8     $ 17,487.1  
    Health care costs         $ 10,314.8     $ 8,006.9       $ 19,891.1     $ 14,386.4  
     
    Total MBR (GAAP measure) 83.1 % 82.5 % 81.8 % 82.3 %
     
    Operating earnings (1) $ 584.3 $ 592.1 $ 1,303.3 $ 1,105.3
    Transaction and integration-related costs, net of tax (36.3 ) (77.2 ) (78.2 ) (92.0 )
    Release of litigation-related reserve, net of tax — — 67.0 —
    Amortization of other acquired intangible assets, net of tax (40.3 ) (32.9 ) (80.0 ) (53.3 )
    Net realized capital gains (losses), net of tax         13.4     (15.7 )     30.7     1.0  
    Net income (2) (GAAP measure)         $ 521.1     $ 466.3       $ 1,242.8     $ 961.0  
     
     
    Segment Information continued (8)
                   
    For the Three MonthsFor the Six Months
    Ended June 30,Ended June 30,
    (Millions)         2014   2013     2014   2013
    Group Insurance:
    Operating revenue (3) (excludes net realized capital gains
    (losses) and an other item) $ 626.4 $ 582.4 $ 1,238.4 $ 1,163.7
    Gain on sale of reinsurance recoverable — 7.2 — 7.2
    Net realized capital gains (losses)         1.3     (2.5 )     4.2     3.0  
    Total revenue (GAAP measure)         $ 627.7     $ 587.1       $ 1,242.6     $ 1,173.9  
     
    Operating earnings (1) $ 60.6 $ 30.6 $ 101.8 $ 62.5
    Reversal of allowance and gain on sale of reinsurance
    recoverable, net of tax — 32.1 — 32.1
    Amortization of other acquired intangible assets, net of tax — (.7 ) (.7 ) (1.4 )
    Net realized capital gains (losses), net of tax         .8     (1.7 )     2.7     1.9  
    Net income (2) (GAAP measure)         $ 61.4     $ 60.3       $ 103.8     $ 95.1  
     
    Large Case Pensions:
    Operating revenue (3) (excludes net realized capital gains (losses)) $ 93.2 $ 106.3 $ 229.2 $ 237.0
    Net realized capital gains (losses)         1.9     (3.5 )     .8     (5.0 )
    Total revenue (GAAP measure)         $ 95.1     $ 102.8       $ 230.0     $ 232.0  
     
    Operating earnings (1) $ 5.4 $ 3.8 $ 10.2 $ 10.0
    Reduction of reserve for anticipated future losses on
    discontinued products, net of tax — 55.9 — 55.9
    Net realized capital gains (losses), net of tax         1.2     (2.2 )     .5     (3.2 )
    Net income (2) (GAAP measure)         $ 6.6     $ 57.5       $ 10.7     $ 62.7  
     
     
    Corporate Financing: (9)
    Operating loss (1) $ (40.3 ) $ (43.9 ) $ (83.3 ) $ (78.7 )
    Transaction and integration-related costs, net of tax — (4.2 ) — (14.0 )
    Loss on early extinguishment of long-term debt, net of tax         —     —       (59.7 )   —  
    Net loss (GAAP measure)         $ (40.3 )   $ (48.1 )     $ (143.0 )   $ (92.7 )
     
    Total Company:
    Operating revenue (3) (excludes net realized capital gains (losses)
    and other items) (A) $ 14,485.6 $ 11,559.4 $ 28,451.9 $ 21,066.1
    Interest income on proceeds of transaction-related debt — .6 — 2.5
    Gain on sale of reinsurance recoverable — 7.2 — 7.2
    Net realized capital gains (losses)         23.8     (29.8 )     52.3     .5  
    Total revenue (GAAP measure) (B)         $ 14,509.4     $ 11,537.4       $ 28,504.2     $ 21,076.3  
     
    Operating expenses (C) $ 2,545.4 $ 2,040.7 $ 5,035.1 $ 3,755.6
    Transaction and integration-related costs 55.8 95.9 119.5 120.2
    Release of litigation-related reserve — — (103.0 ) —
    Reversal of allowance on reinsurance recoverable         —     (42.2 )     —     (42.2 )
    Total operating expenses (GAAP measure) (D)         $ 2,601.2     $ 2,094.4       $ 5,051.6     $ 3,833.6  
     
     
    Operating Expense Ratios:
    Operating expense ratio (5) (C)/(A) 17.6 % 17.7 % 17.7 % 17.8 %
    Total company expense ratio (D)/(B) (GAAP measure) 17.9 % 18.2 % 17.7 % 18.2 %
     
                       
    Membership
     
    June 30,March 31,December 31,June 30,
    (Thousands)         2014     2014     2013     2013
    Medical Membership:
    Commercial 19,503 19,226 18,821 18,634
    Medicare Advantage 1,113 1,101 968 948
    Medicare Supplement 434 417 386 341
    Medicaid         2,054     1,975     2,015     2,045
    Total Medical Membership         23,104     22,719     22,190     21,968
     
    Consumer-Directed Health Plans (10)         3,566     3,528     3,254     3,253
     
     
    Dental Membership:
    Total Dental Membership         14,439     14,565     14,145     14,254
     
    Pharmacy Benefit Management Membership:
    Commercial 10,840 10,525 10,191 10,062
    Medicare Prescription Drug Plan (stand-alone) 1,609 1,632 2,166 2,084
    Medicare Advantage Prescription Drug Plan 735 725 588 572
    Medicaid         2,105     1,301     1,214     1,128
    Total Pharmacy Benefit Management Services         15,289     14,183     14,159     13,846
     
     
    Operating Margins
                   
    For the Three MonthsFor the Six Months
    Ended June 30,Ended June 30,
    (Millions)         2014   2013     2014   2013
    Reconciliation to Income Before Income Taxes:
    Operating earnings (1) before income taxes, excluding interest
    expense (A) $ 1,099.8 $ 972.7 $ 2,421.4 $ 1,825.7
    Interest expense * (81.3 ) (77.5 ) (166.9 ) (140.6 )
    Transaction and integration-related costs (55.8 ) (101.3 ) (119.5 ) (138.4 )
    Loss on early extinguishment of long-term debt — — (91.9 ) —
    Release of litigation-related reserve — — 103.0 —

    Reduction of reserve for anticipated future losses on

    discontinued products

    — 86.0 — 86.0

    Reversal of allowance and gain on sale

    of reinsurance recoverable

    — 49.4 — 49.4
    Amortization of other acquired intangible assets (61.9 ) (51.8 ) (124.1 ) (84.2 )
    Net realized capital gains (losses)         23.8     (29.8 )     52.3     .5  
    Income before income taxes (GAAP measure)         $ 924.6     $ 847.7       $ 2,074.3     $ 1,598.4  
     
    Reconciliation to Net Income:
    Operating earnings,(1) excluding interest expense, net of tax $ 662.9 $ 633.0 $ 1,440.5 $ 1,190.5
    Interest expense, net of tax * (52.9 ) (50.4 ) (108.5 ) (91.4 )
    Transaction and integration-related costs, net of tax (36.3 ) (81.4 ) (78.2 ) (106.0 )
    Loss on early extinguishment of long-term debt, net of tax — — (59.7 ) —
    Release of litigation-related reserve, net of tax — — 67.0 —

    Reduction of reserve for anticipated future losses on

    discontinued products, net of tax

    — 55.9 — 55.9

    Reversal of allowance and gain on sale of reinsurance

    recoverable, net of tax

    — 32.1 — 32.1
    Amortization of other acquired intangible assets, net of tax (40.3 ) (33.6 ) (80.7 ) (54.7 )
    Net realized capital gains (losses), net of tax         15.4     (19.6 )     33.9     (.3 )
    Net income (2) (GAAP measure) (B)         $ 548.8     $ 536.0       $ 1,214.3     $ 1,026.1  
     
    Reconciliation of Revenue:

    Operating revenue (3) (excludes net realized capital gains (losses)

    and other items) (C)

    $ 14,485.6 $ 11,559.4 $ 28,451.9 $ 21,066.1

    Interest income on proceeds of transaction-related debt

    — .6 — 2.5
    Gain on sale of reinsurance recoverable — 7.2 — 7.2
    Net realized capital gains (losses)         23.8     (29.8 )     52.3     .5  
    Total revenue (GAAP measure) (D)         $ 14,509.4     $ 11,537.4       $ 28,504.2     $ 21,076.3  
     
    Operating and Net Income Margins:
    Pretax operating margin (6) (A)/(C) 7.6 % 8.4 % 8.5 % 8.7 %
    After-tax net income margin (B)/(D) (GAAP measure) 3.8 % 4.6 % 4.3 % 4.9 %
     


    * Interest expense of $50.4 million ($77.5 million pretax) and $91.4 million ($140.6 million pretax) for the three and six months ended June 30, 2013, respectively, excludes the negative cost of carry on transaction-related debt, which was issued in connection with the acquisition of Coventry Health Care, Inc. ("Coventry"). Those costs are presented within transaction and integration-related costs prior to the closing of the acquisition of Coventry, which occurred on May 7, 2013 (the "Acquisition Date"). After the Acquisition Date, the interest expense associated with the transaction-related debt is included in interest expense.

    (1) Operating earnings and operating earnings per share exclude from net income attributable to Aetna and operating expenses and operating revenues exclude, as applicable, amortization of other acquired intangible assets, net realized capital gains and losses and other items, if any, that neither relate to the ordinary course of our business nor reflect our underlying business performance. Although the excluded items may recur, management believes that operating earnings, operating earnings per share, operating revenue, operating expenses and our operating expense ratio provide a more useful comparison of Aetna's underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding Aetna's operations and the allocation of resources among Aetna's businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. Non-GAAP financial measures we disclose, such as operating earnings, operating earnings per share, operating revenue, operating expenses, pretax operating margin and our operating expense ratio, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with U.S. generally accepted accounting principles (“GAAP”).

    For the periods covered in this press release, the following items are excluded from operating earnings, operating expenses and operating revenues, as applicable, because we believe they neither relate to the ordinary course of our business nor reflect our underlying business performance:

  • We incurred transaction and integration-related costs of $36.3 million ($55.8 million pretax) and $78.2 million ($119.5 million pretax) during the three and six months ended June 30, 2014, respectively, related to the acquisitions of Coventry and the InterGlobal group (“InterGlobal”), and $81.4 million ($101.3 million pretax) and $106.0 million ($138.4 million pretax) during the three and six months ended June 30, 2013, respectively, related to the acquisition of Coventry. Transaction costs include advisory, legal and other professional fees which are not deductible for tax purposes and are reflected in our GAAP Consolidated Statements of Income in general and administrative expenses. Transaction costs also include transaction-related payments as well as expenses related to the negative cost of carry associated with the permanent financing that we obtained in November 2012 for the Coventry acquisition. Prior to the Acquisition Date, the negative cost of carry was excluded from operating earnings and operating earnings per share. The components of the negative cost of carry are reflected in our GAAP Consolidated Statements of Income in interest expense, net investment income, and general and administrative expenses. On and after the Acquisition Date, the interest expense and general and administrative expenses associated with the permanent financing are no longer excluded from operating earnings or operating earnings per share.
  • In the first quarter of 2014, we incurred a loss on the early extinguishment of long-term debt of $59.7 million ($ 91.9 million pretax) related to the redemption of our 6.0% senior notes due 2016.
  • In the fourth quarter of 2012, we recorded a charge of $78.0 million ($120.0 million pretax) related to the settlement of purported class action litigation regarding Aetna's payment practices related to out-of-network health care providers. That charge included the estimated cost of legal fees of plaintiffs' counsel and the costs of administering the settlement. In the first quarter of 2014, we exercised our right to terminate the settlement agreement. As a result, we released the reserve established in connection with the settlement agreement, net of amounts due to the settlement administrator, which reduced first quarter 2014 other general and administrative expenses by $67.0 million ($103.0 million pretax).
  • In the second quarter of 2013, we reduced the reserve for anticipated future losses on discontinued products by $55.9 million ($86.0 million pretax). We believe excluding any changes in the reserve for anticipated future losses on discontinued products from operating earnings provides more useful information as to our continuing products and is consistent with the treatment of the operating results of these discontinued products, which are credited or charged to the reserve and do not affect our operating results.
  • In 2008, as a result of the liquidation proceedings of Lehman Re Ltd. ("Lehman Re"), a subsidiary of Lehman Brothers Holdings Inc., we recorded an allowance against our reinsurance recoverable from Lehman Re of $27.4 million ($42.2 million pretax). This reinsurance was placed in 1999 and was on a closed book of paid-up group whole life insurance business. In the second quarter of 2013, we sold our claim against Lehman Re to an unrelated third party (including the reinsurance recoverable) and terminated the reinsurance arrangement. Upon the sale of the claim and termination of the arrangement, we released the related allowance thereby reducing other general and administrative expenses by $27.4 million ($42.2 million pretax) and recognized a $4.7 million ($7.2 million pretax) gain on the sale in fees and other revenue.
  • Other acquired intangible assets relate to our acquisition activities and are amortized over their useful lives. However, this amortization does not directly relate to the underwriting or servicing of products for customers and is not directly related to the core performance of Aetna's business operations.
  • Net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of liabilities. However, these transactions do not directly relate to the underwriting or servicing of products for customers and are not directly related to the core performance of Aetna's business operations.

    For a reconciliation of these items to financial measures calculated under GAAP, refer to the tables on pages 9 through 11 and 13 of this press release.

    (2) Net Income refers to net income attributable to Aetna reported in our GAAP Consolidated Statements of Income. Unless otherwise indicated, all references in this press release to operating earnings, operating earnings per share, net income and net income per share are based upon net income attributable to Aetna, which excludes amounts attributable to non-controlling interests.

    (3) Operating revenue excludes net realized capital gains and losses, interest income on the proceeds of the transaction-related debt and the gain on sale of a reinsurance recoverable from Lehman Re as noted in (1) above. Refer to the tables on pages 10, 11 and 13 of this press release for a reconciliation of operating revenue to total revenue calculated under GAAP. Projected operating revenue excludes net realized capital gains of $52.3 million pretax reported by Aetna for the six months ended June 30, 2014. Projected operating revenue also excludes any future net realized capital gains or losses and other items, if any, from total revenue. Aetna is not able to project the amount of future net realized capital gains or losses or any such other items (other than integration-related costs related to the Coventry and InterGlobal acquisitions) and therefore cannot reconcile projected operating revenue to projected total revenue in any period.

    (4) Projected 2014 operating earnings per share exclude from net income estimated after-tax amortization of other acquired intangible assets of approximately $157 million ($241 million pretax), projected integration-related costs related to the Coventry and InterGlobal acquisitions, any future net realized capital gains and losses and other items, if any, that neither relate to the ordinary course of our business nor reflect our underlying business performance. After-tax amortization of other acquired intangible assets relates to our acquisition activities, including Coventry and InterGlobal. Aetna is not able to project the amount of future net realized capital gains and losses or any such other items (other than projected integration-related costs related to the Coventry and InterGlobal acquisitions) and therefore cannot reconcile projected operating earnings per share to projected net income per share in any period. Projected full-year 2014 operating earnings per share reflect a range of 359 million to 360 million weighted average diluted shares.

    (5) The operating expense ratio excludes net realized capital gains and losses and other items, if any, that are excluded from operating revenues or operating expenses, as noted in (1) above. For a reconciliation of this metric to the comparable GAAP measure refer to page 11 of this press release.

    (6) In order to provide useful information regarding Aetna's profitability on a basis comparable to others in the industry, without regard to financing decisions, income taxes or amortization of other acquired intangible assets (each of which may vary for reasons not directly related to the performance of the underlying business), Aetna's pretax operating margin is based on operating earnings excluding interest expense and income taxes. Management also uses pretax operating margin to assess Aetna's performance, including performance versus competitors.

    (7) Our Government MBR is the combined MBR of our Medicare and Medicaid businesses.

    (8) Operating revenue and operating expense information is presented before income taxes. Operating earnings information is presented net of income taxes.

    (9) Our Corporate Financing segment is not a business segment. It is added to our business segments to reconcile our segment reporting to our consolidated results. The net loss of the Corporate Financing segment includes interest expense on our outstanding debt and the financing components of our pension and other postretirement benefit plan expenses (benefits). As described in (1) above, the operating earnings of the Corporate Financing segment exclude other items, if any, that neither relate to the ordinary course of our business nor reflect our underlying business performance. Prior to the Acquisition Date, the Corporate Financing segment operating loss excluded the interest expense components of transaction-related costs. Since the Acquisition Date, the Corporate Financing segment operating loss has included the interest expense component of transaction-related costs.

    (10) Represents members in consumer-directed health plans included in Commercial medical membership.

    CAUTIONARY STATEMENT; ADDITIONAL INFORMATION -- -- Certain information in this press release is forward-looking, including our projections as to operating earnings per share, Commercial medical cost trend, pretax operating margin, operating earnings per share accretion related to the acquisition of Coventry, year-end 2014 medical membership, operating revenue, amortization of other acquired intangible assets, and weighted average diluted shares. Forward-looking information is based on management's estimates, assumptions and projections and is subject to significant uncertainties and other factors, many of which are beyond our control. Important risk factors could cause actual future results and other future events to differ materially from those currently estimated by management, including, but not limited to: the implementation of health care reform legislation, including collection of Health Care Reform fees, assessments and taxes through increased premiums; the implementation of health insurance exchanges; unanticipated increases in medical costs (including increased intensity or medical utilization as a result of flu or otherwise; changes in membership mix to higher cost or lower-premium products or membership-adverse selection; medical cost increases resulting from unfavorable changes in contracting or re-contracting with providers (including as a result of provider consolidation and/or integration); and increased pharmacy costs (including in our health insurance exchange products)); the profitability of our public health insurance exchange and Medicare Advantage products, where membership is greater than our initial projections and may have more adverse health status and/or higher medical benefit utilization than we projected; our ability to achieve the synergies and value creation contemplated by the Coventry acquisition; our ability to effectively integrate Coventry's businesses; the diversion of management time on Coventry integration-related issues; our ability to offset Medicare Advantage and PDP rate pressures; and changes in our future cash requirements, capital requirements, results of operations, financial condition and/or cash flows. Health care reform will continue to significantly impact our business operations and financial results, including our pricing and medical benefit ratios. Components of the legislation will be phased in over the next several years, with the most significant changes occurring in 2014, and we will be required to dedicate material resources and incur material expenses during that time to implement health care reform. Many significant parts of the legislation, including aspects of public health insurance exchanges, Medicaid expansion, enforcement related reporting for the individual and employer mandates, and reinsurance, risk corridor and risk adjustment, require further guidance and clarification at the federal level and/or in the form of regulations and actions by state legislatures to implement the law. In addition, pending efforts in the U.S. Congress to amend or restrict funding for various aspects of health care reform, and litigation challenging aspects of the law continue to create additional uncertainty about the ultimate impact of health care reform. As a result, many of the impacts of health care reform will not be known for the next several years. Other important risk factors include: adverse changes in health care reform and/or other federal or state government policies or regulations as a result of health care reform or otherwise (including legislative, judicial or regulatory measures that would affect our business model, restrict funding for or amend various aspects of health care reform, limit our ability to price for the risk we assume and/or reflect reasonable costs or profits in our pricing, such as mandated minimum medical benefit ratios, or eliminate or reduce ERISA pre-emption of state laws (increasing our potential litigation exposure)); adverse and less predictable economic conditions in the U.S. and abroad (including unanticipated levels of, or increases in the rate of, unemployment); our ability to diversify our sources of revenue and earnings (including by expanding our direct-to-consumer sales and capabilities and our foreign operations), transform our business model, develop new products and optimize our business platforms; the success of our HealthagenSM, Accountable Care Solutions and health information technology initiatives; adverse changes in size, product or geographic mix or medical cost experience of membership; managing executive succession and key talent retention, recruitment and development; failure to achieve and/or delays in achieving desired rate increases and/or profitable membership growth due to regulatory review or other regulatory restrictions, the difficult economy and/or significant competition, especially in key geographic areas where membership is concentrated, including successful protests of business awarded to us; failure to adequately implement Health Care Reform; reputational or financial issues arising from our social media activities, data security breaches, other cybersecurity risks or other causes; the outcome of various litigation and regulatory matters, including audits, challenges to our minimum MLR rebate methodology and/or reports, guaranty fund assessments, intellectual property litigation and litigation concerning, and ongoing reviews by various regulatory authorities of, certain of our payment practices with respect to out-of-network providers and/or life insurance policies; our ability to integrate, simplify, and enhance our existing information technology systems and platforms to keep pace with changing customer and regulatory needs; our ability to successfully integrate our businesses (including Coventry, the InterGlobal group and other businesses we may acquire in the future) and implement multiple strategic and operational initiatives simultaneously; our ability to manage health care and other benefit costs; adverse program, pricing, funding or audit actions by federal or state government payors, including as a result of sequestration and/or curtailment or elimination of the Centers for Medicare & Medicaid Services' star rating bonus payments; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; failure by a service provider to meet its obligations to us; our ability to develop and maintain relationships (including collaborative risk-sharing agreements) with providers while taking actions to reduce medical costs and/or expand the services we offer; our ability to demonstrate that our products lead to access to quality care by our members; our ability to maintain our relationships with third-party brokers, consultants and agents who sell our products; increases in medical costs or Group Insurance claims resulting from any epidemics, acts of terrorism or other extreme events; changes in medical cost estimates due to the necessary extensive judgment that is used in the medical cost estimation process, the considerable variability inherent in such estimates, and the sensitivity of such estimates to changes in medical claims payment patterns and changes in medical cost trends; the ability to successfully complete the implementation of our agreement with CVS Caremark Corporation on a timely basis and to achieve projected operating efficiencies for the agreement; a downgrade in our financial ratings; and adverse impacts from any failure to raise the U.S. Federal government's debt ceiling or any sustained U.S. Federal government shut down. For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2013 Annual Report on Form 10-K ("Aetna's 2013 Annual Report") on file with the Securities and Exchange Commission (the "SEC"). You also should read Aetna’s 2013 Annual Report and Aetna's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, on file with the SEC, and Aetna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, when filed with the SEC, for a discussion of Aetna’s historical results of operations and financial condition.




    Aetna

    Media Contact:

    Cynthia Michener, 860-273-8553

    michenerc@aetna.com

    or

    Investor Contact:

    Tom Cowhey, 860-273-2402

    cowheyt@aetna.com

    Source: Aetna


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