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| AET > SEC Filings for AET > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
OVERVIEW
We are one of the nation's leading diversified health care benefits companies, serving approximately 36.8 million people with information and resources to help them make better informed decisions about their health care. We offer a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities and health care management services for Medicaid plans. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labor groups and expatriates. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions.
The following MD&A provides a review of our financial condition at June 30, 2009 and December 31, 2008 and results of operations for the three and six months ended June 30, 2009 and 2008. This Overview should be read in conjunction with the entire MD&A, which contains detailed information that is important to understanding our results of operations and financial condition, the consolidated financial statements and other data presented in this Quarterly Report on Form 10-Q as well as the MD&A contained in our 2008 Annual Report on Form 10-K (the "2008 Annual Report"). This Overview is qualified in its entirety by the full MD&A.
Summarized Results for the Three and Six Months Ended June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions) 2009 2008 2009 2008
Revenue:
Health Care $ 7,989.8 $ 7,175.5 $ 15,936.3 $ 14,291.5
Group Insurance 545.2 495.8 1,076.4 978.7
Large Case Pensions 135.8 156.8 272.8 296.6
Total revenue 8,670.8 7,828.1 17,285.5 15,566.8
Net income 346.6 480.5 784.4 912.1
Operating earnings: (1)
Health Care 336.0 430.9 805.4 869.5
Group Insurance 42.5 38.5 84.6 72.7
Large Case Pensions 7.7 9.7 16.9 18.0
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(1) Our discussion of operating results for our reportable business segments is based on operating earnings, which is a non-GAAP measure of net income (the term "GAAP" refers to U.S. generally accepted accounting principles). Refer to Segment Results and Use of Non-GAAP Measures in this MD&A on page 26 for a discussion of non-GAAP measures. Refer to pages 27, 30 and 31 for a reconciliation of operating earnings to net income for Health Care, Group Insurance and Large Case Pensions, respectively.
Our business segment operating earnings for the three and six months ended June 30, 2009 were lower than the corresponding periods in 2008. Lower Commercial underwriting margins in our Health Care segment was the primary driver of these lower operating earnings.
During the three and six months ended June 30, 2009, our Commercial health care costs experienced increased per member per month health care costs and continued prior period reserve development. Combined, these factors resulted in higher health care costs that outpaced the increase in member premiums which resulted in a higher Commercial medical benefit ratio and a lower Commercial underwriting margin in 2009.
Additionally, operating earnings reflect higher health care revenue for the three and six months ended June 30, 2009 compared with the corresponding periods in 2008, driven by growth in membership and premium rate increases for renewing membership in 2009. We experienced membership growth in both our administrative services contract ("ASC") (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) and Insured (where we assume all or a majority of the risk for medical and dental care costs) products. At June 30, 2009, we served approximately 19.1 million medical members (consisting of approximately 34% Insured members and 66% ASC members), 14.6 million dental members and 11.2 million pharmacy members.
We continued to generate strong cash flows from operations in 2009, generating $1.0 billion of cash flows from operations in our Health Care and Group Insurance businesses during the six months ended June 30, 2009. These cash flows funded ordinary course operating activities and our share repurchase program. During the six months ended June 30, 2009, we repurchased approximately 21 million shares of our common stock at a cost of approximately $548 million.
TRICARE Managed Care Support Contract
In July 2009, we were awarded the TRICARE managed care support contract for the
North Region by the U.S. Department of Defense. Under this administrative
services contract, which commences in 2010, we expect to support health care
delivery to approximately 2.8 million eligible beneficiaries who are active duty
service members, retirees and family members based in the 21 states of TRICARE's
North Region. The contract consists of five one year option periods, and the
contract award is subject to a pending appeal.
Pending Acquisition
On July 31, 2009, we announced an agreement to acquire Horizon Behavioral
Services, LLC, a leading provider of employee assistance programs, for
approximately $70 million, which we expect to finance with available
resources. We expect to close this transaction after satisfaction of customary
closing conditions, including regulatory approvals.
Executive Management Update
Gery J. Barry, Chief Strategy Officer, left Aetna in May 2009 to pursue other
interests. The strategic planning function now reports to Joseph M. Zubretsky,
Executive Vice President and Chief Financial Officer.
Segment Results and Use of Non-GAAP Measures in this Document The discussion of our results of operations that follows is presented based on our reportable segments in accordance with Statement of Financial Accounting Standards ("FAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," and is consistent with our segment disclosure included in Note 13 of Condensed Notes to Consolidated Financial Statements on page 21. Each segment's discussion of results is based on operating earnings, which is the measure reported to our Chief Executive Officer for purposes of assessing the segment's financial performance and making operating decisions, such as allocating resources to the segment. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. Our Corporate Financing segment is not a business segment. It is added to our business segments to reconcile to our consolidated results. The Corporate Financing segment includes interest expense on our outstanding debt and, beginning in 2009, the financing components of our pension plan and OPEB plan expense (the service cost component of this expense is allocated to our business segments). Prior periods have been reclassified to reflect this change.
Our discussion of the results of operations of each business segment is based on operating earnings, which exclude realized capital gains and losses as well as other items, if any, from net income reported in accordance with GAAP. We believe excluding realized capital gains and losses from net income to arrive at operating earnings provides more useful information about our underlying business performance. 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 our customers and are not directly related to the core performance of our business operations. We also may exclude other items that do not relate to the ordinary course of our business from net income to arrive at operating earnings. In each segment discussion below, we present a table that reconciles operating earnings to net income reported in accordance with GAAP. Each table details the net realized capital gains and losses and any other items excluded from net income, and the footnotes to each table describe the nature of each other item and why we believe it is appropriate to exclude that item from net income.
HEALTH CARE
Health Care consists of medical, pharmacy benefits management, dental and vision plans offered on both an Insured basis and an ASC basis. Medical products include point-of-service ("POS"), preferred provider organization ("PPO"), health maintenance organization ("HMO") and indemnity benefit plans. Medical products also include health savings accounts ("HSAs") and Aetna HealthFundŽ, consumer-directed health plans that combine traditional POS or PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account. We also offer Medicare and Medicaid products and services and specialty products, such as medical management and data analytics services, behavioral health plans and stop loss insurance, as well as products that provide access to our provider network in select markets.
Operating Summary for the Three and Six Months Ended June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions) 2009 2008 2009 2008
Premiums:
Commercial $ 5,370.0 $ 4,954.4 $ 10,692.0 $ 9,837.8
Medicare 1,417.9 1,194.3 2,879.0 2,421.8
Medicaid 242.6 140.2 451.7 282.8
Total premiums 7,030.5 6,288.9 14,022.7 12,542.4
Fees and other revenue 861.8 802.4 1,724.2 1,599.4
Net investment income 95.6 94.4 193.3 181.4
Net realized capital gains (losses) 1.9 (10.2 ) (3.9 ) (31.7 )
Total revenue 7,989.8 7,175.5 15,936.3 14,291.5
Health care costs 6,102.4 5,153.3 11,906.6 10,239.5
Operating expenses:
Selling expenses 280.3 251.3 579.4 530.6
General and administrative expenses 1,027.7 1,087.8 2,129.4 2,153.9
Total operating expenses 1,308.0 1,339.1 2,708.8 2,684.5
Amortization of other acquired intangible
assets 22.8 25.5 45.6 51.6
Total benefits and expenses 7,433.2 6,517.9 14,661.0 12,975.6
Income before income taxes 556.6 657.6 1,275.3 1,315.9
Income taxes 193.8 233.3 448.9 467.0
Net income $ 362.8 $ 424.3 $ 826.4 $ 848.9
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The table presented below reconciles operating earnings to net income reported in accordance with GAAP for the three and six months ended June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions) 2009 2008 2009 2008
Net income $ 362.8 $ 424.3 $ 826.4 $ 848.9
Litigation-related insurance proceeds (1) (24.9 ) - (24.9 ) -
Net realized capital (gains) losses (1.9 ) 6.6 3.9 20.6
Operating earnings $ 336.0 $ 430.9 $ 805.4 $ 869.5
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(1) Following a Pennsylvania Supreme Court ruling in June 2009, we received $38.2 million ($24.9 million after tax) from one of our liability insurers related to certain litigation we settled in 2003. We believe these litigation-related insurance proceeds neither relate to the ordinary course of our business nor reflect our underlying business performance, and therefore, we have excluded them from operating earnings in 2009. We are continuing to litigate similar claims against certain of our other liability insurers.
Operating earnings for the three and six months ended June 30, 2009, when compared to the corresponding periods in 2008, reflect a significantly lower underwriting margin, particularly for Commercial products (refer to discussion of Commercial results on page 28) partially offset by growth in premiums and fees and other revenue, higher net investment income and continued operating expense efficiencies (total operating expenses divided by total revenue). The growth in premiums and fees and other revenue resulted from increases in membership levels as well as premium rate increases for renewing membership.
We calculate our medical benefit ratio ("MBR") by dividing health care costs by premiums. For the three and six months ended June 30, 2009 and 2008, our MBRs by product were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Commercial 85.9 % 80.5 % 83.8 % 80.2 %
Medicare 89.4 % 86.9 % 88.1 % 86.4 %
Medicaid 92.2 % 89.8 % 91.5 % 91.3 %
Total 86.8 % 81.9 % 84.9 % 81.6 %
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Refer to our discussion of Commercial and Medicare results that follows for an explanation of the changes in our MBR.
The operating results of our Commercial products reflect significantly lower underwriting margins in the three and six months ended June 30, 2009 Commercial premiums increased approximately $416 million and $854 million for the three and six months ended June 30, 2009, respectively, when compared to the corresponding periods in 2008. This increase primarily reflects premium rate increases on renewing business.
Our Commercial MBR was 85.9% and 83.8% for the three and six months ended June 30, 2009, respectively, and 80.5% and 80.2%, respectively, for the corresponding periods in 2008. For the three months ended June 30, 2009, we had approximately $65 million of unfavorable development of prior period health care cost estimates. This development was primarily driven by what we believe is unusually high paid claims activity in the second quarter primarily related to 2008. We had no significant development of prior period health care cost estimates for the three months ended June 30, 2008. The development in 2009 contributed to the higher Commercial MBR for the three months ended June 30, 2009 when compared to the corresponding period in 2008, but it was not the primary driver of the increase. The Commercial MBR increases reflect a percentage increase in our per member health care costs that outpaced the percentage increase in per member premiums. The increase in per member health care costs was driven primarily by continued higher claim intensity, particularly in emergency room, ambulatory, laboratory and preventive services, and a higher level of large claims in certain blocks of business. Refer to Critical Accounting Estimates - Health Care Costs Payable in our 2008 Annual Report for a discussion of Health Care Costs Payable.
Medicare results for the three and six months ended June 30, 2009 reflect growth
from the corresponding periods in 2008
Medicare premiums increased approximately $224 million and $457 million for the
three and six months ended June 30, 2009, compared to the corresponding periods
in 2008. This increase primarily reflects growth in our group
private-fee-for-service ("PFFS") Medicare Advantage plans, increases in
supplemental premiums across all our Medicare Advantage products, rate increases
from the Centers for Medicare & Medicaid Services ("CMS") and true-ups of
premium estimates for specified risk adjustments from CMS.
Our Medicare MBRs for the three and six months ended June 30, 2009 were 89.4% and 88.1%, respectively, compared to 86.9% and 86.4% for the corresponding periods in 2008. The Medicare MBRs for the three and six months ended June 30, 2009 were higher than the corresponding period in 2008, reflecting a percentage increase in per member health care costs that slightly outpaced the percentage increase in per member premiums. The percentage increase in per member premiums for the three months ended June 30, 2009 reflects a revision to the risk-adjusted premium from CMS that adversely affected our Medicare MBR for this period. The increase in per member per month health care costs was driven primarily by higher utilization of health care services.
Health Care Costs Payable
We consider the estimate of our health care costs payable to be a critical
accounting estimate. Our 2008 Annual Report contains detailed information about
this accounting estimate (refer to Critical Accounting Estimates in our 2008
Annual Report for additional information). During the three and six months ended
June 30, 2009, we experienced increased health care costs, primarily in our
Commercial products, as described above and have factored this experience into
our current estimates of health care costs payable. We believe our estimate of
health care costs payable is reasonable and adequate to cover our obligations as
of June 30, 2009; however, our actual health care costs may differ from our
estimates.
Other Sources of Revenue
Fees and other revenue increased approximately $59 million and $125 million for
the three and six months ended June 30, 2009, compared to the corresponding
periods in 2008, reflecting growth in ASC membership as described in the
Membership table below.
Membership
Health Care's membership at June 30, 2009 and 2008 was as follows:
2009 2008
(Thousands) Insured ASC Total Insured ASC Total
Medical:
Commercial 5,692 11,960 17,652 5,431 10,860 16,291
Medicare 423 - 423 360 13 373
Medicaid 291 686 977 178 657 835
Total Medical Membership 6,406 12,646 19,052 5,969 11,530 17,499
Consumer-Directed Health
Plans (1) 1,827 1,388
Dental:
Commercial 5,262 7,509 12,771 5,007 7,539 12,546
Medicare and Medicaid 249 404 653 222 393 615
Network Access (2) - 1,145 1,145 - 945 945
Total Dental Membership 5,511 9,058 14,569 5,229 8,877 14,106
Pharmacy:
Commercial 9,969 9,736
Medicare PDP
(stand-alone) 328 368
Medicare Advantage PDP 227 189
Medicaid 27 23
Total Pharmacy Benefit
Management Services 10,551 10,316
Mail Order (3) 683 652
Total Pharmacy
Membership 11,234 10,968
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(1) Represents members in consumer-directed health plans who also are
included in Commercial medical membership above.
(2) Represents members in products that allow these members access to
our dental provider network for a nominal fee.
(3) Represents members who purchased medications through our mail order
pharmacy operations during the second quarter of 2009 and 2008,
respectively, and are included in pharmacy membership above.
Total medical, dental and pharmacy membership at June 30, 2009 increased compared to June 30, 2008. The increase in medical membership was primarily due to growth in Commercial membership, driven by growth within existing plan sponsors and new customers, net of lapses, and Medicaid membership attributable to a new insured contract.
Total dental membership increased in 2009 primarily due to membership growth from both new and current customers.
Pharmacy membership increased in 2009 primarily due to growth in our pharmacy benefit management services and mail order operations. Our pharmacy benefit management services growth was due primarily to an increase in Commercial pharmacy membership. Commercial pharmacy membership increased reflecting strong cross-selling success. Mail order operations reflected an increase in member utilization during this time period.
GROUP INSURANCE
Group Insurance primarily includes group life insurance products offered on an Insured basis, including basic and supplemental group term life, group universal life, supplemental or voluntary programs and accidental death and dismemberment coverage. Group Insurance also includes (i) group disability products offered to employers on both an Insured and an ASC basis, which consist primarily of short-term and long-term disability insurance, (ii) absence management services offered to employers, which include short-term and long-term disability administration and leave management, and (iii) long-term care products that were offered primarily on an Insured basis, which provide benefits covering the cost of care in private home settings, adult day care, assisted living or nursing facilities. We no longer solicit or accept new long-term care customers, and we are working with our customers on an orderly transition of this product to other carriers.
Operating Summary for the Three and Six Months Ended June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions) 2009 2008 2009 2008
Premiums:
Life $ 279.8 $ 260.0 $ 556.6 $ 529.2
Disability 140.4 132.5 280.8 264.5
Long-term care 18.3 21.9 36.5 44.0
Total premiums 438.5 414.4 873.9 837.7
Fees and other revenue 27.8 23.9 55.5 49.1
Net investment income 69.4 65.5 133.5 129.5
Net realized capital gains (losses) 9.5 (8.0 ) 13.5 (37.6 )
Total revenue 545.2 495.8 1,076.4 978.7
Current and future benefits 381.6 356.0 757.2 731.9
Operating expenses:
Selling expenses 23.5 24.3 46.9 48.8
General and administrative expenses 71.5 67.6 139.9 131.4
Total operating expenses 95.0 91.9 186.8 180.2
Amortization of other acquired intangible assets 1.7 1.8 3.4 3.5
Total benefits and expenses 478.3 449.7 947.4 915.6
Income before income taxes 66.9 46.1 129.0 63.1
Income taxes 14.9 12.8 30.9 14.8
Net income $ 52.0 $ 33.3 $ 98.1 $ 48.3
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The table presented below reconciles operating earnings to net income reported in accordance with GAAP for the three and six months ended June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions) 2009 2008 2009 2008
Net income $ 52.0 $ 33.3 $ 98.1 $ 48.3
Net realized capital (gains) losses (9.5 ) 5.2 (13.5 ) 24.4
Operating earnings $ 42.5 $ 38.5 $ 84.6 $ 72.7
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Operating earnings for the three and six months ended June 30, 2009 increased compared to the corresponding periods in 2008 reflecting a higher underwriting margin (premiums less current and future benefits) in our life products, partially offset by lower underwriting margins in our disability products.
The group benefit ratio was 87.0% and 86.6% for the three and six months ended June 30, 2009, respectively, compared to 85.9% and 87.4% for the corresponding periods in 2008. The increase in the group benefit ratio for the three months ended June 30, 2009 compared to the corresponding period in 2008 was primarily due to unfavorable disability experience, partially offset by favorable life experience. The decrease in the group benefit ratio for the six months ended June 30, 2009 compared to the corresponding period in 2008 was primarily due to favorable life experience partially offset by unfavorable disability experience.
LARGE CASE PENSIONS
Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products.
Operating Summary for the Three and Six Months Ended June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions) 2009 2008 2009 2008
Premiums $ 37.4 $ 58.9 $ 87.1 $ 110.8
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