Aetna Reports Fourth-Quarter and Full-Year 2004 Results.HARTFORD Hartford, city (1990 pop. 139,739), state capital, Hartford co., central Conn., on the west bank of the Connecticut River; settled as Newtown 1635–36 on the site of a Dutch trading post (1633; abandoned 1654), inc. 1784. , Conn. -- --Fourth-quarter operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before of $2.06 per share, $1.82 per share excluding prior-period favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. reserve development, compared with Thompson/First Call mean of $1.80, a 38 percent increase over fourth-quarter 2003 on a comparable basis --Fourth-quarter net income of $1.95 per share --Fourth-quarter medical membership increase of 86,000 to 13.7 million; a 654,000 membership increase for full-year 2004 --Full-year operating earnings, excluding prior-year favorable reserve development, of $7.28 per share, a 41 percent increase over 2003 --Full-year net income of $14.30 per share, including previously announced tax refund Tax refund Money back from the government when too much tax has been paid or withheld from a salary. and favorable tax adjustments of $6.56 per share --Guidance increased for full-year 2005 operating earnings per share to $8.75 to $8.90, representing an increase of 20 percent to 22 percent over 2004, and for full-year net membership growth to 950,000 to 1.05 million --All per-share amounts are prior to giving effect to the stock split Aetna Aetna, volcano: see Etna, Italy. announced separately today Aetna (NYSE NYSE See: New York Stock Exchange : AET AET Aetna, Inc. AET After Extra Time AET Actual Evapotranspiration AET Alliance for Environmental Technology AET Alpha-Ethyltryptamine AET Applied Extrusion Technologies, Inc. ) today announced fourth-quarter operating earnings of $2.06 per share. Operating earnings, excluding favorable development, were $1.82 per share, an increase of 38 percent over the prior year. Favorable reserve development was approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $38 million, after tax, or $0.24 per share. The increase in operating earnings primarily reflects higher membership levels, growth in revenues from increased premiums and fees and continued general and administrative expense efficiencies, offset in part by a higher medical cost ratio. Operating earnings exclude net realized capital gains and losses and other items.(1)
Quarterly Financial Results at a Glance
Three Months Ended
December 31, December 31, Change
2004 2003
Total revenues $5.2 $4.6
billion billion 13%
==============================
Operating earnings(a) $317.6 $239.9
million million 32%
==============================
Net income $300.7 $249.5
million million 21%
==============================
Per share results:
Operating earnings(a) $2.06 $1.50 37%
Favorable development
of prior-period health care cost
estimates (0.24) (0.18)
------------------------------
Operating earnings,
excluding development(a) $1.82 $1.32 38%
==============================
Net income $1.95 $1.56 25%
==============================
(a) For full description of operating earnings and per share operating
earnings, please see footnote 1 at end of press release.
2004 Financial Results at a Glance
Twelve Months Ended
December 31, December 31, Change
2004 2003
Total revenues $19.9 $18.0
billion billion 11%
==============================
Operating earnings(a) $1.2 $966.8
billion million 24%
==============================
Income from continuing operations $1.2 $933.8
billion million 30%
Income from discontinued 1.0
operations billion--------------
------------------------------
Net income(b) $2.2 $933.8
billion million
==============================
Per share results:
Operating earnings(a) $7.64 $6.12 25%
Favorable development
of prior-year health care cost
estimates (0.36) (0.94)
------------------------------
Operating earnings,
excluding development(a) $7.28 $5.18 41%
==============================
Income from continuing
operations $7.74 $5.91 31%
Income from discontinued
operations 6.56 --------------
------------------------------
Net income(b) $14.30 $5.91
==============================
(a) For full description of operating earnings and per share
operating earnings, please see footnote 1 at end of press release.
(b) Includes the previously announced tax refund and favorable tax
adjustments. For full explanation, please see footnote 2 at end of
press release.
Full-year 2004 operating earnings increased by 41 percent over the prior year to $7.28 per share, excluding favorable development related to prior years and other items. Net income, which includes the previously announced tax refund and favorable tax reserve adjustments(2), was $14.30 per share. "We are very pleased to have delivered on our commitments by every measure in 2004," said John W. Rowe, M.D., chairman and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. . "We profitably grew membership, maintained stable medical cost trends, achieved strong top-line revenue growth, and continued to achieve our operating expense Operating Expense The essential things that a company must purchase in order to maintain business. Notes: For example, the payment of employees wages are an operating expense. Also known as OPEX. efficiencies. We also demonstrated our commitment to effective capital deployment Installing, setting up, testing and running. This military term, which means the placement of troops and equipment in the field, is widely used with computers as an alternate to the word "implementation. through an active share repurchase Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. program, targeted acquisitions and strategic investments in our business, including the launch of a specialty A contract under seal. A specialty is a written document that has been sealed and delivered and is given as security for the payment of a specifically indicated debt. pharmacy pharmacy, art of compounding and dispensing drugs and medication. The term is also applied to an establishment used for such purposes. Until modern times medication was prepared and dispensed by the physician himself. In the 18th cent. partnership and the development of a second mail order facility. These capital deployment efforts complement recent policy-related initiatives in racial and ethnic disparities and care at the end of life, further differentiating Aetna in our industry. "Based on our continued success in the marketplace, combined with our ongoing, rigorous focus on disciplined pricing and cost management, we are increasing our guidance for 2005 operating earnings to $8.75 to $8.90 per share from our prior guidance of $8.40 per share, representing an increase of 20 percent to 22 percent over 2004, and we are increasing our guidance for membership growth to 950,000 to 1.05 million."(3) "We believe that our enhanced customer offerings have truly differentiated dif·fer·en·ti·ate v. dif·fer·en·ti·at·ed, dif·fer·en·ti·at·ing, dif·fer·en·ti·ates v.tr. 1. To constitute the distinction between: Aetna," said Ronald A. Williams, president." In fact, the continued increase in our enrollment is important market validation See validate. validation - The stage in the software life-cycle at the end of the development process where software is evaluated to ensure that it complies with the requirements. of the strength of Aetna's product and service offerings. We are quite pleased to report a very strong January January: see month. 2005 selling season on the heels of an 86,000 net membership increase in the fourth quarter and 654,000 net new members for all of 2004. "In addition, our recently enhanced Aexcel network, which allows members access to quality, cost-effective cost-effective, n the minimal expenditure of dollars, time, and other elements necessary to achieve the health care result deemed necessary and appropriate. providers, has seen strong customer acceptance. We have expanded Aexcel's availability to nine geographic geographic /geo·graph·ic/ (je?o-graf´ik) in pathology, of or referring to a pattern that is well demarcated, resembling outlines on a map. geographic pertaining to geography. locations from three, and the number of medical specialties Medical Specialties See also anatomy; disease and illness; drugs; health; remedies; surgery. adenography the science of the description of glands. — adenographic, adj. from six to twelve," Williams said. Health Care business results Health Care, which provides a full range of insured The person who obtains or is otherwise covered by insurance on his or her health, life, or property. The insured in a policy is not limited to the insured named in the policy but applies to anyone who is insured under the policy. insured n. and self-insured self-insured Self fund Health insurance adjective Referring to the practice of carrying an individual health insurance policy for oneself; self insurance is usually more expensive than group insurance medical, dental dental /den·tal/ (den´t'l) pertaining to a tooth or teeth. den·tal adj. 1. Of, relating to, or for the teeth. 2. Of, relating to, or intended for dentistry. , pharmacy and behavioral health Behavioral health was first used in the 1980's to name the combination of the fields mental health and substance abuse. As an example, an organization serving both mental health and substance abuse clients might refer to its practice as behavioral health or products and services, reported: --Operating earnings, excluding other items, of $288.2 million for the fourth quarter of 2004, compared with fourth quarter of 2003 operating earnings of $214.1 million. Health care operating earnings included approximately $38 million, after tax, of favorable development of prior-period health care cost estimates in the fourth quarter of 2004 and approximately $28 million, after tax, in the fourth quarter of 2003. The increase was due primarily to higher membership levels, growth in revenues from increased premiums and fees and continued general and administrative expense efficiencies, offset in part by a higher medical cost ratio. --Net income of $261.8 million for the fourth quarter of 2004, compared with $219.4 million in the fourth quarter of 2003. --A Commercial Risk Medical Cost Ratio (MCR MCR My Chemical Romance (band) MCR Minimum Capital Requirement MCR Minimum Cell Rate MCR Middle Common Room (UK universities) MCR Multivariate Curve Resolution ) of 79.0 percent for the fourth quarter of 2004, compared with 78.0 percent for the fourth quarter of 2003, excluding favorable development of prior-period health care cost estimates in both periods. Including development, the Commercial Risk MCR was 77.6 percent for the fourth quarter of 2004 and 76.6 percent for the fourth quarter of 2003. --A Medicare Medicare, national health insurance program in the United States for persons aged 65 and over and the disabled. It was established in 1965 with passage of the Social Security Amendments and is now run by the Centers for Medicare and Medicaid Services. MCR of 91.1 percent for the fourth quarter of 2004, compared with 85.9 percent for the fourth quarter of 2003, excluding favorable development in the fourth quarter of 2004. Including development, the Medicare MCR was 88.5 percent for the fourth quarter of 2004. There was no significant favorable development in the fourth quarter of 2003. --Total medical membership of 13.656 million at December December: see month. 31, 2004, compared with 13.570 million at September September: see month. 30, 2004, an increase of approximately 86,000. Fourth quarter dental membership increased sequentially se·quen·tial adj. 1. Forming or characterized by a sequence, as of units or musical notes. 2. Sequent. se·quen by 296,000 to 11.932 million. Pharmacy membership increased by 124,000 to 8.447 million from September 30, 2004. --Total revenues in the fourth quarter of 2004 increased by 13.6 percent to $4.5 billion from $3.9 billion in the fourth quarter of 2003. Full-year 2004 operating earnings for Health Care were $1.1 billion, compared with 2003 operating earnings of $862.4 million including reserve development. Excluding favorable reserve development of approximately $57 million, after tax, in 2004 and approximately $148 million, after tax, in 2003, operating earnings were $1.1 billion in 2004, compared with $714.4 million in 2003, an increase of 47 percent. Full-year 2004 operating earnings were higher primarily due to higher membership levels, growth in revenues from increased premiums and fees and continued general and administrative expense efficiencies, offset in part by a higher medical cost ratio. Full-year net income for 2004 was $1.1 billion, compared with $809.6 million in 2003. Group Insurance business results Group Insurance, which includes group life, disability and long-term care long-term care (LTC), n the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders. products, reported: --Operating earnings of $38.0 million for the fourth quarter of 2004, compared with $33.4 million for the fourth quarter of 2003. Operating earnings were higher than the fourth quarter of 2003, due primarily to higher revenue and an overall lower benefit cost ratio. --Net income of $44.0 million for the fourth quarter of 2004, compared with $38.9 million for the fourth quarter of 2003. --Total revenues for the fourth quarter of 2004 of $519.3 million, compared with $468.0 million for the fourth quarter of 2003. --Total Group membership of 13.494 million as of December 31, 2004, compared with 13.287 million at September 30, 2004, an increase of 207,000 members. For full-year 2004, Group Insurance reported operating earnings of $126.5 million, compared with $134.8 million in 2003. The decline was primarily due to a higher overall benefit cost ratio, which more than offset an improvement in the operating expense ratio. Full-year net income for 2004 was $146.3 million, compared with $149.3 million in 2003. Large Case Pensions business results Large Case Pensions, which manages a variety of discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: and other retirement and savings products primarily for defined benefit and defined contribution plan Defined contribution plan A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan customers, reported: --Operating earnings of $9.6 million for the fourth quarter of 2004, compared with $9.3 million for the fourth quarter of 2003. --Net income of $13.1 million for the fourth quarter of 2004, compared with $8.1 million for the fourth quarter of 2003. For full-year 2004, Large Case Pensions reported operating earnings of $31.3 million, compared with $36.5 million in 2003. The year-over-year change is mainly due to lower investment income and the runoff Runoff The procedure of printing the end-of-day prices for every stock on an exchange onto ticker tape. Notes: If the "tape is late" then it can take a long time to print off all the closing prices. of liabilities and related assets. Full-year net income for 2004 and 2003 was $41.8 million in each year. Total company results --Total Revenues. Revenues were $5.2 billion for the fourth quarter of 2004, compared with $4.6 billion for the fourth quarter of 2003. For full-year 2004, total revenues were $19.9 billion, compared with $18.0 billion in 2003. The growth in fourth quarter revenue reflects premium and fee rate increases and a higher level of membership that resulted in an increase of 14.2 percent in premiums and 9.9 percent in fees. --Total Operating Expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. . Operating expenses, excluding other items, were $1.03 billion for the fourth quarter of 2004, $7.8 million higher than the fourth quarter of 2003. General and administrative expenses declined by $37.3 million due to ongoing expense reduction initiatives. Selling expenses associated with new membership and premium rate increases increased by $45.1 million. For full-year 2004, operating expenses, excluding other items, were $3.98 billion, $55.3 million lower than the $4.04 billion reported for full-year 2003. Operating expenses for fourth-quarter and full-year 2004 exclude an Aetna Foundation voluntary contribution of $45.0 million pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern . Including this contribution, expenses were $1.08 billion for the fourth quarter of 2004 and $4.03 billion for full-year 2004. Operating expenses for full-year 2003 exclude a physician class-action settlement of $115.4 million pretax. Including the settlement, expenses were $4.15 billion. --Corporate Interest expense was $18.2 million after tax for the fourth quarter of 2004, compared with $16.9 million for the fourth quarter of 2003. Corporate interest expense was $68.0 million for full-year 2004, compared with $66.9 million for 2003. --Net Income. Aetna reported net income of $300.7 million for the fourth quarter of 2004, compared with $249.5 million for the fourth quarter of 2003. For full-year 2004, Aetna reported net income of $2.2 billion, compared with $933.8 million for 2003. Net income for 2004 included $1.03 billion of the previously announced tax refund and favorable tax adjustments related to discontinued operations Discontinued operations Divisions of a business that have been sold or written off and that no longer are maintained by the business. . --Pretax operating margin Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: (4) improved to 9.1 percent for the fourth quarter of 2004, from 7.7 percent for the fourth quarter of 2003. The after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. operating margin, which represents income from continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the divided by total revenue, was 5.8 percent for the fourth quarter of 2004, compared with 5.5 percent in fourth quarter of 2003. For full-year 2004, pretax operating margin improved to 9.7 percent, from 7.9 percent in 2003. The after-tax operating margin was 6.1 percent for 2004, compared with 5.2 percent in 2003. The public may access the conference call through a live audio webcast available on Aetna's Investor Information link on the Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the at www.aetna.com. Financial, statistical and other information, including GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). reconciliations, related to the conference call also will be available on Aetna's Investor Information web site. The conference call also can be accessed by dialing 800-810-0924, or 913-981-4900 for international callers. The Company suggests participants dial in approximately 10 minutes prior to the call. 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 888-203-1112, or 719-457-0820 for international callers. The replay access code is 485178. Telephone replays will be available from 11:30 a.m. ET on February February: see month. 10 until midnight ET on February 17. As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 13.7 million medical members, 11.9 million dental members, 8.4 million pharmacy members and 13.5 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost-effective health care through a nationwide network of more than 655,000 health care professionals, including over 390,000 primary care and specialist doctors and 3,937 hospitals. For more information, please visit www.aetna.com. (Figures as of December 31, 2004) (1) Operating earnings exclude net realized capital gains (losses) and other items from income from continuing operations as discussed below. Although the excluded items may recur, management believes that operating earnings and operating earnings per share provide a useful comparison of its underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding its operations and allocation of resources allocation of resources Apportionment of productive assets among different uses. The issue of resource allocation arises as societies seek to balance limited resources (capital, labour, land) against the various and often unlimited wants of their members. among its businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. Each of these excluded items is discussed below: --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, but these transactions do not directly relate to the underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. or servicing of products for customers and are not directly related to the core performance of the Company's business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets . --A contribution to the Aetna Foundation of approximately $29.3 million after tax ($45.0 million pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta ) is included as an other item in the fourth quarter and full-year 2004 and represents a non-recurring voluntary contribution that is over and above the Company's normal level of contributions for 2004 and does not reflect underlying 2004 business performance. --Settlement of a physician class-action lawsuit lawsuit: see procedure; tort. of approximately $75 million after tax ($115.4 million pretax) is included as the other item in 2003 and represents an estimate of 2003 net settlement costs of that litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. . Management believes this settlement was not in the ordinary course of business and its impact does not reflect underlying 2003 business performance. The Company also displays certain metrics metrics Managed care A popular term for standards by which the quality of a product, service, or outcome of a particular form of Pt management is evaluated. See TQM. (e.g., medical cost ratios, operating earnings, operating earnings per share and pretax operating margins) excluding changes to prior-period health care cost estimates. Each quarter, the Company re-examines previously established health care cost payable estimates based on actual claim submissions and other changes in facts and circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Decreases (increases) in prior periods' estimates represent the effect of favorable (unfavorable) development of prior period health care cost estimates on current period results of operations, at each financial statement date. The Company believes excluding changes to prior period health care cost estimates better reflects the underlying current-period health care costs. For a reconciliation of these items to financial measures calculated under accounting principles generally accepted in the United States of America UNITED STATES OF AMERICA. The name of this country. The United States, now thirty-one in number, are Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, (GAAP), refer to the tables on pages 10 to 14 of this release. (2) On July July: see month. 8, 2004, the Company was notified that the Congressional Joint Committee on Taxation approved a tax refund of approximately $740 million after tax, including interest, relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc businesses that were sold in the 1990s by the Company's predecessor predecessor - parent . The Company received approximately $666 million of the tax refund during the third quarter of 2004 and expects to receive the remaining refund TO REFUND. To pay back by the party who has received it, to the party who has paid it, money which ought not to have been paid. 2. On a deficiency of assets, executors and administrators cum testamento annexo, are entitled to have refunded to them legacies in 2005. The refund was recorded as income from discontinued operations. This approval also finalized See finalization. the Internal Revenue Service's (IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. ) audit of the Company's tax returns for the years 1991 through 2001. As a result of the resolution of these audits, the Company also recorded favorable adjustments of $250 million to existing tax liabilities as income from discontinued operations. In the first quarter of 2004, the Company recorded favorable adjustments of $40 million to existing tax liabilities as income from discontinued operations due to the finalization Writing the table of contents (TOC) on a recordable CD or DVD disc. The finalization process ensures that the disc can be played back on most CD and DVD players. See disc-at-once. of the IRS audit of the Company's tax returns for the years 1984 through 1990. The total of these items for 2004 related to discontinued operations was $1.03 billion. (3) Projected operating earnings per share for 2005 exclude any future net realized capital gains or losses capital gains or losses n. particularly when calculating the tax liability of an individual or business, this is the difference between the original cost plus the cost of capital improvements, excluding maintenance, called "basis" and the sales price. . The Company is not able to project the amount of future net realized capital gains or losses and cannot therefore reconcile projected 2005 operating earnings to projected income from continuing operations. Projected operating earnings per share are prior to the effect of the stock split. Projected operating earnings per share for full year 2005 assume approximately 154 million weighted-average diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. shares. Projected operating earnings for 2005 exclude the effect of expensing stock options which will become effective in the third quarter of 2005. (4) In order to provide useful information regarding profitability of the Company on a basis comparable to others in the industry, without regard to financing decisions Financing decisions Decisions concerning the liabilities and stockholders' equity side of the firm's balance sheet, such as a decision to issue bonds. , income taxes and amortization of other acquired intangible assets Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. (each of which may vary for reasons not directly related to performance of the underlying business), the company's pretax operating margin excludes interest expense, income taxes and amortization of other acquired intangible assets. Management also uses pretax operating margin to assess its performance, including performance versus competitors COMPETITORS, French law. Persons who compete or aspire to the same office, rank or employment. As an English word in common use, it has a much wider application. Ferriere, Dict. de Dr. h.t. . Operating earnings used in the pretax margin calculation also exclude the items noted in footnote Text that appears at the bottom of a page that adds explanation. It is often used to give credit to the source of information. When accumulated and printed at the end of a document, they are called "endnotes." 1. For a reconciliation to margin calculated under GAAP, refer to the tables on page 13 of this release. ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to earnings and membership. Forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. information is based on management's estimates, assumptions and projections, and is subject to significant uncertainties and other factors, many of which are beyond Aetna's control. Important risk factors could cause actual future results and other future events to differ materially from those currently estimated by management. Those risk factors include, but are not limited to: unanticipated increases in medical costs (including increased medical utilization utilization, n 1. the extent to which a given group uses a particular service in a specified period. Although usually expressed as the number of services used per year per 100 or per 1000 persons eligible for the service, utilization rates may be , increased pharmacy costs, increases resulting from unfavorable changes in contracting or re-contracting with providers, changes in membership mix to lower-premium or higher-cost products or membership-adverse selection; as well as changes in medical cost estimates due to the necessary extensive judgment that is used in the medical cost estimation estimation In mathematics, use of a function or formula to derive a solution or make a prediction. Unlike approximation, it has precise connotations. In statistics, for example, it connotes the careful selection and testing of a function called an estimator. 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); decreases in membership or failure to achieve desired membership growth due to significant competition or other factors; increases in medical costs or Group Insurance claims resulting from any acts of terrorism terrorism, the threat or use of violence, often against the civilian population, to achieve political or social ends, to intimidate opponents, or to publicize grievances. or otherwise; the ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, and to improve relations with providers while taking actions to reduce medical costs; the ability to successfully implement Aetna's operating model Operating Model is a term that is used in many contexts. In essence an operating model describes how an organization operates across both business and technology domains. The Operating Model describes what is important for the organization. to a projected growing membership base and to successfully implement multiple strategic and operational initiatives simultaneously si·mul·ta·ne·ous adj. 1. Happening, existing, or done at the same time. See Synonyms at contemporary. 2. Mathematics ; lower levels of investment income from continued low interest rates; adverse government regulation (including legislative proposals eliminating or reducing ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). pre-emption PRE-EMPTION, intern. law. The right of preemption is the right of a nation to detain the merchandise of strangers passing through her territories or seas, in order to afford to her subjects the preference of purchase. 1 Chit. Com. Law, 103; 1 Bl. Com. 287. 2. of state laws that would increase potential litigation exposure, and other proposals, such as patients' rights The legal interests of persons who submit to medical treatment. For many years, common medical practice meant that physicians made decisions for their patients. This paternalistic view has gradually been supplanted by one promoting patient autonomy, whereby patients and legislation, that would increase potential litigation exposure or mandate A judicial command, order, or precept, written or oral, from a court; a direction that a court has the authority to give and an individual is bound to obey. A mandate might be issued upon the decision of an appeal, which directs that a particular action be taken, or upon a coverage of certain health benefits); adverse pricing actions by government payors; changes in size, product mix and medical cost experience of membership in key markets; our ability to integrate, simplify, and enhance our existing information technology system and platform to keep pace with changing customer and regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. needs; and the outcome of various litigation and regulatory matters, including litigation and ongoing reviews of business practices by various regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities (including the current industry wide investigation into insurance brokerage BROKERAGE, contracts. The trade or occupation of a broker; the commissions paid to a broker for his services. practices concerning broker compensation arrangements, bid quoting practices and potential antitrust Antitrust The antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade. violations being conducted by the New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Attorney General and the Connecticut Connecticut, state, United States Connecticut (kənĕt`ĭkət), southernmost of the New England states of the NE United States. It is bordered by Massachusetts (N), Rhode Island (E), Long Island Sound (S), and New York (W). Attorney General, and for which the Company has received and may receive subpoenas, and related litigation). For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2003 Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. , on file with the Securities and Exchange Commission. You also should read Aetna's 2004 Annual Report on Form 10-K when filed with the Securities and Exchange Commission for a discussion of Aetna's historical results of operations and financial condition.
Consolidated Statements of Income
($ in Millions)
Three Months Ended Twelve Months Ended
------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2003 2004 2003
------------------------------------------
Revenue:
Health care premiums $3,870.4 $3,388.7 $14,862.8 $13,235.5
Other premiums 473.3 415.1 1,813.9 1,668.5
Administrative services
contract fees 518.4 471.7 2,054.9 1,884.7
Net investment income 276.9 277.6 1,062.5 1,095.0
Other income 10.0 6.3 39.2 27.5
Net realized capital gains 19.3 15.4 70.8 65.2
------------------------------------------
Total revenue 5,168.3 4,574.8 19,904.1 17,976.4
Benefits and expenses:
Health care costs (1) 3,026.5 2,616.5 11,637.7 10,135.8
Current and future benefits 560.9 525.0 2,191.5 2,090.8
Operating expenses:
Selling expenses 188.9 143.8 700.0 567.4
General and administrative
expenses (2) 887.2 879.5 3,328.8 3,587.1
------------------------------------------
Total operating
expenses 1,076.1 1,023.3 4,028.8 4,154.5
Interest expense 28.1 25.9 104.7 102.9
Amortization of other
acquired intangible assets 7.8 12.7 42.5 50.8
------------------------------------------
Total benefits and
expenses 4,699.4 4,203.4 18,005.2 16,534.8
------------------------------------------
Income from continuing
operations before income
taxes 468.9 371.4 1,898.9 1,441.6
Income taxes 168.2 121.9 683.8 507.8
------------------------------------------
Income from continuing
operations 300.7 249.5 1,215.1 933.8
Income from discontinued
operations, net of tax (3) - - 1,030.0 -
------------------------------------------
Net income $300.7 $249.5 $2,245.1 $933.8
==========================================
Shareholders' equity $9,081.4 $7,924.0
======================
(1) The three months ended December 31, 2004 and December 31, 2003
include favorable development of prior-period health care cost
estimates of approximately $60 million pretax (approximately $38
million after tax) and approximately $43 million pretax
(approximately $28 million after tax), respectively, in the Health
Care segment. The twelve months ended December 31, 2004 and December
31, 2003 include favorable development of prior-period health care
cost estimates of approximately $90 million pretax (approximately $57
million after tax) and approximately $228 million pretax
(approximately $148 million after tax), respectively, in the Health
Care segment.
(2) The three and twelve months ended December 31, 2004 include $45.0
million pretax for the Aetna Foundation contribution. The twelve
months ended December 31, 2003 include $115.4 million pretax for the
physician class action settlement.
(3) Income from discontinued operations for the twelve months ended
December 31, 2004 includes approximately $740 million after tax,
including interest, related to the Congressional Joint Committee on
Taxation's approval of a tax refund, $250 million related to the
completion of certain Internal Revenue Service audits associated with
businesses that were sold in the 1990s by the Company's predecessor
(former Aetna) and $40 million related to the completion of certain
Internal Revenue Service audits associated with former Aetna.
Summary of Results
($ in Millions)
Three Months Ended Twelve Months Ended
------------------------- -------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Operating earnings,
excluding other
items and
favorable
development $279.6 $211.9 $1,141.5 $818.8
Favorable
development of
prior-period
health care cost
estimates 38.0 28.0 57.0 148.0
------------ ------------ ------------ ------------
Operating
earnings,
excluding other
items 317.6 239.9 1,198.5 966.8
Aetna Foundation
contribution (29.3) - (29.3) -
Physician class
action settlement - - - (75.0)
------------ ------------ ------------ ------------
Operating
earnings,
including other
items 288.3 239.9 1,169.2 891.8
Net realized
capital gains 12.4 9.6 45.9 42.0
------------ ------------ ------------ ------------
Income from
continuing
operations
(GAAP measure) 300.7 249.5 1,215.1 933.8
Income from
discontinued
operations (1) - - 1,030.0 -
------------ ------------ ------------ ------------
Net income
(GAAP measure) $300.7 $249.5 $2,245.1 $933.8
============ ============ ============ ============
Weighted average
common shares -
basic 147,367,056 153,086,405 151,391,260 152,681,613
============ ============ ============ ============
Weighted average
common shares -
diluted 153,922,694 159,704,773 156,961,756 158,081,582
============ ============ ============ ============
Summary of Results Per Common Share
Operating earnings,
excluding other
items and
favorable
development $1.82 $1.32 $7.28 $5.18
Favorable
development of
prior-period
health care cost
estimates .24 .18 .36 .94
------------ ------------ ------------ ------------
Operating
earnings,
excluding other
items 2.06 1.50 7.64 6.12
Aetna Foundation
contribution (.19) - (.19) -
Physician class
action settlement - - - (.48)
------------ ------------ ------------ ------------
Operating
earnings,
including other
items 1.87 1.50 7.45 5.64
Net realized
capital gains .08 .06 .29 .27
------------ ------------ ------------ ------------
Income from
continuing
operations
(GAAP measure) 1.95 1.56 7.74 5.91
Income from
discontinued
operations (1) - - 6.56 -
------------ ------------ ------------ ------------
Net income
(GAAP measure) $1.95 $1.56 $14.30 $5.91
============ ============ ============ ============
Shareholders'
equity (2) $61.99 $51.93
============ ============
(1) Income from discontinued operations for the twelve months ended
December 31, 2004 includes approximately $740 million after tax,
including interest, related to the Congressional Joint Committee on
Taxation's approval of a tax refund, $250 million related to the
completion of certain Internal Revenue Service audits associated with
businesses that were sold in the 1990s by the Company's predecessor
(former Aetna) and $40 million related to the completion of certain
Internal Revenue Service audits associated with former Aetna.
(2) Actual common shares outstanding were 146.5 million at December
31, 2004 and 152.6 million at December 31, 2003.
Segment Information (1)
($ in Millions)
Three Months Ended Twelve Months Ended
------------------- ---------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2003 2004 2003
--------- --------- ---------- ----------
Health Care:
Total revenue $4,460.5 $3,926.2 $17,200.6 $15,377.1
========= ========= ========== ==========
Selling expenses $167.3 $128.0 $630.9 $510.7
General and administrative
expenses 798.2 834.5 3,110.0 3,293.3
--------- --------- ---------- ----------
Operating expenses, excluding
other items 965.5 962.5 3,740.9 3,804.0
Aetna Foundation contribution 45.0 - 45.0 -
Physician class action
settlement - - - 115.4
--------- --------- ---------- ----------
Total operating expenses
(GAAP measure) $1,010.5 $962.5 $3,785.9 $3,919.4
========= ========= ========== ==========
Operating earnings, excluding
other items and favorable
development $250.2 $186.1 $1,051.7 $714.4
Favorable development of
prior-period health care
cost estimates 38.0 28.0 57.0 148.0
--------- --------- ---------- ----------
Operating earnings, excluding
other items 288.2 214.1 1,108.7 862.4
Aetna Foundation contribution (29.3) - (29.3) -
Physician class action
settlement - - - (75.0)
--------- --------- ---------- ----------
Operating earnings, including
other items 258.9 214.1 1,079.4 787.4
Net realized capital gains 2.9 5.3 15.6 22.2
--------- --------- ---------- ----------
Net income (GAAP measure) $261.8 $219.4 $1,095.0 $809.6
========= ========= ========== ==========
Group Insurance:
Total revenue $519.3 $468.0 $1,960.1 $1,832.9
========= ========= ========== ==========
Selling expenses $21.6 $15.8 $69.1 $56.7
General and administrative
expenses 39.2 40.1 153.9 159.5
--------- --------- ---------- ----------
Total operating expenses $60.8 $55.9 $223.0 $216.2
========= ========= ========== ==========
Operating earnings $38.0 $33.4 $126.5 $134.8
Net realized capital gains 6.0 5.5 19.8 14.5
--------- --------- ---------- ----------
Net income (GAAP measure) $44.0 $38.9 $146.3 $149.3
========= ========= ========== ==========
Large Case Pensions:
Total revenue $188.5 $180.6 $743.4 $766.4
========= ========= ========== ==========
Operating earnings $9.6 $9.3 $31.3 $36.5
Net realized capital gains
(losses) 3.5 (1.2) 10.5 5.3
--------- --------- ---------- ----------
Net income (GAAP measure) $13.1 $8.1 $41.8 $41.8
========= ========= ========== ==========
Corporate Interest:
Interest expense, net of tax $18.2 $16.9 $68.0 $66.9
========= ========= ========== ==========
Total Company:
Total revenue $5,168.3 $4,574.8 $19,904.1 $17,976.4
========= ========= ========== ==========
Selling expenses $188.9 $143.8 $700.0 $567.4
General and administrative
expenses 842.2 879.5 3,283.8 3,471.7
--------- --------- ---------- ----------
Operating expenses, excluding
other items 1,031.1 1,023.3 3,983.8 4,039.1
Aetna Foundation contribution 45.0 - 45.0 -
Physician class action
settlement - - - 115.4
--------- --------- ---------- ----------
Total operating expenses
(GAAP measure) $1,076.1 $1,023.3 $4,028.8 $4,154.5
========= ========= ========== ==========
(1) Revenue and operating expense information is presented before
income taxes. Operating earnings information is presented net of
income taxes.
Enrollment
(Members in Thousands)
Dec. 31, Dec. 31, Sept. 30,
2004 2003 2004
-----------------------------------
Medical Membership:
Commercial 13,446 12,783 13,358
Medicare 97 105 99
Medicaid 113 114 113
-----------------------------------
Total Medical Membership 13,656 13,002 13,570
===================================
Dental Membership 11,932 10,942 11,636
===================================
Pharmacy Membership (1) 8,447 7,521 8,323
===================================
Group Insurance Membership 13,494 12,288 13,287
===================================
Aetna HealthFund(R) (2) 222 44 212
===================================
Operating Margins
($ in Millions)
Three Months Ended Twelve Months Ended
-----------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2003 2004 2003
-----------------------------------------
Reconciliation to Income from
continuing operations before
income taxes:
Operating earnings before
income taxes, excluding
interest expense,
amortization of other
acquired intangible assets,
other items and favorable
development (A) $470.5 $351.6 $1,930.3 $1,417.5
Favorable development of
prior-period health care
cost estimates 60.0 43.0 90.0 228.0
-----------------------------------------
Operating earnings before
income taxes, excluding
interest expense,
amortization of other
acquired intangible assets
and other items (B) 530.5 394.6 2,020.3 1,645.5
Interest expense (28.1) (25.9) (104.7) (102.9)
Amortization of other
acquired intangible assets (7.8) (12.7) (42.5) (50.8)
Aetna Foundation contribution
(other item) (45.0) - (45.0) -
Physician class action
settlement (other item) - - - (115.4)
Net realized capital gains 19.3 15.4 70.8 65.2
-----------------------------------------
Income from continuing
operations before income
taxes (C) (GAAP measure) $468.9 $371.4 $1,898.9 $1,441.6
=========================================
Reconciliation to Income from
continuing operations:
Operating earnings, excluding
interest expense,
amortization of other
acquired intangible assets,
other items and favorable
development (D) $302.8 $237.1 $1,237.1 $918.7
Favorable development of
prior-period health care
cost estimates, net of tax 38.0 28.0 57.0 148.0
-----------------------------------------
Operating earnings, excluding
interest expense,
amortization of other
acquired intangible assets
and other items (E) 340.8 265.1 1,294.1 1,066.7
Interest expense, net of tax (18.2) (16.9) (68.0) (66.9)
Amortization of other
acquired intangible assets,
net of tax (5.0) (8.3) (27.6) (33.0)
Aetna Foundation
contribution, net of tax
(other item) (29.3) - (29.3) -
Physician class action
settlement, net of tax
(other item) - - - (75.0)
Net realized capital gains,
net of tax 12.4 9.6 45.9 42.0
-----------------------------------------
Income from continuing
operations (F) (GAAP
measure) $300.7 $249.5 $1,215.1 $933.8
=========================================
Reconciliation of Revenue:
Revenue, excluding net
realized capital gains (G) $5,149.0 $4,559.4 $19,833.3 $17,911.2
Net realized capital gains 19.3 15.4 70.8 65.2
-----------------------------------------
Total revenue (H) (GAAP
measure) $5,168.3 $4,574.8 $19,904.1 $17,976.4
=========================================
Total Company Operating
Margins:
Pretax operating margin
(B)/(G) 10.3% 8.7% 10.2% 9.2%
Pretax operating margin -
Adjusted (A)/(G) 9.1% 7.7% 9.7% 7.9%
Pretax operating margin
(C)/(H) (GAAP measure) 9.1% 8.1% 9.5% 8.0%
After-tax operating margin
(E)/(G) 6.6% 5.8% 6.5% 6.0%
After-tax operating margin -
Adjusted (D)/(G) 5.9% 5.2% 6.2% 5.1%
After-tax operating margin
(F)/(H) (GAAP measure) 5.8% 5.5% 6.1% 5.2%
(1) Pharmacy membership includes 7,989; 7,244 and 7,896 thousand
members receiving pharmacy benefit management services and 458; 277
and 427 thousand members who purchased medications through Aetna's
mail order pharmacy during the quarterly period at December 31, 2004;
December 31, 2003 and September 30, 2004, respectively.
(2) Represents Aetna's consumer-directed membership included in
Commercial medical membership.
Health Care Medical Cost Ratios (1)
($ in Millions)
Three Months Ended Twelve Months Ended
------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2003 2004 2003
------------------------------------------
Health Care Premiums:
Health Care Risk (A) $3,870.4 $3,388.7 $14,862.8 $13,235.5
Commercial Risk (B) $3,641.2 $3,161.0 $13,924.1 $12,329.3
Medicare (C) $229.2 $227.7 $938.7 $906.2
Health Care Costs:
Health Care Risk
----------------------------
Health care costs (D)
(GAAP measure) $3,026.5 $2,616.5 $11,637.7 $10,135.8
Favorable development of
prior-period health care
cost estimates 60.0 43.0 90.0 228.0
------------------------------------------
Health care costs - Adjusted
(E) $3,086.5 $2,659.5 $11,727.7 $10,363.8
==========================================
Commercial Risk
----------------------------
Health care costs (F)
(GAAP measure) $2,823.8 $2,421.9 $10,828.8 $9,365.4
Favorable development of
prior-period health care
cost estimates 54.0 43.0 78.0 215.0
------------------------------------------
Health care costs - Adjusted
(G) $2,877.8 $2,464.9 $10,906.8 $9,580.4
==========================================
Medicare
----------------------------
Health care costs (H)
(GAAP measure) $202.9 $195.6 $809.0 $771.8
Favorable development of
prior-period health care
cost estimates 6.0 - 12.0 13.0
------------------------------------------
Health care costs - Adjusted
(I) $208.9 $195.6 $821.0 $784.8
==========================================
Health Care Medical Cost Ratios:
Health Care Risk (D)/(A)
(GAAP measure) 78.2% 77.2% 78.3% 76.6%
Health Care Risk - Adjusted
(E)/(A) 79.7% 78.5% 78.9% 78.3%
Commercial Risk (F)/(B)
(GAAP measure) 77.6% 76.6% 77.8% 76.0%
Commercial Risk - Adjusted
(G)/(B) 79.0% 78.0% 78.3% 77.7%
Medicare (H)/(C) (GAAP
measure) 88.5% 85.9% 86.2% 85.2%
Medicare - Adjusted (I)/(C) 91.1% 87.5% 86.6%
(1) Health Care Risk includes all medical and dental risk products.
Commercial Risk includes all medical and dental risk products except
Medicare and Medicaid. Risk includes all medical and dental products
for which the Company assumes all or a majority of health care cost,
utilization or other risk.
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