Market Overview

Aetna to Announce Second-Quarter 2018 Results

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Aetna (NYSE: AET)
today announced that second-quarter 2018 results will be made public on
Thursday, August 2, at 6:30 a.m. ET. Given the pending transaction with
CVS Health, Aetna will not host a conference call in conjunction with
its earnings release.

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

 
Statements of Income Before Income Taxes Attributable to Aetna by
Segment (Unaudited)
     
Health Care
(Millions) Q1 2017     Q2 2017     Q3 2017     Q4 2017     Full Year 2017
Revenue:    
Premiums $ 13,240 $ 13,242 $ 12,730 $ 12,890 $ 52,102
Fees and other revenue 1,448 1,458 1,416 1,428 5,750
Net investment income 117 114 113 138 482
Net realized capital gains 1   7   26   21   55  
Total revenue 14,806   14,821   14,285   14,477   58,389  
Benefits and expenses:
Benefit costs 10,928 10,591 10,423 10,862 42,804
Operating expenses 2,625 2,472 2,521 2,934 10,552
Amortization of other acquired intangible assets 60   58   58   96   272  
Total benefits and expenses 13,613   13,121   13,002   13,892   53,628  
Income before income taxes including non-controlling interests 1,193   1,700   1,283   585   4,761  
Less: Income (loss) before income taxes attributable to
non-controlling interests
2   (23 ) 14   (4 ) (11 )
Income before income taxes attributable to Aetna $ 1,191   $ 1,723   $ 1,269   $ 589   $ 4,772  
 
 
Reconciliation of the Most Directly Comparable GAAP Measure to
Certain Reported Amounts
 
(Millions)   Health Care
Reconciliation of total revenue to adjusted revenue Q1 2017     Q2 2017     Q3 2017     Q4 2017     Full Year 2017
Total revenue (GAAP measure) $ 14,806 $ 14,821     $ 14,285 $ 14,477 $ 58,389
Net realized capital gains (1 ) (7 ) (26 ) (21 ) (55 )
Adjusted revenue(2) (excludes net realized capital gains) $ 14,805   $ 14,814   $ 14,259   $ 14,456   $ 58,334  
 
Reconciliation of income before income taxes to pre-tax adjusted
earnings
Income before income taxes (GAAP measure) $ 1,193 $ 1,700 $ 1,283 $ 585 $ 4,761
Less: Income (loss) before income taxes attributable to
non-controlling interests (GAAP measure)
2   (23 ) 14   (4 ) (11 )
Income before income taxes attributable to Aetna (GAAP measure) 1,191 1,723 1,269 589 4,772
Penn Treaty-related guaranty fund assessments 231 231
Amortization of other acquired intangible assets 60 58 58 96 272
Net realized capital gains (1 ) (7 ) (26 ) (21 ) (55 )
Pre-tax adjusted earnings(1) $ 1,481   $ 1,774   $ 1,301   $ 664   $ 5,220  
 
 
Statements of Income Before Income Taxes Attributable to Aetna by
Segment (Unaudited)
     
Corporate/Other (3)
(Millions) Q1 2017     Q2 2017     Q3 2017     Q4 2017     Full Year 2017
Revenue:    
Premiums $ 523 $ 533 $ 542 $ 194 $ 1,792
Fees and other revenue 27 28 27 98 180
Net investment income 143 123 120 82 468
Net realized capital (losses) gains (334 ) 18   20   2   (294 )
Total revenue 359   702   709   376   2,146  
Benefits and expenses:
Benefit costs 533 525 537 229 1,824
Operating expenses 1,228 80 91 113 1,512
Interest expense 173 86 90 93 442
Loss on early extinguishment of long-term debt 246 246
Reduction of reserve for anticipated future losses on discontinued
products
  (109 )     (109 )
Total benefits and expenses 2,180   582   718   435   3,915  
(Loss) income before income taxes including non-controlling interests (1,821 ) 120   (9 ) (59 ) (1,769 )
Less: Income before income taxes attributable to non-controlling
interests
1         1  
(Loss) income before income taxes attributable to Aetna $ (1,822 ) $ 120   $ (9 ) $ (59 ) $ (1,770 )
 
 
Reconciliation of the Most Directly Comparable GAAP Measure to
Certain Reported Amounts
 
(Millions)   Corporate/Other (3)
Reconciliation of total revenue to adjusted revenue Q1 2017     Q2 2017     Q3 2017     Q4 2017     Full Year 2017
Total revenue (GAAP measure) $ 359 $ 702     $ 709 $ 376 $ 2,146
Gain related to sale of certain domestic group insurance businesses (88 ) (88 )
Interest income on proceeds of transaction-related debt (11 ) (11 )
Net realized capital losses (gains) 334   (18 ) (20 ) (2 ) 294  
Adjusted revenue(2) (excludes net realized capital losses
(gains) and other items)
$ 682   $ 684   $ 689   $ 286   $ 2,341  
 
Reconciliation of income before income taxes to pre-tax adjusted
loss
(Loss) income before income taxes (GAAP measure) $ (1,821 ) $ 120 $ (9 ) $ (59 ) $ (1,769 )
Less: Income before income taxes attributable to non-controlling
interests (GAAP measure)
1         1  
(Loss) income before income taxes attributable to Aetna (GAAP
measure)
(1,822 ) 120 (9 ) (59 ) (1,770 )
Gain related to sale of certain domestic group insurance businesses (88 ) (88 )
Loss on early extinguishment of long-term debt 246 246
Transaction and integration-related costs 1,212 (10 ) 38 1,240
Restructuring costs 60 60
Reduction of reserve for anticipated future losses on discontinued
products
(109 ) (109 )
Net realized capital losses (gains) 334   (18 ) (20 ) (2 ) 294  
Pre-tax adjusted loss(1) $ (30 ) $ (17 ) $ (29 ) $ (51 ) $ (127 )
 
 
Statements of Income Before Income Taxes Attributable to Aetna
(Unaudited)
     
Total Company
(Millions) Q1 2017     Q2 2017     Q3 2017     Q4 2017     Full Year 2017
Revenue:    
Premiums $ 13,763 $ 13,775 $ 13,272 $ 13,084 $ 53,894
Fees and other revenue 1,475 1,486 1,443 1,526 5,930
Net investment income 260 237 233 220 950
Net realized capital (losses) gains (333 ) 25   46   23   (239 )
Total revenue 15,165   15,523   14,994   14,853   60,535  
Benefits and expenses:
Benefit costs 11,461 11,116 10,960 11,091 44,628
Operating expenses 3,853 2,552 2,612 3,047 12,064
Interest expense 173 86 90 93 442
Loss on early extinguishment of long-term debt 246 246
Amortization of other acquired intangible assets 60 58 58 96 272
Reduction of reserve for anticipated future losses on discontinued
products
  (109 )     (109 )
Total benefits and expenses 15,793   13,703   13,720   14,327   57,543  
(Loss) income before income taxes including non-controlling interests (628 ) 1,820   1,274   526   2,992  
Less: Income (loss) before income taxes attributable to
non-controlling interests
3   (23 ) 14   (4 ) (10 )
(Loss) income before income taxes attributable to Aetna $ (631 ) $ 1,843   $ 1,260   $ 530   $ 3,002  
 
 
Reconciliation of the Most Directly Comparable GAAP Measure to
Certain Reported Amounts
 
(Millions)   Total Company
Reconciliation of total revenue to adjusted revenue Q1 2017     Q2 2017     Q3 2017     Q4 2017     Full Year 2017
Total revenue (GAAP measure) $ 15,165 $ 15,523     $ 14,994 $ 14,853 $ 60,535
Gain related to sale of certain domestic group insurance businesses (88 ) (88 )
Interest income on proceeds of transaction-related debt (11 ) (11 )
Net realized capital losses (gains) 333   (25 ) (46 ) (23 ) 239  
Adjusted revenue(2) (excludes net realized capital losses
(gains) and other items)
$ 15,487   $ 15,498   $ 14,948   $ 14,742   $ 60,675  
 
Reconciliation of income before income taxes to pre-tax adjusted
earnings
(Loss) income before income taxes (GAAP measure) $ (628 ) $ 1,820 $ 1,274 $ 526 $ 2,992
Less: Income (loss) before income taxes attributable to
non-controlling interests (GAAP measure)
3   (23 ) 14   (4 ) (10 )
(Loss) income before income taxes attributable to Aetna (GAAP
measure)
(631 ) 1,843 1,260 530 3,002
Gain related to sale of certain domestic group insurance businesses (88 ) (88 )
Loss on early extinguishment of long-term debt 246 246
Penn Treaty-related guaranty fund assessments 231 231
Transaction and integration-related costs 1,212 (10 ) 38 1,240
Restructuring costs 60 60
Reduction of reserve for anticipated future losses on discontinued
products
(109 ) (109 )
Amortization of other acquired intangible assets 60 58 58 96 272
Net realized capital losses (gains) 333   (25 ) (46 ) (23 ) 239  
Pre-tax adjusted earnings(1) $ 1,451   $ 1,757   $ 1,272   $ 613   $ 5,093  
 
 
Health Care Medical Benefit Ratios    
     
(Millions) Q1 2017     Q2 2017     Q3 2017     Q4 2017 Full Year 2017
Premiums (GAAP measure)    
Commercial $ 6,129 $ 6,287 $ 6,063 $ 6,149 $ 24,628
Government 7,111   6,955   6,667   6,741   27,474  
Health Care $ 13,240   $ 13,242   $ 12,730   $ 12,890   $ 52,102  
Health Care Costs (GAAP measure)
Commercial $ 4,860 $ 4,938 $ 4,928 $ 5,277 $ 20,003
Government 6,068   5,653   5,495   5,585   22,801  
Health Care $ 10,928   $ 10,591   $ 10,423   $ 10,862   $ 42,804  
Medical Benefit Ratios "MBRs"
Commercial 79.3 % 78.5 % 81.3 % 85.8 % 81.2 %
Government 85.3 % 81.3 % 82.4 % 82.9 % 83.0 %
Health Care 82.5 % 80.0 % 81.9 % 84.3 % 82.2 %
 

Footnotes

(1) Non-GAAP financial measures such as pre-tax adjusted
earnings (loss) and adjusted revenue 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 that 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 segment and are not
allocated to Aetna's business operations. The 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 the three months ended December 31, 2017, Aetna sold its
    domestic group life insurance, group disability insurance and absence
    management businesses (the "Group Insurance sale"). The transaction
    was accomplished through an indemnity reinsurance arrangement. A
    significant portion of the gain has been 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 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.
  • 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.
  • Aetna recorded transaction and integration-related costs during the
    year ended December 31, 2017 primarily related to its proposed
    acquisition by CVS Health and its proposed acquisition of Humana (the
    "Humana Transaction"). Transaction costs include costs associated with
    the transactions contemplated by the merger agreement under which CVS
    Health Corporation has agreed to acquire all of Aetna's outstanding
    stock, the termination of the Humana Merger Agreement, 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 general and
    administrative 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, the negative cost of carry associated
    with these senior notes was excluded from 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 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 pre-tax adjusted
    earnings.
  • Restructuring costs for the three months ended December 31, 2017
    include severance costs associated with Aetna's expense management and
    cost control initiatives. The restructuring costs are reflected in
    Aetna's GAAP Consolidated Statements of Income in general and
    administrative expenses.
  • In 1993, Aetna discontinued the sale of fully guaranteed large case
    pensions products and established a reserve for anticipated future
    losses on these products, which Aetna reviews quarterly. During the
    three months ended June 30, 2017, Aetna reduced the reserve for
    anticipated future losses on discontinued products. Aetna believes
    excluding any changes in the reserve for anticipated future losses on
    discontinued products from pre-tax adjusted earnings provides more
    useful information as to Aetna's continuing products and is consistent
    with the treatment of the operating results of these discontinued
    products, which are credited or charged to the reserve and do not
    affect Aetna's operating results.
  • 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.

For a reconciliation of financial measures calculated under GAAP to
these items, refer to the tables on pages 3 through 5 of this press
release.

(2) 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 (1)
above. Refer to the tables on pages 3 through 5 of this press release
for a reconciliation of total revenue calculated under GAAP to adjusted
revenue.

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

  • 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 (1) 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.

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