Aetna Reports Second-Quarter 2006 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. -- Aetna Aetna, volcano: see Etna, Italy. (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. ):
-- Second-quarter operating earnings of $0.65 per share, $0.64
per share excluding reserve development; a 23 percent increase
over the prior-year quarter: in line with Thomson/First Call
mean estimate of $0.64 per share
-- Second-quarter net income of $0.67 per share
-- Second-quarter revenues increased 14 percent over the
prior-year quarter
-- Guidance for full-year 2006 operating earnings per share
increased to $2.77 to $2.79, from prior guidance of $2.74 to
$2.76, based on 580 million diluted shares
-- Third quarter operating earnings per share expected to be
$0.72
-- Full-year Total Operating Expense Ratio projected to be
approximately 18.5 percent, an improved level from prior
guidance of approximately 19 percent
-- Full-year net medical membership growth guidance now
projected to be 700,000 to 750,000, down from prior range
of 900,000 to 1 million
-- Full-year Commercial Risk Medical Cost Ratio now projected
to be approximately 80 percent, from prior guidance of
approximately 79 percent
Aetna (NYSE: AET) today announced second-quarter 2006 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 $0.65 per share. Operating earnings, excluding prior-period favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. reserve development, were $0.64 per share, an increase of 23 percent compared to the prior-year quarter. Favorable development was approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $6.0 million, after tax, or $0.01 per share. The increase in operating earnings reflects a 14 percent increase in revenue, primarily from year-over-year membership growth, and continued expansion of the operating margin Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: , primarily resulting from general and administrative expense efficiencies. Operating earnings exclude net realized capital gains (losses) and other items.(1) Second quarter net income was $0.67 per share.
Quarterly Financial Results at a Glance
Three Months Ended
June 30, 2006 June 30, 2005(a) Change
Total revenues $6.3 billion $5.5 billion 14%
============== ================
Operating earnings, excluding
development(b) $371.1 million $312.8 million 19%
============== ================
Net income $389.5 million $394.9 million (1%)
============== ================
Per share results:
Operating earnings(b) $0.65 $0.57 14%
Favorable development of
prior-period health care
cost estimates (0.01) (0.05)
-------------- ----------------
Operating earnings,
excluding development(b) $0.64 $0.52 23%
============== ================
Net income $0.67 $0.65 3%
============== ================
Weighted average common shares
(diluted) 584.2 million 607.0 million
(a) Restated for FAS123R and stock split. Refer to footnote 2 at the
end of this press release.
(b) For a full description of operating earnings and per-share
operating earnings, refer to footnote 1 at the end of this press
release.
"Our second-quarter results were marked by an improvement of 23 percent in operating earnings per share and a 14 percent increase in revenues over the prior-year quarter. We also continued to see expansion of our profit margin in the second quarter as our 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. as a percentage of revenue declined to 18.4 percent from 19.7 percent," said Ronald A. Williams, 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. and president. "Despite these very strong financial results, certain areas of our business did not meet our expectations. These included a large government case and our Stop-Loss stop-loss, n a general term referring to that category of coverage that provides insurance protection (reinsurance) to an employer for a self-funded plan. product, which were particularly impacted by higher-than-expected large claims; and our Small Group customer market, where we experienced heightened competitive pressures in certain 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. areas. These factors contributed to a higher overall Commercial Risk medical cost ratio of 81.4 percent, excluding development. We are taking specific corrective actions A corrective action is a change implemented to address a weakness identified in a management system. Normally corrective actions are instigated in response to a customer complaint, abnormal levels if internal nonconformity, nonconformities identified during an internal audit or to address these issues. "To be clear, we continue to believe that the outlook for Aetna and the industry overall remains bright, and that we are not seeing a change in fundamental dynamics. Our MCR MCR My Chemical Romance (band) MCR Minimum Capital Requirement MCR Minimum Cell Rate MCR Middle Common Room (UK universities) MCR Multivariate Curve Resolution , although higher, continues to be very competitive within our industry. And the flexibility of our 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. and active management allow us to meet challenges in the health care environment and still deliver positive results. "Given our solid revenue growth, our success at managing operating costs operating costs npl → gastos mpl operacionales and improved margins, we now expect full-year 2006 operating earnings per share to be in the range of $2.77 to $2.79, up from our prior guidance of $2.74 to $2.76. Furthermore, based on strong sales momentum and our demonstrated ability to win in the marketplace, we continue to expect operating earnings growth of at least 15 percent in 2007."(3) 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 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. 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 of $346.9 million for the second quarter of 2006, compared with $294.2 million for the second quarter of 2005, excluding approximately $6 million, after tax, of favorable development in the second quarter of 2006 and $35 million, after tax, of favorable development in the second quarter of 2005. Including development in both periods, operating earnings were $352.9 million in the second quarter of 2006 and $329.2 million in the second quarter of 2005. The increase in operating earnings reflects a 15 percent increase in revenue primarily from year-over-year membership growth and continued general and administrative expense efficiencies. --Net income of $293.2 million for the second quarter of 2006, compared with $331.7 million for the second quarter of 2005. Net income for the second quarter 2006 included other items consisting of a previously announced $8.1 million 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. debt refinancing Refinancing An extension and/or increase in amount of existing debt. charge, and a previously announced $47.1 million after-tax write-off Write-Off A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues. of an insurance recoverable related to a prior-year physician class action settlement. --A Commercial Risk Medical Cost Ratio (MCR) of 81.4 percent for the second quarter of 2006, compared with 78.9 percent for the second quarter of 2005, excluding favorable reserve development in both periods. Including development, the Commercial Risk MCR was 81.1 percent for the second quarter of 2006 and 77.6 percent for the second quarter of 2005. --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 89.3 percent for the second quarter of 2006, compared with 90.2 percent for the second quarter of 2005, excluding unfavorable reserve development in the second quarter of 2006 and favorable reserve development in the second quarter of 2005. Including development, the Medicare MCR was 89.5 percent for the second quarter of 2006 and 89.3 percent for the second quarter of 2005. --Total medical membership of 15.407 million at June June: see month. 30, 2006, compared with 15.418 million at March 31, 2006, a decrease of approximately 11,000. Second-quarter pharmacy 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 62,000 to 10.213 million and dental membership increased by 43,000 to 13.374 million from March 31, 2006. --Total revenues in the second quarter of 2006 increased by 15 percent to $5.5 billion from $4.8 billion in the second quarter of 2005, primarily due to rate increases, membership increases and acquisitions. 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 $36.0 million for the second quarter of 2006, compared with $30.9 million for the second quarter of 2005, reflecting higher net investment income levels and improved 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. margins offset in part by higher operating expenses. --Net income of $31.4 million for the second quarter of 2006, compared with $32.8 million for the second quarter of 2005. --Total revenues of $553.1 million for the second quarter of 2006, compared with $522.8 million for the second quarter of 2005. --Total Group Insurance membership of 15.265 million at June 30, 2006, compared with 13.089 million at March 31, 2006, primarily reflecting the acquisition of Broadspire's disability business, which added approximately 2.1 million self-insured members. 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 qualified pension plans, reported: --Operating earnings of $10.1 million for the second quarter of 2006, compared with $7.5 million for the second quarter of 2005, primarily reflecting higher investment income. --Net income of $86.8 million for the second quarter of 2006, compared with $50.2 million for the second quarter of 2005. Net income included a $75.0 million after-tax benefit for second quarter 2006 and a $43.4 million after-tax benefit for second quarter 2005 related to the reduction of reserves for discontinued products. Total Company results --Total Revenues. Revenues increased 14 percent to $6.3 billion for the second quarter of 2006, compared with $5.5 billion for the second quarter of 2005. The growth in second quarter revenue reflects a higher level of membership year-over year and premium and fee rate increases that resulted in an increase of 13 percent in premiums and 22 percent in fees and other revenue. --Total Operating Expenses. Operating expenses were $1.2 billion for the second quarter of 2006, $71.3 million higher than the second quarter of 2005, excluding the debt refinancing charge of $12.4 million, pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta , and the write-off of an insurance recoverable related to a prior-year physician class action settlement of $72.4 million, pre-tax. Operating expenses as a percentage of revenue(4) improved to 18.4 percent for the second quarter of 2006 from 19.7 percent for the second quarter of 2005, reflecting continued expense efficiencies. Including the other items, operating expenses were $156.1 million higher than in the second quarter of 2005. Including net realized capital gains (losses) and the other items, operating expenses as a percentage of revenue were 19.8 percent in the second quarter of 2006 and 19.7 percent in the second quarter of 2005. --Corporate Interest Expense was $21.9 million after tax for the second quarter of 2006, compared with $19.8 million after tax for the second quarter of 2005. The increase reflects higher interest rates and the termination The point where a line, channel or circuit ends. See SCSI termination and hybrid. of interest rate swap Interest Rate Swap A deal between banks or companies where borrowers switch floating-rate loans for fixed rate loans in another country. These can be either the same or different currencies. agreements in the second quarter of 2005, as well as higher overall levels of long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. . --Net Income. Aetna reported net income of $389.5 million for the second quarter of 2006, compared with $394.9 million for the second quarter of 2005. Net income for the second quarter of 2006 includes a $75.0 million after-tax benefit related to the reduction of reserves for discontinued products, an $8.1 million after-tax debt refinancing charge, and a $47.1 million after-tax write off of an insurance recoverable related to a prior-year physician class action settlement. For 2005, net income includes a $43.4 million after-tax benefit related to the reduction of reserves for discontinued products. --Operating Margin, excluding reserve development, was 10.0 percent for the second quarter of 2006, compared with 9.6 percent for the second quarter of 2005, pre-tax.(5) The after-tax 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 6.2 percent in the second quarter of 2006, compared with 7.2 percent in the second quarter of 2005. --Share repurchases. Aetna repurchased 21.2 million shares at a cost of $840 million in the second quarter of 2006, bringing the year-to-date Year-to-date (YTD) The period beginning at the start of the calendar year up to the current date. total of shares repurchased to 24.2 million, at a cost of $991 million. A live audio webcast of the second-quarter results conference call 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 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 877-502-9276, or 913-981-5591 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 2281824. Telephone replays will be available from 11:30 a.m. ET on July July: see month. 27 until midnight ET on August 10. Aetna is one of the nation's leading diversified diversified (di·verˑ·s health care benefits companies, serving approximately 29.9 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, long-term care and disability plans, and medical management capabilities. Our customers include employer groups employer group Association of employers Managed care An entity with a current group benefits agreement in effect with a health plan to provide covered health care services to its employee-subscribers and eligible dependents. , individuals, college students, part-time part-time adj. For or during less than the customary or standard time: a part-time job. part and hourly workers, health plans and government-sponsored plans. www.aetna.com (1) Operating earnings exclude net realized capital gains and 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 more useful comparison of the Company's underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding the Company's 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 the Company's businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. Each of these excluded items is discussed below: --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 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 . --Release of reserves of $75.0 million, after tax, for second quarter 2006 and $43.4 million, after tax, for second quarter 2005, for anticipated future losses on discontinued products, included as an other item for the Company, represents a reduction of reserves previously established for certain products no longer offered by the Company and does not benefit ongoing business operations. --A debt refinancing charge of $8.1 million, after tax, ($12.4 million pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern ) represents the net charge from the write-off of debt issuance costs and the recognition of deferred gains on terminated ter·mi·nate v. ter·mi·nat·ed, ter·mi·nat·ing, ter·mi·nates v.tr. 1. To bring to an end or halt: interest rate swaps in connection with the redemption The liberation of an estate in real property from a mortgage. Redemption is the process by which land that has been mortgaged or pledged is bought back or reclaimed. It is accomplished through a payment of the debt owed or a fulfillment of the other conditions. of the Company's 8.5 percent senior notes due 2041. This is an other item in the second quarter of 2006 and does not reflect underlying 2006 business performance. --The write-off of a $47.1 million, after tax, ($72.4 million pretax) insurance recoverable related to a prior-year physician class action settlement as a result of a trial court summary judgment ruling. This is an other item in the second quarter of 2006 and does not reflect underlying 2006 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 reserve development. 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 reserve development better reflects the underlying current-period health care costs. For a reconciliation of these items to financial measures calculated under U.S. generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (GAAP), refer to the tables on pages 9 to 13 of this press release. (2) Effective January January: see month. 1, 2006, the Company adopted FAS 123R applying the modified mod·i·fy v. mod·i·fied, mod·i·fy·ing, mod·i·fies v.tr. 1. To change in form or character; alter. 2. retrospective LAW, RETROSPECTIVE. A retrospective law is one that is to take effect, in point of time, before it was passed. 2. Whenever a law of this kind impairs the obligation of contracts, it is void. 3 Dall. 391. approach. Accordingly, all prior-period financial information was adjusted to reflect the Company's stock-based compensation activity. Additionally, results per common share and weighted average common shares have been adjusted to reflect the February February: see month. 17, 2006 two-for-one stock split. (3) Projected operating earnings per share and 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. ratio for full-year 2006 exclude $4.1 million of net realized capital gains for the six months ended June 30, 2006 and projected operating earnings, operating earnings per share and operating expense ratio for all periods also 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. from income from continuing operations. The Company is not able to project the amount of future net realized capital gains or losses and cannot therefore reconcile projected operating earnings to projected income from continuing operations, or to a projected change in income from continuing operations in any period. Projected operating earnings per share and Commercial Risk Medical Cost Ratio for full-year 2006 also exclude approximately $6 million, after tax, of favorable development of prior-period health care cost estimates for the second quarter of 2006. The Company believes excluding this reserve development better reflects the underlying current-period health care costs. Projected operating earnings per share and operating expense ratio for full-year 2006 also excludes the $6.2 million, after-tax, acquisition-related software charge reported in the first quarter of 2006 and the other items reported in the second quarter of 2006, as described 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. Projected operating earnings per share for 2006 assume approximately 580 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. (4) Operating expenses as a percentage of revenue excludes net realized capital gains and losses from total revenue. Net realized capital gains and losses do not directly relate to underwriting or servicing of products for customers and are not directly related to the core performance of the Company's business operations. Operating expenses exclude the other items described in footnote 1. For a reconciliation to operating expenses as a percentage of revenue calculated under GAAP, refer to the tables on page 13 of this press release. (5) 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 the Company's 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 described in footnote 1. For reconciliation to operating margin calculated under GAAP, refer to the tables on page 13 of this press release. ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to operating earnings, operating expense ratios, membership growth and medical cost ratios. 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, such as the increasing competitiveness we are experiencing in certain markets which could cause our membership to be lower than we expect and our medical cost ratios to be higher than we expect. 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, reputational issues 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. , epidemics This article is a list of major epidemics. Worldwide Pandemics
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 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. 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, 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 others, 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 2005 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 2005 Annual Report on Form 10-K and Aetna's 2006 second quarter report on Form 10-Q Form 10-Q See 10-Q. 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 Six Months Ended
------------------- ---------------------
June 30, June 30, June 30, June 30,
2006 2005(1) 2006 2005(1)
-------- -------- --------- ---------
Revenue:
Health care premiums $4,761.9 $4,145.7 $ 9,488.0 $ 8,199.2
Other premiums 507.9 501.7 1,010.0 1,000.2
Fees and other revenue 717.6 587.2 1,408.5 1,166.5
Net investment income 275.8 256.6 573.8 547.8
Net realized capital
(losses) gains (11.2) 5.7 6.4 10.1
-------- -------- --------- ---------
Total revenue 6,252.0 5,496.9 12,486.7 10,923.8
Benefits and expenses:
Health care costs (2) 3,898.3 3,244.7 7,684.5 6,293.2
Current and future benefits 578.8 581.3 1,179.5 1,196.6
Operating expenses:
Selling expenses 240.1 205.9 483.6 408.9
General and
administrative expenses
(3) 997.1 875.2 1,950.7 1,788.4
-------- -------- --------- ---------
Total operating
expenses 1,237.2 1,081.1 2,434.3 2,197.3
Interest expense 33.8 30.5 67.3 57.7
Amortization of other
acquired intangible assets 21.8 11.5 41.7 22.2
Reduction of reserve for
anticipated future losses
on discontinued products (115.4) (66.7) (115.4) (66.7)
-------- -------- --------- ---------
Total benefits and
expenses 5,654.5 4,882.4 11,291.9 9,700.3
-------- -------- --------- ---------
Income from continuing
operations before income
taxes 597.5 614.5 1,194.8 1,223.5
Income taxes 208.0 219.6 419.7 439.3
-------- -------- --------- ---------
Income from continuing
operations 389.5 394.9 775.1 784.2
Income from discontinued
operations, net of tax (4) - - 16.1 -
-------- -------- --------- ---------
Net income $ 389.5 $ 394.9 $ 791.2 $ 784.2
======== ======== ========= =========
Shareholders' equity $ 9,963.1 $ 9,531.3
========= =========
(1) Effective January 1, 2006, the Company adopted FAS 123R applying
the modified retrospective approach. Accordingly, all prior-period
financial information was adjusted to reflect the Company's stock-
based compensation activity.
(2) Health care costs for the three months ended June 30, 2006 include
favorable development of prior-period health care cost estimates
of approximately $10 million pretax (approximately $6 million
after tax) in the Health Care segment. Health care costs for the
three months ended June 30, 2005 include favorable development of
prior-period health care cost estimates of approximately $55
million pretax (approximately $35 million after tax) in the Health
Care segment.
(3) General and administrative expenses for the three and six months
ended June 30, 2006 include a charge of $72.4 million ($47.1
million after tax) in connection with the write-off of an
insurance recoverable related to a prior-year physician class
action settlement as a result of a trial court summary judgment
ruling and a $12.4 million ($8.1 million after tax) net charge
from the write-off of debt issuance costs and the recognition of
deferred gains on terminated interest rate swaps in connection
with the redemption of the Company's 8.5% senior notes due 2041.
Both of these charges are reflected in the Health Care segment.
The six months ended June 30, 2006 also include a charge of $8.3
million ($6.2 million after tax) for an acquisition-related
software charge reflected in the Group Insurance segment.
(4) Income from discontinued operations of approximately $16 million
for the six months ended June 30, 2006 reflects the Company's
receipt in February 2006 of a $50 million refund, including
interest, from the completion of certain Internal Revenue Service
audits associated with businesses previously sold by the Company's
former parent company. The Company previously recorded $735
million of this refund. The $50 million refund resulted in an
additional $16 million in income from discontinued operations.
Summary of Results
(in Millions)
Three Months Six Months
Ended Ended
----------------- -----------------
June June June June
30, 30, 30, 30,
2006 2005(1) 2006 2005(1)
------ -------- ------ --------
Operating earnings, excluding
favorable development $371.1 $ 312.8
Favorable development of prior-
period health care cost
estimates 6.0 35.0
------ --------
Operating earnings 377.1 347.8 $757.4 $ 734.2
Debt refinancing charge (8.1) - (8.1) -
Physician class action
settlement insurance-related
charge (47.1) - (47.1) -
Reduction of reserve for
anticipated future losses on
discontinued products 75.0 43.4 75.0 43.4
Acquisition-related software
charge - - (6.2) -
Net realized capital (losses)
gains (7.4) 3.7 4.1 6.6
------ -------- ------ --------
Income from continuing operations
(GAAP measure) 389.5 394.9 775.1 784.2
Income from discontinued
operations (2) - - 16.1 -
------ -------- ------ --------
Net income (GAAP measure) $389.5 $ 394.9 $791.2 $ 784.2
====== ======== ====== ========
Weighted average common shares -
basic 560.8 581.3 564.1 584.0
====== ======== ====== ========
Weighted average common shares -
diluted 584.2 607.0 588.6 608.9
====== ======== ====== ========
Summary of Results Per Common Share
Operating earnings, excluding
favorable development $ .64 $ .52
Favorable development of prior-
period health care cost
estimates .01 .05
------ --------
Operating earnings .65 .57 $ 1.29 $ 1.21
Debt refinancing charge (.02) - (.02) -
Physician class action
settlement insurance-related
charge (.08) - (.08) -
Reduction of reserve for
anticipated future losses on
discontinued products .13 .07 .13 .07
Acquisition-related software
charge - - (.01) -
Net realized capital (losses)
gains (.01) .01 .01 .01
------ -------- ------ --------
Income from continuing operations
(GAAP measure) .67 .65 1.32 1.29
Income from discontinued
operations (2) - - .02 -
------ -------- ------ --------
Net income (GAAP measure) $ .67 $ .65 $ 1.34 $ 1.29
====== ======== ====== ========
Shareholders' equity (3) $18.19 $ 16.44
====== ========
(1) Effective January 1, 2006, the Company adopted FAS 123R applying
the modified retrospective approach. Accordingly, all prior-period
financial information was adjusted to reflect the Company's stock-
based compensation activity. Additionally, results per common
share and weighted average common shares have been adjusted to
reflect the February 17, 2006 two-for-one stock split.
(2) Income from discontinued operations of approximately $16 million
for the six months ended June 30, 2006 reflects the Company's
receipt in February 2006 of a $50 million refund, including
interest, from the completion of certain Internal Revenue Service
audits associated with businesses previously sold by the Company's
former parent company. The Company previously recorded $735
million of this refund. The $50 million refund resulted in an
additional $16 million in income from discontinued operations.
(3) Actual common shares outstanding were 547.7 million at June 30,
2006 and 579.9 million at June 30, 2005.
Segment Information (1)
($ in Millions)
Three Months Ended Six Months Ended
------------------- ---------------------
June 30, June 30, June 30, June 30,
2006 2005(2) 2006 2005(2)
-------- -------- --------- ---------
Health Care:
Total revenue $5,525.1 $4,796.9 $11,021.0 $ 9,490.8
======== ======== ========= =========
Selling expenses $ 217.8 $ 185.1 $ 439.2 $ 369.0
General and administrative
expenses 848.5 832.3 1,747.5 1,696.2
-------- -------- --------- ---------
Operating expenses,
excluding other items 1,066.3 1,017.4 2,186.7 2,065.2
Debt refinancing charge 12.4 - 12.4 -
Physician class action
settlement insurance-
related charge 72.4 - 72.4 -
-------- -------- --------- ---------
Total operating expenses $1,151.1 $1,017.4 $ 2,271.5 $ 2,065.2
======== ======== ========= =========
Operating earnings,
excluding favorable
development $ 346.9 $ 294.2
Favorable development of
prior-period health care
cost estimates 6.0 35.0
-------- --------
Operating earnings 352.9 329.2 $ 713.5 $ 699.7
Debt refinancing charge (8.1) - (8.1) -
Physician class action
settlement insurance-
related charge (47.1) - (47.1) -
Net realized capital
(losses) gains (4.5) 2.5 (.8) 3.8
-------- -------- --------- ---------
Net income (GAAP measure) $ 293.2 $ 331.7 $ 657.5 $ 703.5
======== ======== ========= =========
Group Insurance:
Total revenue $ 553.1 $ 522.8 $ 1,088.3 $ 1,057.5
======== ======== ========= =========
Selling expenses $ 22.3 $ 20.8 $ 44.4 $ 39.9
General and administrative
expenses 59.0 39.6 100.9 84.0
-------- -------- --------- ---------
Operating expenses,
excluding other item 81.3 60.4 145.3 123.9
Acquisition-related
software charge - - 8.3 -
-------- -------- --------- ---------
Total operating expenses
(GAAP measure) $ 81.3 $ 60.4 $ 153.6 $ 123.9
======== ======== ========= =========
Operating earnings $ 36.0 $ 30.9 $ 68.2 $ 60.4
Acquisition-related
software charge - - (6.2) -
Net realized capital
(losses) gains (4.6) 1.9 (2.4) 3.3
-------- -------- --------- ---------
Net income (GAAP measure) $ 31.4 $ 32.8 $ 59.6 $ 63.7
======== ======== ========= =========
Large Case Pensions:
Total revenue $ 173.8 $ 177.2 $ 377.4 $ 375.5
======== ======== ========= =========
Operating earnings $ 10.1 $ 7.5 $ 19.4 $ 11.6
Reduction of reserve for
anticipated future
losses on discontinued
products 75.0 43.4 75.0 43.4
Net realized capital
gains (losses) 1.7 (.7) 7.3 (.5)
-------- -------- --------- ---------
Net income (GAAP measure) $ 86.8 $ 50.2 $ 101.7 $ 54.5
======== ======== ========= =========
Corporate Interest:
Interest expense, net of tax $ 21.9 $ 19.8 $ 43.7 $ 37.5
======== ======== ========= =========
Total Company:
Total revenue $6,252.0 $5,496.9 $12,486.7 $10,923.8
======== ======== ========= =========
Selling expenses $ 240.1 $ 205.9 $ 483.6 $ 408.9
General and administrative
expenses 912.3 875.2 1,857.6 1,788.4
-------- -------- --------- ---------
Operating expenses,
excluding other items 1,152.4 1,081.1 2,341.2 2,197.3
Debt refinancing charge 12.4 - 12.4 -
Physician class action
settlement insurance-
related charge 72.4 - 72.4 -
Acquisition-related
software charge - - 8.3 -
-------- -------- --------- ---------
Total operating expenses
(GAAP measure) $1,237.2 $1,081.1 $ 2,434.3 $ 2,197.3
======== ======== ========= =========
(1) Revenue and operating expense information is presented before
income taxes. Operating earnings information is presented net of
income taxes.
(2) Effective January 1, 2006, the Company adopted FAS 123R applying
the modified retrospective approach. Accordingly, all prior-period
financial information was adjusted to reflect the Company's stock-
based compensation activity.
Enrollment
(Members in Thousands)
June June December March
30, 30, 31, 31,
2006 2005 2005 2006
------- -------- -------- --------
Medical Membership:
Commercial 15,157 14,221 14,521 15,176
Medicare Advantage 123 101 101 117
Medicare Health
Support Program 14 - 19 15
Medicaid 113 113 114 110
------- -------- -------- --------
Total Medical
Membership 15,407 14,435 14,755 15,418
======= ======== ======== ========
Consumer-Directed
Health Plans (1) 621 420 453 614
======= ======== ======== ========
Dental Membership 13,374 12,976 13,098 13,331
======= ======== ======== ========
Pharmacy Membership:
Commercial 9,141 8,579 8,885 9,172
Medicare PDP
(stand-alone) 323 - - 278
Medicare Advantage
PDP 114 - - 107
------- -------- -------- --------
Total Pharmacy
Benefit
Management
Services 9,578 8,579 8,885 9,557
Mail Order (2) 635 538 560 594
------- -------- -------- --------
Total Pharmacy
Membership 10,213 9,117 9,445 10,151
======= ======== ======== ========
Group Insurance
Membership (3) 15,265 13,662 13,618 13,089
======= ======== ======== ========
Health Care Medical Cost Ratios (4)
($ in Millions)
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-------- -------- -------- --------
Health Care Premiums:
Health Care Risk (A) $4,761.9 $4,145.7 $9,488.0 $8,199.2
Commercial Risk (B) $4,325.9 $3,896.9 $8,622.4 $7,702.7
Medicare (C) $ 436.0 $ 248.8 $ 865.6 $ 496.5
Health Care Costs:
Health Care Risk
----------------
Health care costs (D)
(GAAP measure) $3,898.3 $3,244.7 $7,684.5 $6,293.2
Favorable development of
prior-period health care
cost estimates 10.0 55.0
-------- --------
Health care costs -
Adjusted (E) $3,908.3 $3,299.7
======== ========
Commercial Risk
---------------
Health care costs (F)
(GAAP measure) $3,508.3 $3,022.5 $6,919.5 $5,860.4
Favorable development of
prior-period health care
cost estimates 11.0 53.0
-------- --------
Health care costs -
Adjusted (G) $3,519.3 $3,075.5
======== ========
Medicare
--------
Health care costs (H)
(GAAP measure) $ 390.3 $ 222.3 $ 765.3 $ 432.9
(Unfavorable) favorable
development of prior-
period health care cost
estimates (1.0) 2.0
-------- --------
Health care costs -
Adjusted (I) $ 389.3 $ 224.3
======== ========
Health Care Medical
Cost Ratios:
Health Care Risk
(D)/(A)
(GAAP measure) 81.9% 78.3% 81.0% 76.8%
Health Care Risk -
Adjusted (E)/(A) 82.1% 79.6%
Commercial Risk
(F)/(B)
(GAAP measure) 81.1% 77.6% 80.3% 76.1%
Commercial Risk -
Adjusted (G)/(B) 81.4% 78.9%
Medicare (H)/(C)
(GAAP measure) 89.5% 89.3% 88.4% 87.2%
Medicare - Adjusted
(I)/(C) 89.3% 90.2%
(1) Represents members in consumer-directed health plans included in
the Company's Commercial medical membership.
(2) Represents members who purchased medications through the Company's
mail order pharmacy during the quarterly period.
(3) June 30, 2006 includes approximately 2.1 million disability
members acquired from Broadspire on March 31, 2006.
(4) 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.
Operating Margins
($ in Millions)
Three Months Ended Six Months Ended
------------------- ---------------------
June 30, June 30, June 30, June 30,
2006 2005(1) 2006 2005(1)
-------- -------- --------- ---------
Reconciliation to Income
from continuing operations
before income taxes:
Operating earnings before
income taxes, excluding
interest expense,
amortization of other
acquired intangible assets
and favorable development
(A) $ 623.7 $ 529.1
Favorable development of
prior-period health care
cost estimates 10.0 55.0
-------- --------
Operating earnings before
income taxes, excluding
interest expense and
amortization of other
acquired intangible assets
(B) 633.7 584.1 $ 1,275.1 $ 1,226.6
Interest expense (33.8) (30.5) (67.3) (57.7)
Amortization of other
acquired intangible
assets (21.8) (11.5) (41.7) (22.2)
Debt refinancing charge (12.4) - (12.4) -
Physician class action
settlement insurance-
related charge (72.4) - (72.4) -
Reduction of reserve for
anticipated future
losses on discontinued
products 115.4 66.7 115.4 66.7
Acquisition-related
software charge - - (8.3) -
Net realized capital
(losses) gains (11.2) 5.7 6.4 10.1
-------- -------- --------- ---------
Income from continuing
operations before income
taxes (C) (GAAP measure) $ 597.5 $ 614.5 $ 1,194.8 $ 1,223.5
======== ======== ========= =========
Reconciliation to Income
from continuing operations:
Operating earnings,
excluding interest expense,
amortization of other
acquired intangible assets
and favorable development
(D) $ 407.2 $ 340.1
Favorable development of
prior-period health care
cost estimates, net of
tax 6.0 35.0
-------- --------
Operating earnings,
excluding interest expense
and amortization of other
acquired intangible assets
(E) 413.2 375.1 $ 828.2 $ 786.2
Interest expense, net of
tax (21.9) (19.8) (43.7) (37.5)
Amortization of other
acquired intangible
assets, net of tax (14.2) (7.5) (27.1) (14.5)
Debt refinancing charge,
net of tax (8.1) - (8.1) -
Physician class action
settlement insurance-
related charge, net of
tax (47.1) - (47.1) -
Reduction of reserve for
anticipated future
losses on discontinued
products, net of tax 75.0 43.4 75.0 43.4
Acquisition-related
software charge, net of
tax - - (6.2) -
Net realized capital
(losses) gains, net of
tax (7.4) 3.7 4.1 6.6
-------- -------- --------- ---------
Income from continuing
operations (F)
(GAAP measure) $ 389.5 $ 394.9 $ 775.1 $ 784.2
======== ======== ========= =========
Reconciliation of Revenue:
Revenue, excluding net
realized capital (losses)
gains (G) $6,263.2 $5,491.2 $12,480.3 $10,913.7
Net realized capital
(losses) gains (11.2) 5.7 6.4 10.1
-------- -------- --------- ---------
Total revenue (H)
(GAAP measure) $6,252.0 $5,496.9 $12,486.7 $10,923.8
======== ======== ========= =========
Operating Margins:
Pretax operating margin
(B)/(G) 10.1% 10.6% 10.2% 11.2%
Pretax operating margin -
Adjusted (A)/(G) 10.0% 9.6%
Pretax operating margin
(C)/(H) (GAAP measure) 9.6% 11.2% 9.6% 11.2%
After-tax operating margin
(E)/(G) 6.6% 6.8% 6.6% 7.2%
After-tax operating margin -
Adjusted (D)/(G) 6.5% 6.2%
After-tax operating margin
(F)/(H) (GAAP measure) 6.2% 7.2% 6.2% 7.2%
Operating Expenses
($ in Millions)
Reconciliation of Operating
Expenses:
Operating expenses,
excluding other items (I) $1,152.4 $1,081.1 $ 2,341.2 $ 2,197.3
Debt refinancing charge 12.4 - 12.4 -
Physician class action
settlement insurance-
related charge 72.4 - 72.4 -
Acquisition-related
software charge - - 8.3 -
-------- -------- --------- ---------
Total operating expenses (J)
(GAAP measure) $1,237.2 $1,081.1 $ 2,434.3 $ 2,197.3
======== ======== ========= =========
Operating Expenses
Percentages:
Operating expenses as a % of
revenue (I)/(G) 18.4% 19.7% 18.8% 20.1%
Total operating expenses as
a % of total revenue
(J)/(H) (GAAP measure) 19.8% 19.7% 19.5% 20.1%
(1) Effective January 1, 2006, the Company adopted FAS 123R applying
the modified retrospective approach. Accordingly, all prior-period
financial information was adjusted to reflect the Company's stock-
based compensation activity.
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