Market Overview

Aetna Reports First-Quarter 2018 Results

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Aetna (NYSE:AET) announced first-quarter 2018 net income(1) of
$1.2 billion, or $3.67 per share. Adjusted earnings(2) for
first-quarter 2018 were $1.1 billion, or $3.19 per share.

"Our core businesses performed well in the quarter, generating strong
earnings per share growth and delivering significant value to our
members, clients and shareholders," said Mark T. Bertolini, Aetna
chairman and CEO. "Our Medicare growth strategy remains on track as we
grew to serve nearly 250,000 additional Medicare Advantage members in
the first quarter. We are pleased with our strong start to the year and
remain focused on our business priorities as we plan for our projected
combination with CVS Health in the second half of 2018."

"Our first quarter operating results were largely in line with our
expectations as favorable prior years' reserve development more than
offset higher than projected flu related medical costs," said Shawn M.
Guertin, Aetna executive vice president and CFO. "Our operating results
continue to be supported by a solid balance sheet and strong cash flow
and adjusted margins."

 

(In millions, except per share data)

    First-Quarter 2018
Revenue     Earnings     EPS
 
GAAP $ 15,335 $ 1,209 $ 3.67
 
Non-GAAP (Adjusted) $ 15,216 $ 1,051 $ 3.19
 
Medical Membership totaled 22.1 million at March 31, 2018
 

 

Aetna presents both GAAP and non-GAAP financial measures in this press
release to provide investors with additional information. Refer to
footnotes (1) through (6) for definitions of
non-GAAP financial measures and pages 9 and 10 for reconciliations of
the most directly comparable GAAP financial measures to non-GAAP
financial measures.

First-Quarter Financial Results at a Glance
    First-Quarter
(Millions, except per common share data) 2018     2017     Change
Total revenue $ 15,335 $ 15,165 1 %
Adjusted revenue(3) 15,216 15,487 (2 )%
Net income (loss)(1) 1,209 (381 ) N/M*
Adjusted earnings(2) 1,051 939 12 %
 
Per share results:
Net income (loss)(1) $ 3.67 $ (1.11 ) N/M*
Adjusted earnings(2) 3.19 2.71 18 %
 
Weighted average common shares - diluted (GAAP)(5) 329.6 343.8
Adjusted weighted average common shares - diluted (non-GAAP)(5) 329.6   346.2    

* Not meaningful due to the net loss reported for first-quarter 2017.

Effective for the first quarter of 2018, Aetna realigned its business
segments to correspond with changes to its management structure and
internal management reporting, which reflect the company's evolving
business strategy of helping its members live healthier lives. As a
result of this realignment, Aetna's operations are now conducted in the
Health Care reportable segment. Health Care offers a broad range of
traditional, voluntary and consumer-directed health insurance products
and related services to large and small employers, public sector
employers, and Medicaid and Medicare beneficiaries. Aetna's Health Care
products are offered on both an insured basis and an employer-funded
basis. Health Care also includes emerging business products and services
that complement and enhance Aetna's medical products.

Aetna presents the remainder of its financial results in the
Corporate/Other category, which consists of:

  • Products for which Aetna no longer solicits or accepts new customers,
    such as its large case pensions and long-term care products;
  • Contracts Aetna has divested through reinsurance or other contracts,
    such as its domestic group life insurance, group disability insurance
    and absence management businesses; and
  • Corporate expenses not supporting Aetna's business operations,
    including transaction and integration-related costs, income taxes,
    interest expense on its outstanding debt and the financing components
    of its pension and other postretirement employee benefit plans expense.

Prior period segment financial information has been restated to conform
to the current year presentation.

Total Company Results

  • Net income(1) was $1.2 billion for
    first-quarter 2018 compared with a net loss of $381 million for
    first-quarter 2017. The increase in net income during first-quarter
    2018 compared with a net loss during first-quarter 2017 was primarily
    due to first-quarter 2017 reflecting costs associated with the
    termination of the Humana Merger Agreement and the increase in
    adjusted earnings described below.
  • Adjusted earnings(2) were $1.1 billion for
    first-quarter 2018 compared with $939 million for first-quarter 2017.
    The increase in adjusted earnings during first-quarter 2018 was
    primarily due to the favorable impact of the Tax Cuts and Jobs Act of
    2017 (the "TCJA"). Adjusted earnings exclude the impact of a
    non-recurring tax benefit in first-quarter 2018 and other items as
    described in footnote(2).
  • Total revenue was $15.3 billion for first-quarter 2018
    compared with $15.2 billion for first-quarter 2017. The increase in
    total revenue was primarily due to first-quarter 2017 reflecting a
    realized capital loss of $336 million pre-tax due to unamortized cash
    flow hedge losses being recognized into earnings upon the redemption
    of certain of Aetna's senior notes, largely offset by the decrease in
    adjusted revenue discussed below.
  • Adjusted revenue(3) was $15.2 billion for
    first-quarter 2018 compared with $15.5 billion for first-quarter 2017.
    The decrease in adjusted revenue was primarily due to the sale of
    Aetna's domestic group life insurance, group disability insurance and
    absence management businesses (the "Group Insurance sale") during
    fourth-quarter 2017, partially offset by higher adjusted revenue in
    Aetna's Health Care segment described below.
  • Total company expense ratio was 18.2 percent and 25.4 percent
    for the first quarters of 2018 and 2017, respectively. The improvement
    for first-quarter 2018 was primarily due to the first-quarter 2017
    ratio reflecting the costs associated with the termination of the
    Humana Merger Agreement, partially offset by the reinstatement of the
    health insurer fee ("HIF") for 2018.
  • Adjusted expense ratio(4) was 17.9
    percent and 16.0 percent for the first quarters of 2018 and 2017,
    respectively. The increase for first-quarter 2018 was primarily due to
    the reinstatement of the HIF for 2018.
  • After-tax net income margin was 7.9 percent for first-quarter
    2018 compared with after-tax net loss margin of 2.5 percent for
    first-quarter 2017. The increase in the after-tax net income margin
    for first-quarter 2018 compared with after-tax net loss margin for
    first-quarter 2017 was primarily due to the first-quarter 2017 ratio
    reflecting the costs associated with the termination of the Humana
    Merger Agreement.
  • Adjusted pre-tax margin(6) remained
    relatively consistent at 10.1 percent and 10.0 percent for the first
    quarters of 2018 and 2017, respectively. The 2018 ratio reflects
    continued strong performance in Aetna's Health Care segment.
  • Total debt to consolidated capitalization ratio(7) decreased
    to 35.8 percent at March 31, 2018 compared with 37.0 percent at
    December 31, 2017.
  • Effective tax rate was 16.8 percent for first-quarter 2018
    compared with 39.6 percent for first-quarter 2017. The decrease in
    Aetna's effective tax rate for first-quarter 2018 was primarily due to
    the reduced corporate income tax rate specified in the TCJA and a
    non-recurring tax benefit recorded in first-quarter 2018, partially
    offset by the reinstatement of the non-deductible HIF in 2018.
  • Operating cash flow excluding large case pensions products as a
    percentage of net income
    was 282.5% during first-quarter 2018. The
    ratio reflects an advance payment of Medicare premium received in
    March 2018 related to April 2018.
  • Cash and investments at the parent were approximately $2.3
    billion at March 31, 2018.
    • Aetna started the quarter with approximately $2.2 billion;
    • Net subsidiary dividends to the parent were $427 million in the
      quarter;
    • Aetna paid a shareholder dividend of $164 million in the quarter;
      and
    • After other sources and uses, Aetna ended the quarter with
      approximately $2.3 billion of cash and investments at the parent.

Health Care Segment Results

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

  • Income before income taxes(1) of $1.4 billion for
    first-quarter 2018 compared with $1.2 billion for first-quarter 2017.
    The increase in income before income taxes was primarily due to
    first-quarter 2017 reflecting a $231 million pre-tax expense related
    to estimated future guaranty fund assessments as a result of Penn
    Treaty being placed in liquidation.
  • Pre-tax adjusted earnings(2) remained relatively consistent
    at approximately $1.5 billion for the first-quarters of 2018 and 2017.
    Aetna's first-quarter 2018 results were favorably impacted by Aetna's
    previously announced exit from individual Commercial products and by
    membership growth in its Medicare products, substantially offset by
    lower membership in Aetna's Commercial and Medicaid insured products.
  • Total revenue and adjusted revenue(3) were both $15.1
    billion for first-quarter 2018 and both $14.8 billion for
    first-quarter 2017. The increase in total revenue and adjusted revenue
    was primarily due to membership growth in Aetna's Medicare products,
    the adoption of new accounting guidance related to revenue recognition
    effective during first-quarter 2018 and the favorable impact of the
    reinstatement of the HIF for 2018. The increase was partially offset
    by lower membership in Aetna's ACA compliant individual and small
    group products and its Medicaid products.
  • Medical membership at March 31, 2018 decreased slightly compared with
    December 31, 2017 reflecting declines in Aetna's Commercial products
    primarily related to Aetna's ACA compliant individual and small group
    products and declines in Aetna's Medicaid products, partially offset
    by growth in Aetna's Medicare products.
  • Medical benefit ratios ("MBRs") for first-quarter 2018 and 2017 were
    as follows:
   
First-Quarter
2018     2017     Change
Commercial 77.5 % 79.3 % (1.8 ) pts.
Government 82.6 % 85.3 % (2.7 ) pts.
Total Health Care 80.4 % 82.5 % (2.1 ) pts.
 
  • Aetna's first-quarter 2018 Commercial MBR decreased compared with
    first-quarter 2017 primarily due to the reinstatement of the HIF for
    2018 and Aetna's previously announced exit from individual Commercial
    products for 2018.
  • Aetna's first-quarter 2018 Government MBR decreased compared with
    first-quarter 2017 primarily due to the reinstatement of the HIF for
    2018.
  • Aetna's first-quarter 2018 Total Health Care MBR was negatively
    impacted by approximately 50 basis points compared with first-quarter
    2017 due to higher medical costs as a result of a more severe flu
    season during first-quarter 2018 compared to first-quarter 2017.
  • In first-quarter 2018, Aetna experienced favorable development of
    prior years' health care cost estimates in its Commercial, Medicare
    and Medicaid products, primarily attributable to fourth-quarter 2017
    performance.
  • Prior years' health care costs payable estimates developed favorably
    by $503 million and $614 million during the first quarters of 2018 and
    2017, respectively. This development is reported on a basis consistent
    with the prior years' development reported in the health care costs
    payable table in Aetna's annual audited financial statements, and does
    not directly correspond to an increase in 2018 operating results.
  • Days claims payable(7) was 50 days at March 31,
    2018, a sequential increase of 1 day compared to December 31, 2017 and
    a decrease of 3 days compared with March 31, 2017. The year over year
    decrease was driven primarily by changes in business mix.

Given the pending transaction with CVS Health, Aetna is not hosting a
conference call in conjunction with its first-quarter 2018 earnings
release and does not expect to do so for future quarters. Please direct
any questions regarding this press release to Aetna Investor Relations
or Aetna Communications.

About Aetna
Aetna is one of the nation's leading diversified
health care benefits companies, serving an estimated 40.3 million people
with information and resources to help them make better informed
decisions about their health care. Aetna offers a broad range of
traditional, voluntary and consumer-directed health insurance products
and related services, including medical, pharmacy, dental and behavioral
health plans, and medical management capabilities, Medicaid health care
management services, workers' compensation administrative services and
health information technology products and services. Aetna's customers
include employer groups, individuals, college students, part-time and
hourly workers, health plans, health care providers, governmental units,
government-sponsored plans, labor groups and expatriates. For more
information, see www.aetna.com
and learn about how Aetna is helping to build a healthier world.
@AetnaNews

 
Condensed Consolidated Balance Sheets
(Unaudited)
         
(Millions)

At March 31,
2018

At December 31,
2017

Assets:
Cash and short-term investments $ 10,396 $ 6,356
Accounts receivable, net 5,650 5,071
Other current assets 4,655   4,096
Total current assets 20,701   15,523
Long-term investments 16,409 17,793
Other long-term assets 22,087   21,835
Total assets $ 59,197   $ 55,151
 
Liabilities and shareholders' equity:
Health care costs payable $ 5,783 $ 5,815
Current portion of long-term debt 1,374 999
Other current liabilities 12,536   10,023
Total current liabilities 19,693   16,837
Long-term debt, less current portion 7,785 8,160
Other long-term liabilities 15,054 14,317
Total Aetna shareholders' equity 16,398 15,580
Non-controlling interests 267   257
Total liabilities and equity $ 59,197   $ 55,151
   
Consolidated Statements of Income

(Unaudited)

  Three Months
Ended March 31,
(Millions) 2018     2017
Revenue:
Premiums $ 13,070 $ 13,763
Fees and other revenue 2,062 1,475
Net investment income 197 260
Net realized capital gains (losses) 6   (333 )
Total revenue 15,335   15,165  
 
Benefits and expenses:
Benefit costs 10,574 11,461
Cost of products sold 373
Operating expenses 2,787 3,853
Interest expense 89 173
Amortization of other acquired intangible assets 47 60
Loss on early extinguishment of long-term debt   246  
Total benefits and expenses 13,870   15,793  
 
Income (loss) before income taxes 1,465 (628 )
Income tax expense (benefit) 246   (249 )
Net income (loss) including non-controlling interests 1,219   (379 )
Less: Net income attributable to non-controlling interests 10   2  
Net income (loss) attributable to Aetna $ 1,209   $ (381 )
 
Consolidated Statements of Cash Flows
(Unaudited)
    For the Three Months
Ended March 31,
(Millions) 2018     2017
Cash flows from operating activities:
Net income (loss) including non-controlling interests $ 1,219 $ (379 )
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized capital (gains) losses (6 ) 333
Depreciation and amortization 132 160
Debt fair value amortization (3 ) (7 )
Equity in earnings of affiliates, net (10 ) (38 )
Stock-based compensation expense 39 54
Amortization of net investment premium 15 17
Loss on early extinguishment of long-term debt 246
Gain on sale of businesses (113 )
Changes in assets and liabilities:
Premiums due and other receivables (384 ) (477 )
Income taxes 240 (271 )
Other assets and other liabilities 319 (95 )
Health care and insurance liabilities 1,893   1,356  
Net cash provided by operating activities 3,341   899  
Cash flows from investing activities:
Proceeds from sales and maturities of investments 2,410 2,738
Cost of investments (1,621 ) (2,723 )
Additions to property, equipment and software (99 ) (71 )
Cash used for acquisitions, net of cash acquired (6 )  
Net cash provided by (used for) investing activities 684   (56 )
Cash flows from financing activities:
Repayment of long-term debt (11,484 )
Common shares issued under benefit plans, net (72 ) (103 )
Common shares repurchased (3,300 )
Dividends paid to shareholders (164 ) (88 )
Contributions, non-controlling interests 10   13  
Net cash used for financing activities (226 ) (14,962 )
Net increase (decrease) in cash and cash equivalents 3,799 (14,119 )
Cash and cash equivalents, beginning of period 4,076   17,996  
Cash and cash equivalents, end of period $ 7,875   $ 3,877  
 
Reconciliation of the Most Directly Comparable GAAP Measure to
Certain Reported Amounts
(Millions, except per common share data)        

Three Months Ended
March 31, 2018

       

Three Months Ended
March 31, 2017

Reconciliation of net income (loss) to adjusted earnings

Total
Company

   

Per
Common
Share

Total
Company

   

Per
Common
Share

Net income (loss)(1) (GAAP measure) $ 1,209 $ 3.67 $ (381 ) $ (1.11 )
Gain related to sale of certain domestic group insurance businesses (113 ) (0.34 )
Transaction and integration-related costs 58 0.18 1,212 3.50
Loss on early extinguishment of long-term debt 246 0.71
Penn Treaty-related guaranty fund assessments 231 0.67
Amortization of other acquired intangible assets 47 0.14 60 0.17
Net realized capital (gains) losses (6 ) (0.02 ) 333 0.96
Income tax benefit (144 ) (0.44 ) (762 ) (2.20 )
Dilutive share impact to adjusted earnings(5)       0.01  
Adjusted earnings(2) $ 1,051   $ 3.19   $ 939   $ 2.71  
 
Weighted average common shares - diluted (GAAP)(5) 329.6 343.8
Adjusted weighted average common shares - diluted (non-GAAP)(5) 329.6 346.2
 

Three Months
Ended March 31, 2018

Three Months
Ended March 31, 2017

(Millions)

Health
Care

Corporate/
Other(8)

Total
Company

Health
Care

Corporate/
Other(8)

Total
Company

Reconciliation of total revenue to adjusted revenue
Total revenue (GAAP measure) $ 15,127 $ 208 $ 15,335 $ 14,806 $ 359 $ 15,165
Gain related to sale of certain domestic group insurance businesses (113 ) (113 )
Interest income on proceeds of transaction-related debt (11 ) (11 )
Net realized capital (gains) losses (5 ) (1 ) (6 ) (1 ) 334   333  
Adjusted revenue(3) (excludes net realized capital
(gains) losses and other items)
$ 15,122   $ 94   $ 15,216   $ 14,805   $ 682   $ 15,487  
 
Reconciliation of income (loss) before income taxes to pre-tax
adjusted earnings (loss)
Income (loss) before income taxes (GAAP measure) $ 1,457 $ 8 $ 1,465 $ 1,193 $ (1,821 ) $ (628 )
Less: Income before income taxes attributable to non-controlling
interests (GAAP measure)
13     13   2   1   3  
Income (loss) before income taxes attributable to Aetna (GAAP
measure)
1,444 8 1,452 1,191 (1,822 ) (631 )
Gain related to sale of certain domestic group insurance businesses (113 ) (113 )
Transaction and integration-related costs 58 58 1,212 1,212
Loss on early extinguishment of long-term debt 246 246
Penn Treaty-related guaranty fund assessments 231 231
Amortization of other acquired intangible assets 47 47 60 60
Net realized capital (gains) losses (5 ) (1 ) (6 ) (1 ) 334   333  
Pre-tax adjusted earnings (loss)(2) $ 1,486   $ (48 ) $ 1,438   $ 1,481   $ (30 ) $ 1,451  
 
Margins and Ratios
      Three Months
Ended March 31,
(Millions) 2018     2017
Reconciliation of income (loss) before income taxes to adjusted
earnings before income taxes, excluding interest expense:
Income (loss) before income taxes (GAAP measure) $ 1,465 $ (628 )
Interest expense(9) 89 88
Gain related to sale of certain domestic group insurance businesses (113 )
Transaction and integration-related costs 58 1,212
Loss on early extinguishment of long-term debt 246
Penn Treaty-related guaranty fund assessments 231
Amortization of other acquired intangible assets 47 60
Net realized capital (gains) losses (6 ) 333  
Adjusted earnings(2) before income taxes, excluding
interest expense
(A) $ 1,540   $ 1,542  
 
Reconciliation of net income (loss) to adjusted earnings
excluding interest expense, net of tax:
Net income (loss)(1) (GAAP measure) (B) $ 1,209 $ (381 )
Interest expense(9) 89 88
Gain related to sale of certain domestic group insurance businesses (113 )
Transaction and integration-related costs 58 1,212
Loss on early extinguishment of long-term debt 246
Penn Treaty-related guaranty fund assessments 231
Amortization of other acquired intangible assets 47 60
Net realized capital (gains) losses (6 ) 333
Income tax benefit (163 ) (793 )
Adjusted earnings(2) excluding interest expense, net of
tax
$ 1,121   $ 996  
 
Reconciliation of total revenue to adjusted revenue:
Total revenue (GAAP measure) (C) $ 15,335 $ 15,165
Gain related to sale of certain domestic group insurance businesses (113 )
Interest income on proceeds of transaction-related debt (11 )
Net realized capital (gains) losses (6 ) 333  
Adjusted revenue(3) (excludes net realized capital
(gains) losses and other items)
(D) $ 15,216   $ 15,487  
 
Reconciliation of total operating expenses to adjusted operating
expenses:
Total operating expenses (GAAP measure) (E) $ 2,787 $ 3,853
Transaction and integration-related costs (58 ) (1,138 )
Penn Treaty-related guaranty fund assessments   (231 )
Adjusted operating expenses (F) $ 2,729   $ 2,484  
 
After-tax net income (loss) and adjusted pre-tax margins:
After-tax net income (loss) margin (GAAP measure) (B)/(C) 7.9 % (2.5 )%
Adjusted pre-tax margin(6) (A)/(D) 10.1 % 10.0 %
 
Expense ratios:
Total company expense ratio (GAAP measure) (E)/(C) 18.2 % 25.4 %
Adjusted expense ratio(4) (F)/(D) 17.9 % 16.0 %
 
Operating Cash Flow excluding Large Case Pensions Products as a
Percentage of Net Income
      Three Months
Ended March 31,
(Millions) 2018   2017
Net cash provided by operating activities (GAAP measure) $ 3,341 $ 899
Less: Net cash used for operating activities: Large case pensions
products
(60 ) (84 )
Net cash provided by operating activities excluding large case
pensions products
(A) 3,401   983  
 
Net income (loss)(1) (GAAP Measure) 1,209 (381 )
Less: Net income: Large case pensions products 5   5  
Net income (loss) attributable to Aetna excluding large case
pensions products
(B) $ 1,204   $ (386 )
 
Operating cash flow excluding large case pensions products as a
percentage of net income:
Operating cash flow as a percentage of net income (1)
(GAAP Measure)
(A)/(B) 282.5 % N/M*

* Not meaningful due to the net loss reported for the three months ended
March 31, 2017.

Footnotes

(1) Net income (loss) refers to net income (loss)
attributable to Aetna reported in Aetna's Consolidated Statements of
Income in accordance with U.S. generally accepted accounting principles
("GAAP"). Income (loss) before income taxes refers to income (loss)
before income taxes attributable to Aetna in accordance with GAAP.
Unless otherwise indicated, all references in this press release to net
income, net income per share and income before income taxes exclude
amounts attributable to non-controlling interests.

(2) Non-GAAP financial measures such as adjusted earnings,
adjusted earnings per share, pre-tax adjusted earnings, adjusted
operating expenses, adjusted revenue, adjusted expense ratio and
adjusted pre-tax margin exclude from the relevant GAAP metrics, as
applicable:

  • Amortization of other acquired intangible assets;
  • Net realized capital gains or losses; and
  • Other items, if any, that neither relate to the ordinary course of
    Aetna's business nor reflect Aetna's underlying business performance.

Although the excluded items may recur, management believes the non-GAAP
financial measures Aetna discloses, including those described above,
provide a more useful comparison of Aetna's underlying business
performance from period to period. The chief executive officer assesses
consolidated Aetna results based on adjusted earnings and assesses
business segment results based on pre-tax adjusted earnings because
income taxes are recorded in Aetna's Corporate/Other category and are
not allocated to Aetna's business operations. Non-GAAP financial
measures Aetna discloses, including those described above, should not be
considered a substitute for, or superior to, financial measures
determined or calculated in accordance with GAAP.

For the periods covered in this press release, the following items are
excluded from the non-GAAP financial measures described above, as
applicable, because Aetna believes they neither relate to the ordinary
course of Aetna's business nor reflect Aetna's underlying business
performance:

  • During 2017, Aetna sold its domestic group life insurance, group
    disability insurance and absence management businesses. The
    transaction was accomplished through an indemnity reinsurance
    arrangement. A significant portion of the gain on sale was deferred
    and will be amortized into earnings: (a) over the remaining contract
    period (estimated to be approximately 3 years) in proportion to the
    amount of insurance protection provided for the prospective
    reinsurance portion of the gain; and (b) as Aetna recovers amounts due
    from the buyer over a period estimated to be approximately 30 years
    for the retrospective reinsurance portion of the gain. The gain
    recognized during the three months ended March 31, 2018 does not
    directly relate to the underwriting or servicing of products for
    customers and is not directly related to the core performance of
    Aetna's business operations.
  • Aetna recorded transaction-related costs during the three months ended
    March 31, 2018 related to its proposed acquisition by CVS Health
    Corporation ("CVS Health"). Aetna also recorded transaction and
    integration-related costs during the three months ended March 31, 2017
    primarily related to its proposed acquisition of Humana (the "Humana
    Transaction"). Transaction costs include costs associated with the
    transactions contemplated by the CVS Health merger agreement, real
    estate costs associated with the cancellation of Aetna's previously
    announced headquarters relocation which will no longer occur due to
    CVS Health's proposed acquisition of Aetna, the termination of the
    Humana Merger Agreement (as defined below), the termination of Aetna's
    agreement to sell certain assets to Molina Healthcare, Inc. and
    advisory, legal and other professional fees which are reflected in
    Aetna's GAAP Consolidated Statements of Income in operating expenses.
    Transaction costs also include the negative cost of carry associated
    with the debt financing that Aetna obtained in June 2016 for the
    Humana Transaction. Prior to the mandatory redemption of the SMR Notes
    (as defined below), the negative cost of carry associated with these
    senior notes was excluded from adjusted earnings and pre-tax adjusted
    earnings. The negative cost of carry associated with the $2.8 billion
    aggregate principal amount of Aetna's senior notes issued in June 2016
    that are not subject to mandatory redemption (the "Other 2016 Senior
    Notes") was excluded from adjusted earnings and pre-tax adjusted
    earnings through the date of the termination of the Humana Merger
    Agreement. The components of the negative cost of carry are reflected
    in Aetna's GAAP Consolidated Statements of Income in interest expense
    and net investment income. Subsequent to the termination of the Humana
    Merger Agreement, the interest expense and net investment income
    associated with the Other 2016 Senior Notes were no longer excluded
    from adjusted earnings and pre-tax adjusted earnings.
  • During the three months ended March 31, 2017, Aetna incurred losses on
    the early extinguishment of long-term debt due to (a) the mandatory
    redemption of $10.2 billion aggregate principal amount of certain of
    its senior notes issued in June 2016 (collectively, the "SMR Notes")
    following the termination of the definitive agreement (the "Humana
    Merger Agreement") to acquire Humana Inc. ("Humana") and (b) the early
    redemption of $750 million aggregate principal amount of its
    outstanding senior notes due 2020.
  • During the three months ended March 31, 2017, Aetna recorded an
    expense for estimated future guaranty fund assessments related to Penn
    Treaty Network America Insurance Company and one of its subsidiaries
    (collectively, "Penn Treaty"), which was placed in rehabilitation in
    2009 and placed in liquidation in March 2017. This expense does not
    directly relate to the underwriting or servicing of products for
    customers and is not directly related to the core performance of
    Aetna's business operations.
  • Other acquired intangible assets relate to Aetna's acquisition
    activities and are amortized over their useful lives. However, this
    amortization does not directly relate to the underwriting or servicing
    of products for customers and is not directly related to the core
    performance of Aetna's business operations.
  • Net realized capital gains and losses arise from various types of
    transactions, primarily in the course of managing a portfolio of
    assets that support the payment of liabilities. However, these
    transactions do not directly relate to the underwriting or servicing
    of products for customers and are not directly related to the core
    performance of Aetna's business operations.
  • The corresponding tax benefit or expense related to the items excluded
    from adjusted earnings above was calculated utilizing the appropriate
    tax rate for each individual item. In addition, Aetna recorded a
    non-recurring tax benefit of $149 million in first-quarter 2018.
    Neither the income tax benefit or expense on the excluded items nor
    the tax benefit related to the non-recurring item directly relates to
    the underwriting or servicing of products for customers, and neither
    is directly related to the core performance of Aetna's business
    operations.

For a reconciliation of financial measures calculated under GAAP to
these items, refer to the tables on pages 9 and 10 of this press release.

(3) Adjusted revenue excludes net realized capital gains and
losses, gain related to the Group Insurance sale and interest income on
the proceeds of Aetna's senior notes issued in June 2016 as noted in (2)
above. Refer to the tables on pages 9 and 10 of this press release for a
reconciliation of total revenue calculated under GAAP to adjusted
revenue.

(4) The adjusted expense ratio excludes net realized capital
gains and losses and other items, if any, that are excluded from
adjusted revenue or adjusted operating expenses, as noted in (2)
above. For a reconciliation of the comparable GAAP measure to this
metric for the periods covered by this press release, refer to page 10
of this press release.

(5) In periods when Aetna reports a net loss attributable to
Aetna, in-the-money stock-based compensation awards are excluded from
Aetna's calculation of diluted earnings per share ("EPS") because their
inclusion would have an anti-dilutive effect. Therefore Aetna excluded
from its first-quarter 2017 GAAP net loss per share calculation
in-the-money stock-based compensation awards which would have increased
Aetna's weighted-average shares used to compute diluted EPS by 2.4
million shares. Aetna reported adjusted earnings for first-quarter 2017.
Therefore such 2.4 million shares were included in Aetna's calculation
of adjusted EPS for first-quarter 2017 because they had a dilutive
effect on Aetna's adjusted EPS.

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

(7) Days claims payable is calculated by dividing the health
care costs payable at each quarter end by the average health care costs
per day in each respective quarter. The total debt to consolidated
capitalization ratio is calculated by dividing total long-term debt and
short-term debt ("Total Debt") by the sum of Total Debt and total Aetna
shareholders' equity.

(8) Aetna's Corporate/Other category is not a business
segment. It is added to Aetna's business segments to reconcile segment
reporting to Aetna's consolidated results. The Corporate/Other category
consists of:

  • Products for which Aetna no longer solicits or accepts new customers
    such as its large case pensions and long-term care products;
  • Contracts Aetna has divested through reinsurance or other contracts,
    such as its domestic group life insurance, group disability insurance
    and absence management businesses; and
  • Corporate expenses not supporting Aetna's business operations,
    including transaction and integration-related costs, income taxes,
    interest expense on its outstanding debt and the financing components
    of its pension and other postretirement employee benefit plans expense.

As described in (2) above, the pre-tax adjusted earnings of
the Corporate/Other category exclude other items, if any, that neither
relate to the ordinary course of Aetna's business nor reflect Aetna's
underlying business performance.

(9) Interest expense included in the reconciliation to
adjusted earnings before income taxes, excluding interest expense and
the reconciliation to adjusted earnings excluding interest expense, net
of tax, for first-quarter 2017 excludes costs associated with the term
loan credit agreement executed in connection with the Humana Transaction
and the negative cost of carry on transaction-related debt incurred in
connection with the Humana Transaction. These costs are included within
transaction and integration-related costs. Refer to (2) above
for further discussion.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. You can
generally identify forward-looking statements by the use of
forward-looking terminology such as "anticipate," "believe," "can,"
"continue," "could," "estimate," "evaluate," "expect," "explore,"
"forecast," "guidance," "intend," "likely," "may," "might," "outlook,"
"plan," "potential," "predict," "probable," "project," "seek," "should,"
"view," or "will," or the negative thereof or other variations thereon
or comparable terminology. These forward-looking statements are only
predictions and involve known and unknown risks and uncertainties, many
of which are beyond Aetna's control.

Statements in this press release that are forward-looking, including
Aetna's projections as to the closing date for CVS Health's proposed
acquisition of Aetna (the "CVS Health Transaction") and Aetna's and/or
the combined company's future operating results, are based on
management's estimates, assumptions and projections, and are 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, including, but not limited to: the
timing to consummate the CVS Health Transaction; the risk that a
regulatory approval that may be required for the CVS Health Transaction
is delayed, is not obtained or is obtained subject to conditions that
are not anticipated; the risk that a condition to the closing of the CVS
Health Transaction may not be satisfied; the ability to achieve the
synergies and value creation from the CVS Health Transaction
contemplated by management; CVS Health's ability to promptly and
effectively integrate Aetna's businesses; the diversion of and attention
of management of both CVS Health and Aetna on transaction-related
issues; unanticipated increases in medical costs (including increased
intensity or medical utilization as a result of flu or otherwise;
changes in membership mix to higher cost or lower-premium products or
membership adverse selection; medical cost increases resulting from
unfavorable changes in contracting or re-contracting with providers
(including as a result of provider consolidation and/or integration);
and/or increased pharmacy costs); the profitability of Aetna's Medicaid
products; changes in medical cost estimates due to the necessary
extensive judgment that is used in the medical cost estimation process,
the considerable variability inherent in such estimates, and the
sensitivity of such estimates to changes in medical claims payment
patterns and changes in medical cost trends; and changes in Aetna's
future cash requirements, capital requirements, results of operations,
financial condition and/or cash flows. As currently enacted, health care
reform will continue to significantly impact Aetna's business operations
and financial results, including Aetna's pricing and medical benefit
ratios, and certain components of the legislation will continue to be
phased in until 2022. Aetna will be required to dedicate significant
resources and incur significant expenses during 2018 to implement health
care reform. Significant parts of the legislation continue to evolve
through the promulgation of executive orders, regulations and guidance.
In addition, pending efforts in the U.S. Congress to repeal, amend,
replace or restrict funding for various aspects of health care reform
and pending litigation challenging aspects of the law and its
implementation continue to create additional uncertainty about the
ultimate impact of health care reform. As a result, many of the impacts
of health care reform are unknown. Other important risk factors include:
adverse changes in federal or state government policies, legislation or
regulations (including legislative, judicial or regulatory measures that
would affect Aetna's business model, repeal, restrict funding for or
amend various aspects of health care reform, limit Aetna's ability to
price for the risk it assumes and/or reflect reasonable costs or profits
in its pricing, such as mandated minimum medical benefit ratios, or
eliminate or reduce ERISA pre-emption of state laws (increasing Aetna's
potential litigation exposure)); the implementation of health care
reform legislation, collection of ACA fees, assessments and taxes
through increased premiums; adverse legislative, regulatory and/or
judicial changes to or interpretations of existing health care reform
legislation and/or regulations (including those relating to minimum
medical loss ratio ("MLR") rebates); the timing and amount of and
payment methods for satisfying assessments for Penn Treaty Network
America Insurance Company and other insolvent payors under state
guaranty fund laws; adverse and less predictable economic conditions in
the U.S. and abroad (including unanticipated levels of, or increases in
the rate of, unemployment); reputational or financial issues arising
from Aetna's social media activities, data security breaches, other
cybersecurity risks or other causes; adverse program, pricing, funding
or audit actions by federal or state government payors, including as a
result of changes to or curtailment or elimination of the Centers for
Medicare & Medicaid Services' ("CMS") star rating bonus payments;
Aetna's ability to maintain and/or enhance its CMS star ratings; Aetna's
ability to diversify Aetna's sources of revenue and earnings (including
by developing and expanding Aetna's consumer health and services
businesses and expanding Aetna's foreign operations), transform Aetna's
business model, develop new products and optimize Aetna's business
platforms; the success of Aetna's consumer health and services
initiatives; adverse changes in size, product or geographic mix or
medical cost experience of membership; managing executive succession and
key talent retention, recruitment and development; failure to achieve
and/or delays in achieving desired rate increases and/or profitable
membership growth due to regulatory review or other regulatory
restrictions, an uncertain economy and/or significant competition,
especially in key geographic areas where membership is concentrated,
including successful protests of business awarded to Aetna; failure to
adequately implement health care reform and/or repeal or replacement of
or changes in health care reform; the outcome of various litigation and
regulatory matters, including audits, challenges to Aetna's minimum MLR
rebate methodology and/or reports, intellectual property litigation and
litigation concerning, and ongoing reviews by various regulatory
authorities of, certain of Aetna's payment practices with respect to
out-of-network providers and/or other providers; Aetna's ability to
integrate, simplify, and enhance Aetna's existing products, processes
and information technology systems and platforms to keep pace with
changing customer and regulatory needs; Aetna's ability to successfully
integrate Aetna's businesses (including businesses Aetna may acquire in
the future), separate divested businesses and implement multiple
strategic and operational initiatives simultaneously; Aetna's ability to
manage health care and other benefit costs; Aetna's ability to reduce
administrative expenses while maintaining targeted levels of service and
operating performance; failure by a service provider to meet its
obligations to Aetna; Aetna's ability to develop and maintain
relationships (including joint ventures or other collaborative
risk-sharing agreements) with providers while taking actions to reduce
medical costs and/or expand the services Aetna offers; Aetna's ability
to demonstrate that Aetna's products and processes lead to access to
quality affordable care by Aetna's members; Aetna's ability to maintain
its relationships with third-party brokers, consultants and agents who
sell its products; increases in medical costs resulting from any
epidemics, acts of terrorism or other extreme events; a downgrade in
Aetna's financial ratings; and adverse impacts from any failure to raise
the U.S. Federal government's debt ceiling or any sustained U.S. Federal
government shut down. For more discussion of important risk factors that
may materially affect Aetna, please see the risk factors contained in
Aetna's 2017 Annual Report on Form 10-K ("Aetna's Annual Report"), on
file with the Securities and Exchange Commission (the "SEC"). You also
should read Aetna's Annual Report and Aetna's Quarterly Report on Form
10-Q for the quarter ended March 31, 2018, when filed with the SEC, for
a discussion of Aetna's historical results of operations and financial
condition.

No assurances can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do
occur, what impact they will have on the results of operations,
financial condition or cash flows of Aetna. You are cautioned not to
place undue reliance on Aetna's forward-looking statements. These
forward-looking statements are and will be based on management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements.
Aetna does not assume any duty to update or revise forward-looking
statements, whether as a result of new information, future events or
otherwise, as of any future date.

 

Supplementary Information

Statements of Income Before Income Taxes Attributable to Aetna by
Segment (Unaudited)
  Health     Corporate/    
(Millions) Care Other Total
Three months ended March 31, 2018
Revenue:
Premiums $ 13,048 $ 22 $ 13,070
Fees and other revenue 1,947 115 2,062
Net investment income 127 70 197
Net realized capital gains 5   1   6  
Total revenue 15,127   208   15,335  
Benefits and expenses:
Benefit costs 10,491 83 10,574
Cost of products sold 373 373
Operating expenses 2,759 28 2,787
Interest expense 89 89
Amortization of other acquired intangible assets 47     47  
Total benefits and expenses 13,670   200   13,870  
Income before income taxes including non-controlling interests 1,457   8   1,465  
Less: Income before income taxes attributable to non-controlling
interests
13     13  
Income before income taxes attributable to Aetna $ 1,444   $ 8   $ 1,452  
 
Three months ended March 31, 2017
Revenue:
Premiums $ 13,240 $ 523 $ 13,763
Fees and other revenue 1,448 27 1,475
Net investment income 117 143 260
Net realized capital gains (losses) 1   (334 ) (333 )
Total revenue 14,806   359   15,165  
Benefits and expenses:
Benefit costs 10,928 533 11,461
Operating expenses 2,625 1,228 3,853
Interest expense 173 173
Amortization of other acquired intangible assets 60 60
Loss on early extinguishment of long-term debt   246   246  
Total benefits and expenses 13,613   2,180   15,793  
Income (loss) before income taxes including non-controlling interests 1,193   (1,821 ) (628 )
Less: Income before income taxes attributable to non-controlling
interests
2   1   3  
Income (loss) before income taxes attributable to Aetna $ 1,191   $ (1,822 ) $ (631 )
 
Membership
    March 31, 2018     December 31, 2017     March 31, 2017
(Thousands) Insured     ASC     Total Insured     ASC     Total Insured     ASC     Total
Medical Membership:  
Commercial 4,068 13,737 17,805 4,504 13,596 18,100 4,557 13,351 17,908
Medicare Advantage 1,722 1,722 1,473 1,473 1,443 1,443
Medicare Supplement 748 748 740 740 711 711
Medicaid 1,104   728   1,832   1,316   608   1,924   1,570   814   2,384
Total Medical Membership 7,642   14,465   22,107   8,033   14,204   22,237   8,281   14,165   22,446
 
Dental Membership:
Total Dental Membership 5,058   7,665   12,723   5,421   8,006   13,427   5,898   8,116   14,014
 
Pharmacy Benefit Management Services Membership:
Commercial 7,442 8,034 8,217
Medicare Prescription Drug Plan (stand-alone) 2,156 2,077 2,064
Medicare Advantage Prescription Drug Plan 1,243 1,129 1,106
Medicaid 2,256   2,525   2,817
Total Pharmacy Benefit Management Services Membership 13,097   13,765   14,204
   
Health Care Medical Benefit Ratios
    Three Months Ended
March 31,   March 31,
(Millions) 2018 2017
Health Care Premiums (GAAP measure)
Commercial $ 5,580 $ 6,129
Government 7,468   7,111  
Health Care $ 13,048   $ 13,240  
Health Care Benefit Costs (GAAP measure)
Commercial $ 4,323 $ 4,860
Government 6,168   6,068  
Health Care $ 10,491   $ 10,928  
Medical Benefit Ratios "MBRs"
Commercial 77.5 % 79.3 %
Government 82.6 % 85.3 %
Health Care 80.4 % 82.5 %
 
Roll Forward of Health Care Costs Payable
(Unaudited)
    Three Months Ended March 31,
(Millions) 2018     2017
Health care costs payable, beginning of period $ 5,815 $ 6,558
Less: reinsurance recoverables 6   5  
Health care costs payable, beginning of period, net 5,809 6,553
Add: Components of incurred health care costs
Current year 10,974 11,420
Prior years(a) (503 ) (614 )
Total incurred health care costs (b) 10,471 10,806
 
Less: Claims paid
Current year 6,176 6,298
Prior years 4,334   4,742  
Total claims paid 10,510 11,040
 
Health care costs payable, end of period, net 5,770 6,319
Add: premium deficiency reserve 9 110
Add: reinsurance recoverables 4   3  
Health care costs payable, end of period $ 5,783   $ 6,432  

(a) Negative amounts reported for incurred health care costs
related to prior years result from claims being settled for less than
originally estimated.

(b) First-quarter 2018 total incurred health care costs
exclude from the table above $9 million related to a premium deficiency
reserve for the 2018 coverage year related to Aetna's Medicaid products.
First-quarter 2017 total incurred health care costs exclude $110 million
related to a premium deficiency reserve for the 2017 coverage year
related to Aetna's individual Commercial products. Total incurred health
care costs for first-quarter 2018 and 2017 also exclude from the table
above $11 million and $12 million, respectively, of benefit costs
recorded in Aetna's Health Care segment that are included in Aetna's
unpaid claims liability.

 
Days Claims Payable (Unaudited)
    March 31, 2018     December 31, 2017     September 30, 2017     June 30, 2017     March 31, 2017
Days Claims Payable 50 49 54 54 53

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