Market Overview

Aetna Reports Second-Quarter 2018 Results

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Aetna (NYSE:AET) announced second-quarter 2018 net income(1) of
approximately $1.2 billion, or $3.67 per share. Adjusted earnings(2)
for second-quarter 2018 were approximately $1.1 billion, or $3.43 per
share. Aetna's performance for the six months ended June 30, 2018
resulted in net income of approximately $2.4 billion, or $7.34 per
share, and adjusted earnings of approximately $2.2 billion, or $6.62 per
share, for the six months ended June 30, 2018.

"Our solid second quarter results reflect an ongoing commitment to
operational excellence and to improving the health and wellbeing of the
people we serve," said Mark T. Bertolini, Aetna chairman and CEO. "Our
strategy is focused on placing the consumer at the center of everything
we do, and I am pleased with our progress toward building a simpler,
more affordable and responsive health care experience for our members."

"Disciplined pricing and moderate medical cost trend contributed to our
strong second quarter results," said Shawn M. Guertin, Aetna executive
vice president and CFO. "Steady business fundamentals, focused execution
and healthy cash flow position the company for continued solid
performance in the second half of 2018."

(In millions, except per share data)

   
Second-Quarter 2018
Revenue     Earnings     EPS
 
GAAP $ 15,561 $ 1,212 $ 3.67
 
Non-GAAP (Adjusted) $ 15,463 $ 1,132 $ 3.43
 

Medical Membership totaled 22.1 million at June 30, 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 (5) for definitions of
non-GAAP financial measures and pages 9 through 11 for reconciliations
of the most directly comparable GAAP financial measures to non-GAAP
financial measures.

 
Second-Quarter Financial Results at a Glance
    Second-Quarter
(Millions, except per common share data) 2018     2017     Change
Total revenue $ 15,561 $ 15,523 %
Adjusted revenue(3) 15,463 15,498 %
Net income(1) 1,212 1,203 1 %
Adjusted earnings(2) 1,132 1,145 (1 )%
 
Per common share results:
Net income(1) $ 3.67 $ 3.60 2 %
Adjusted earnings(2) 3.43 3.42 %
 
Weighted average common shares - diluted 329.8 334.5
 

Total Company Results

  • Net income(1) remained relatively consistent
    at $1.2 billion for the second quarters of 2018 and 2017. Aetna's
    second-quarter 2018 results were favorably impacted by a gain
    recognized as a result of the sale of Aetna's domestic group life
    insurance, group disability insurance and absence management
    businesses (the "Group Insurance sale") which occurred during
    fourth-quarter 2017. The increase was substantially offset by the
    change in adjusted earnings described below, net realized capital
    losses in second-quarter 2018 compared to net realized capital gains
    in second-quarter 2017 and a larger reduction of Aetna's reserve for
    anticipated future losses on discontinued products in 2017 compared to
    2018.
  • Adjusted earnings(2) remained relatively
    consistent at $1.1 billion for the second quarters of 2018 and 2017.
    Aetna's second-quarter 2018 results were impacted by lower pre-tax
    adjusted earnings in Aetna's Health Care segment described below and
    lower adjusted earnings due to the Group Insurance sale which occurred
    during fourth-quarter 2017, substantially offset by the favorable
    impact of the Tax Cuts and Jobs Act of 2017 (the "TCJA").
  • Total revenue was $15.6 billion for
    second-quarter 2018 compared with $15.5 billion for second-quarter
    2017. Adjusted revenue(3) remained consistent at $15.5
    billion for the second quarters of 2018 and 2017. Total revenue and
    adjusted revenue for second-quarter 2018 reflect higher revenue in
    Aetna's Heath Care segment described below, substantially offset by
    lower revenue as a result the Group Insurance sale which occurred
    during fourth-quarter 2017. Total revenue for second-quarter 2018 also
    reflects a gain recognized as a result of the Group Insurance sale.
  • Total company expense ratio was 17.8 percent and 16.4 percent
    for the second quarters of 2018 and 2017, respectively. The adjusted
    expense ratio(4) was 17.8 percent and 16.5 percent for the
    second quarters of 2018 and 2017, respectively. The increase in both
    ratios for second-quarter 2018 was primarily due to the reinstatement
    of the health insurer fee ("HIF") for 2018.
  • After-tax net income margin remained relatively consistent at
    7.8 percent for second-quarter 2018 compared with 7.7 percent for
    second-quarter 2017. The after-tax net income margin for
    second-quarter 2018 reflects the favorable impact of the TCJA,
    substantially offset by the decrease in the adjusted pre-tax margin
    described below.
  • Adjusted pre-tax margin(5) was 10.7
    percent and 11.7 percent for the second quarters of 2018 and 2017,
    respectively. The decrease in the adjusted pre-tax margin for
    second-quarter 2018 was primarily due to lower favorable development
    of prior-periods' health care cost estimates in second-quarter 2018
    compared to second-quarter 2017.
  • Total debt to capitalization ratio(6) decreased
    to 31.9 percent at June 30, 2018 compared with 37.0 percent at
    December 31, 2017 primarily due to the repayment of $1.0 billion
    aggregate principal amount of Aetna's senior notes during
    second-quarter 2018.
  • Effective tax rate was 27.0 percent for second-quarter 2018
    compared with 35.0 percent for second-quarter 2017. The decrease in
    Aetna's effective tax rate for second-quarter 2018 was primarily due
    to the reduced corporate income tax rate specified in the TCJA,
    partially offset by the reinstatement of the non-deductible HIF for
    2018.
  • Operating cash flow excluding large case pensions products as a
    percentage of net income
    was 192.8% during the six months ended
    June 30, 2018. The ratio reflects an advance payment of Medicare
    premium received in June 2018 related to July 2018.
  • Cash and investments at the parent were approximately $1.7
    billion at June 30, 2018.
    • Aetna started the quarter with approximately $2.3 billion;
    • Aetna repaid $1.0 billion aggregate principal amount of its senior
      notes in the quarter;
    • Net subsidiary dividends to the parent were $717 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 $1.7 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 $1.5 billion for
    second-quarter 2018 compared with $1.7 billion for second-quarter
    2017. Pre-tax adjusted earnings(2) were $1.6 billion for
    second-quarter 2018 compared with $1.8 billion for second-quarter
    2017. The decrease in income before income taxes and pre-tax adjusted
    earnings was primarily due to lower favorable development of
    prior-periods' health care cost estimates in Aetna's Government
    products in second-quarter 2018 compared to second-quarter 2017,
    investments in Aetna's Medicare growth initiatives and a smaller
    favorable adjustment in second-quarter 2018 compared to second-quarter
    2017 of Aetna's prior year risk adjustment estimates for its
    individual and small group ACA compliant products. The impact on both
    income before income taxes and pre-tax adjusted earnings of Aetna's
    updated prior year risk adjustment estimates for its individual and
    small group ACA compliant products, net of offsetting items, was
    approximately $130 million during second-quarter 2018.
  • Total revenue and adjusted revenue(3) were both $15.4
    billion for second-quarter 2018 and both $14.8 billion for
    second-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 June 30, 2018 decreased slightly compared with
    March 31, 2018. The decrease primarily reflects decreases in Aetna's
    Commercial Insured products largely offset by increases in Aetna's
    Commercial ASC and Medicare products.
  • Medical benefit ratios ("MBRs") for the three and six months ended
    June 30, 2018 and 2017 were as follows:
       
Second-Quarter Year-to-Date
2018     2017     Change 2018     2017     Change
Commercial 77.1 % 78.5 % (1.4 ) pts. 76.9 % 78.9 % (2.0 ) pts.
Government 81.8 % 81.3 % 0.5   pts. 82.2 % 83.3 % (1.1 ) pts.
Total Health Care 79.7 % 80.0 % (0.3 ) pts. 79.9 % 81.3 % (1.4 ) pts.
 
  • Aetna's second-quarter 2018 Commercial MBR decreased compared with
    second-quarter 2017 primarily due to the reinstatement of the HIF for
    2018 and the favorable impact of the adoption of new accounting
    guidance related to revenue recognition effective during first-quarter
    2018. The decrease was partially offset by a smaller favorable
    adjustment in second-quarter 2018 compared to second-quarter 2017 of
    Aetna's prior year risk adjustment estimates for its individual and
    small group ACA compliant products.
  • Aetna's second-quarter 2018 Government MBR increased compared with
    second-quarter 2017 primarily due to lower favorable development of
    prior-periods' health care cost estimates in second-quarter 2018
    compared to second-quarter 2017 and new Medicare business mix, largely
    offset by the reinstatement of the HIF for 2018.
  • In second-quarter 2018, Aetna experienced favorable development of
    prior-periods' health care cost estimates in its Commercial, Medicaid
    and Medicare products, primarily attributable to first-quarter 2018
    performance.
  • Prior years' health care costs payable estimates developed favorably
    by $548 million and $750 million during the first six months 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(6) was 49 days at June 30, 2018,
    a sequential decrease of 1 day compared to March 31, 2018 and a
    decrease of 5 days compared with June 30, 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 second-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 38.8 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 June 30,
2018

At December 31,
2017

Assets:
Cash and short-term investments $ 10,058 $ 6,356
Accounts receivable, net 5,176 5,071
Other current assets 4,391   4,096
Total current assets 19,625   15,523
Long-term investments 16,375 17,793
Other long-term assets 22,316   21,835
Total assets $ 58,316   $ 55,151
 
Liabilities and shareholders' equity:
Health care costs payable $ 5,666 $ 5,815
Current portion of long-term debt 375 999
Other current liabilities 11,950   10,023
Total current liabilities 17,991   16,837
Long-term debt, less current portion 7,784 8,160
Other long-term liabilities 14,870 14,317
Total Aetna shareholders' equity 17,403 15,580
Non-controlling interests 268   257
Total liabilities and equity $ 58,316   $ 55,151
 
 
Consolidated Statements of Income
(Unaudited)
 
    Three Months
Ended June 30,
    Six Months
Ended June 30,
(Millions) 2018     2017 2018     2017
Revenue:
Premiums $ 13,301 $ 13,775 $ 26,426 $ 27,538
Fees and other revenue 2,077 1,486 4,084 2,961
Net investment income 206 237 403 497
Net realized capital (losses) gains (23 ) 25   (17 ) (308 )
Total revenue 15,561   15,523   30,896   30,688  
 
Benefits and expenses:
Benefit costs 10,670 11,116 21,244 22,577
Cost of products sold 391 764
Operating expenses 2,769 2,552 5,556 6,405
Interest expense 88 86 177 259
Amortization of other acquired intangible assets 47 58 94 118
Loss on early extinguishment of long-term debt 246
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (109 ) (70 ) (109 )
Total benefits and expenses 13,895   13,703   27,765   29,496  
 
Income before income taxes 1,666 1,820 3,131 1,192
Income tax expense 449   637   695   389  
Net income including non-controlling interests 1,217   1,183   2,436   803  
Less: Net income (loss) attributable to non-controlling interests 5   (20 ) 15   (19 )
Net income attributable to Aetna $ 1,212   $ 1,203   $ 2,421   $ 822  
 
 
Consolidated Statements of Cash Flows
(Unaudited)
    For the Six Months
Ended June 30,
(Millions) 2018     2017
Cash flows from operating activities:
Net income including non-controlling interests $ 2,436 $ 803
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized capital losses 17 308
Depreciation and amortization 264 339
Debt fair value amortization (7 ) (10 )
Equity in earnings of affiliates, net (23 ) (60 )
Stock-based compensation expense 83 94
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (109 )
Amortization of net investment premium 28 37
Loss on early extinguishment of long-term debt 246
Gain on sale of businesses (234 )
Changes in assets and liabilities:
Premiums due and other receivables 43 (1,335 )
Income taxes 387 (222 )
Other assets and other liabilities 36 (432 )
Health care and insurance liabilities 1,425   1,033  
Net cash provided by operating activities 4,385   692  
Cash flows from investing activities:
Proceeds from sales and maturities of investments 5,157 6,091
Cost of investments (4,543 ) (5,736 )
Additions to property, equipment and software (219 ) (180 )
Cash used for acquisitions, net of cash acquired (7 )  
Net cash provided by investing activities 388   175  
Cash flows from financing activities:
Repayment of long-term debt (1,000 ) (11,734 )
Common shares issued under benefit plans, net (87 ) (126 )
Common shares repurchased (3,300 )
Dividends paid to shareholders (327 ) (254 )
Contributions, non-controlling interests 12   125  
Net cash used for financing activities (1,402 ) (15,289 )
Net increase (decrease) in cash and cash equivalents 3,371 (14,422 )
Cash and cash equivalents, beginning of period 4,076   17,996  
Cash and cash equivalents, end of period $ 7,447   $ 3,574  
 
 
Reconciliation of the Most Directly Comparable GAAP Measure to
Certain Reported Amounts
(Millions, except per common share data)        

Three Months Ended
June 30, 2018

       

Three Months Ended
June 30, 2017

Reconciliation of net income to adjusted earnings

Total
Company

   

Per
Common
Share

Total
Company

   

Per
Common
Share

Net income(1) (GAAP measure) $ 1,212 $ 3.67 $ 1,203 $ 3.60
Gain related to sale of certain domestic group insurance businesses (121 ) (0.37 )
Transaction and integration-related costs 19 0.06 (10 ) (0.03 )
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (0.21 ) (109 ) (0.33 )
Amortization of other acquired intangible assets 47 0.14 58 0.17
Net realized capital losses (gains) 23 0.07 (25 ) (0.08 )
Income tax expense 22   0.07   28   0.09  
Adjusted earnings(2) $ 1,132   $ 3.43   $ 1,145   $ 3.42  
 
Weighted average common shares - diluted 329.8 334.5
 
 

Three Months Ended
June 30, 2018

Three Months Ended
June 30, 2017

(Millions)

Health
Care

Corporate/
Other(7)

Total
Company

Health
Care

Corporate/
Other (7)

Total
Company

Reconciliation of total revenue to adjusted revenue
Total revenue (GAAP measure) $ 15,355 $ 206 $ 15,561 $ 14,821 $ 702 $ 15,523
Gain related to sale of certain domestic group insurance businesses (121 ) (121 )
Net realized capital losses (gains) 17   6   23   (7 ) (18 ) (25 )
Adjusted revenue(3) (excludes net realized capital losses
(gains) and an other item)
$ 15,372   $ 91   $ 15,463   $ 14,814   $ 684   $ 15,498  
 
Reconciliation of income before income taxes to pre-tax adjusted
earnings (loss)
Income before income taxes (GAAP measure) $ 1,545 $ 121 $ 1,666 $ 1,700 $ 120 $ 1,820
Less: Income (loss) before income taxes attributable to
non-controlling interests (GAAP measure)
7     7   (23 )   (23 )
Income before income taxes attributable to Aetna (GAAP measure) 1,538 121 1,659 1,723 120 1,843
Gain related to sale of certain domestic group insurance businesses (121 ) (121 )
Transaction and integration-related costs 19 19 (10 ) (10 )
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (70 ) (109 ) (109 )
Amortization of other acquired intangible assets 47 47 58 58
Net realized capital losses (gains) 17   6   23   (7 ) (18 ) (25 )
Pre-tax adjusted earnings (loss)(2) $ 1,602   $ (45 ) $ 1,557   $ 1,774   $ (17 ) $ 1,757  
 
 
Reconciliation of the Most Directly Comparable GAAP Measure to
Certain Reported Amounts
(Millions, except per common share data)         Six Months Ended

June 30, 2018

        Six Months Ended

June 30, 2017

Total
Company

   

Per
Common
Share

Total
Company

   

Per
Common
Share

Net income(1) (GAAP measure) $ 2,421 $ 7.34 $ 822 $ 2.42
Gain related to sale of certain domestic group insurance businesses (234 ) (0.71 )
Transaction and integration-related costs 77 0.23 1,202 3.53
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (0.21 ) (109 ) (0.32 )
Loss on early extinguishment of long-term debt 246 0.72
Penn Treaty-related guaranty fund assessments 231 0.68
Amortization of other acquired intangible assets 94 0.29 118 0.35
Net realized capital losses 17 0.05 308 0.90
Income tax benefit (122 ) (0.37 ) (734 ) (2.16 )
Adjusted earnings(2) $ 2,183   $ 6.62   $ 2,084   $ 6.12  
 
Weighted average common shares - diluted 329.7 340.3
 

Six Months Ended
June 30, 2018

Six Months Ended
June 30, 2017

(Millions)

Health
Care

Corporate/
Other( 7)

Total
Company

Health
Care

Corporate/
Other (7)

Total
Company

Reconciliation of total revenue to adjusted revenue
Total revenue (GAAP measure) $ 30,482 $ 414 $ 30,896 $ 29,627 $ 1,061 $ 30,688
Gain related to sale of certain domestic group insurance businesses (234 ) (234 )
Interest income on proceeds of transaction-related debt (11 ) (11 )
Net realized capital losses (gains) 12   5   17   (8 ) 316   308  
Adjusted revenue(3) (excludes net realized capital losses
(gains) and other items)
$ 30,494   $ 185   $ 30,679   $ 29,619   $ 1,366   $ 30,985  
 
Reconciliation of income (loss) before income taxes to pre-tax
adjusted earnings (loss)
Income (loss) before income taxes (GAAP measure) $ 3,002 $ 129 $ 3,131 $ 2,893 $ (1,701 ) $ 1,192
Less: Income (loss) before income taxes attributable to
non-controlling interests (GAAP measure)
20     20   (21 ) 1   (20 )
Income (loss) before income taxes attributable to Aetna (GAAP
measure)
2,982 129 3,111 2,914 (1,702 ) 1,212
Gain related to sale of certain domestic group insurance businesses (234 ) (234 )
Transaction and integration-related costs 77 77 1,202 1,202
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (70 ) (109 ) (109 )
Loss on early extinguishment of long-term debt 246 246
Penn Treaty-related guaranty fund assessments 231 231
Amortization of other acquired intangible assets 94 94 118 118
Net realized capital losses (gains) 12   5   17   (8 ) 316   308  
Pre-tax adjusted earnings (loss)(2) $ 3,088   $ (93 ) $ 2,995   $ 3,255   $ (47 ) $ 3,208  
 
 
Margins and Ratios
    Three Months
Ended June 30,
    Six Months
Ended June 30,
(Millions) 2018     2017 2018     2017
Reconciliation of income before income taxes to adjusted earnings
before income taxes, excluding interest expense:
Income before income taxes (GAAP measure) $ 1,666 $ 1,820 $ 3,131 $ 1,192
Interest expense(8) 88 86 177 174
Gain related to sale of certain domestic group insurance businesses (121 ) (234 )
Transaction and integration-related costs 19 (10 ) 77 1,202
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (109 ) (70 ) (109 )
Loss on early extinguishment of long-term debt 246
Penn Treaty-related guaranty fund assessments 231
Amortization of other acquired intangible assets 47 58 94 118
Net realized capital losses (gains) 23   (25 ) 17   308  
Adjusted earnings(2) before income taxes, excluding
interest expense
(A) $ 1,652   $ 1,820   $ 3,192   $ 3,362  
 
Reconciliation of net income to adjusted earnings excluding
interest expense, net of tax:
Net income(1) (GAAP measure) (B) $ 1,212 $ 1,203 $ 2,421 $ 822
Interest expense(8) 88 86 177 174
Gain related to sale of certain domestic group insurance businesses (121 ) (234 )
Transaction and integration-related costs 19 (10 ) 77 1,202
Reduction of reserve for anticipated future losses on discontinued
products
(70 ) (109 ) (70 ) (109 )
Loss on early extinguishment of long-term debt 246
Penn Treaty-related guaranty fund assessments 231
Amortization of other acquired intangible assets 47 58 94 118
Net realized capital losses (gains) 23 (25 ) 17 308
Income tax expense (benefit) 4   (2 ) (159 ) (795 )
Adjusted earnings(2) excluding interest expense, net of
tax
$ 1,202   $ 1,201   $ 2,323   $ 2,197  
 
Reconciliation of total revenue to adjusted revenue:
Total revenue (GAAP measure) (C) $ 15,561 $ 15,523 $ 30,896 $ 30,688
Gain related to sale of certain domestic group insurance businesses (121 ) (234 )
Interest income on proceeds of transaction-related debt (11 )
Net realized capital losses (gains) 23   (25 ) 17   308  
Adjusted revenue(3) (excludes net realized capital losses
(gains) and other items)
(D) $ 15,463   $ 15,498   $ 30,679   $ 30,985  
 
Reconciliation of total operating expenses to adjusted operating
expenses:
Total operating expenses (GAAP measure) (E) $ 2,769 $ 2,552 $ 5,556 $ 6,405
Transaction and integration-related costs (19 ) 10 (77 ) (1,128 )
Penn Treaty-related guaranty fund assessments       (231 )
Adjusted operating expenses (F) $ 2,750   $ 2,562   $ 5,479   $ 5,046  
 
After-tax net income and adjusted pre-tax margins:
After-tax net income margin (GAAP measure) (B)/(C) 7.8 % 7.7 % 7.8 % 2.7 %
Adjusted pre-tax margin(5) (A)/(D) 10.7 % 11.7 % 10.4 % 10.9 %
 
Expense ratios:
Total company expense ratio (GAAP measure) (E)/(C) 17.8 % 16.4 % 18.0 % 20.9 %
Adjusted expense ratio(4) (F)/(D) 17.8 % 16.5 % 17.9 % 16.3 %
 
 
Operating Cash Flow excluding Large Case Pensions Products as a
Percentage of Net Income
 
    Six Months
Ended June 30,
(Millions) 2018     2017
Net cash provided by operating activities $ 4,385 $ 692
Less: Net cash used for operating activities: Large case pensions
products
(155 ) (128 )

Net cash provided by operating activities excluding large case
pensions products

(A) 4,540   820  
 
Net income(1) 2,421 822
Less: Net income: Large case pensions products 66   81  
Net income(1) excluding large case pensions products (B) $ 2,355   $ 741  
 
Operating cash flow excluding large case pensions products as a
percentage of net income:
Operating cash flow as a percentage of net income (1) (A)/(B) 192.8 % 110.7 %
 

Footnotes

(1) Net income refers to net income attributable to Aetna
reported in Aetna's Consolidated Statements of Income in accordance with
U.S. generally accepted accounting principles ("GAAP"). Income before
income taxes refers to income 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 and six months ended June 30, 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 and six
    months ended June 30, 2018 related to its proposed acquisition by CVS
    Health Corporation ("CVS Health"). Aetna also recorded transaction and
    integration-related costs during the three and six months ended
    June 30, 2017 primarily related to its proposed acquisition of Humana
    Inc. (the "Humana Transaction"). The negative transaction costs for
    the three months ended June 30, 2017 reflect the release of previously
    accrued expenses upon reconciliation to the final actual expenses
    incurred related to 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
    "CVS Health Transaction"), 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.
  • 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 both
    the three months ended June 30, 2018 and 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 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 net income attributable to Aetna.
  • During the six months ended June 30, 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 the entire $750 million aggregate principal amount of
    its senior notes due 2020.
  • During the six months ended June 30, 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 the six months ended June
    30, 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 through 11 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 through 11 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 11
of this press release.

(5) 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.

(6) 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 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.

(7) 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.

(8) 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 the six months ended June 30, 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 its performance in the second half of 2018,
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,
including the collection and payment of amounts under the ACA's risk
adjustment program. 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, each on file with the SEC,
and Aetna's Quarterly Report on Form 10-Q for the quarter ended June 30,
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)

 
(Millions)    

Health
Care

   

Corporate/
Other

   

Total

Three months ended June 30, 2018
Revenue:
Premiums $ 13,283 $ 18 $ 13,301
Fees and other revenue 1,954 123 2,077
Net investment income 135 71 206
Net realized capital losses (17 ) (6 ) (23 )
Total revenue 15,355   206   15,561  
Benefits and expenses:
Benefit costs 10,591 79 10,670
Cost of products sold 391 391
Operating expenses 2,781 (12 ) 2,769
Interest expense 88 88
Amortization of other acquired intangible assets 47 47
Reduction of reserve for anticipated future losses on discontinued
products
  (70 ) (70 )
Total benefits and expenses 13,810   85   13,895  
Income before income taxes including non-controlling interests 1,545   121   1,666  
Less: Income before income taxes attributable to non-controlling
interests
7     7  
Income before income taxes attributable to Aetna $ 1,538   $ 121   $ 1,659  
 
Three months ended June 30, 2017
Revenue:
Premiums $ 13,242 $ 533 $ 13,775
Fees and other revenue 1,458 28 1,486
Net investment income 114 123 237
Net realized capital gains 7   18   25  
Total revenue 14,821   702   15,523  
Benefits and expenses:
Benefit costs 10,591 525 11,116
Operating expenses 2,472 80 2,552
Interest expense 86 86
Amortization of other acquired intangible assets 58 58
Reduction of reserve for anticipated future losses on discontinued
products
 

 

(109 ) (109 )
Total benefits and expenses 13,121   582   13,703  
Income before income taxes including non-controlling interests 1,700   120   1,820  
Less: Loss before income taxes attributable to non-controlling
interests
(23 )   (23 )
Income before income taxes attributable to Aetna $ 1,723   $ 120   $ 1,843  
 
 
Statements of Income Before Income Taxes Attributable to Aetna by
Segment (Unaudited)
 
(Millions)     Health
Care
    Corporate/
Other
    Total
Six months ended June 30, 2018
Revenue:
Premiums $ 26,386 $ 40 $ 26,426
Fees and other revenue 3,846 238 4,084
Net investment income 262 141 403
Net realized capital losses (12 ) (5 ) (17 )
Total revenue 30,482 414 30,896
Benefits and expenses:
Benefit costs 21,082 162 21,244
Cost of products sold 764 764
Operating expenses 5,540 16 5,556
Interest expense 177 177
Amortization of other acquired intangible assets 94 94
Reduction of reserve for anticipated future loss on discontinued
products
  (70 ) (70 )
Total benefits and expenses 27,480   285   27,765  
Income before income taxes including non-controlling interests 3,002   129   3,131  
Less: Income before income taxes attributable to non-controlling
interests
20     20  
Income before income taxes attributable to Aetna $ 2,982   $ 129   $ 3,111  
 
Six months ended June 30, 2017
Revenue:
Premiums $ 26,482 $ 1,056 $ 27,538
Fees and other revenue 2,906 55 2,961
Net investment income 231 266 497
Net realized capital gains (losses) 8   (316 ) (308 )
Total revenue 29,627   1,061   30,688  
Benefits and expenses:
Benefit costs 21,519 1,058 22,577
Operating expenses 5,097 1,308 6,405
Interest expense 259 259
Amortization of other acquired intangible assets 118 118
Loss on early extinguishment of long-term debt 246 246
Reduction of reserve for anticipated future loss on discontinued
products
  (109 ) (109 )
Total benefits and expenses 26,734   2,762   29,496  
Income (loss) before income taxes including non-controlling interests 2,893   (1,701 ) 1,192  
Less: (Loss) income before income taxes attributable to
non-controlling interests
(21 ) 1   (20 )
Income (loss) before income taxes attributable to Aetna $ 2,914   $ (1,702 ) $ 1,212  
 
 
Membership
 
    June 30, 2018     March 31, 2018     December 31, 2017     June 30, 2017
(Thousands) Insured     ASC     Total Insured     ASC     Total Insured     ASC     Total Insured     ASC     Total
Medical Membership:  
Commercial 3,976 13,793 17,769 4,068 13,737 17,805 4,504 13,596 18,100 4,407 13,375 17,782
Medicare Advantage 1,734 1,734 1,722 1,722 1,473 1,473 1,453 1,453
Medicare Supplement 757 757 748 748 740 740 724 724
Medicaid 1,104   711   1,815   1,104   728   1,832   1,316   608   1,924   1,307   822   2,129
Total Medical Membership 7,571   14,504   22,075   7,642   14,465   22,107   8,033   14,204   22,237   7,891   14,197   22,088
 
Dental Membership:
Total Dental Membership 5,006   7,674   12,680   5,058   7,665   12,723   5,421   8,006   13,427   5,534   8,078   13,612
 
Pharmacy Benefit Management Services Membership:
Commercial 7,412 7,442 8,034 8,087
Medicare Prescription Drug Plan (stand-alone) 2,174 2,156 2,077 2,062
Medicare Advantage Prescription Drug Plan 1,258 1,243 1,129 1,116
Medicaid 2,235   2,256   2,525   2,832
Total Pharmacy Benefit Management Services Membership 13,079   13,097   13,765   14,097
 
 
Health Care Medical Benefit Ratios
    Three Months Ended     Six Months Ended
June 30,     June 30, June 30,     June 30,
(Millions) 2018     2017 2018     2017
Health Care Premiums (GAAP measure)
Commercial $ 5,807 $ 6,287 $ 11,442 $ 12,416
Government 7,476   6,955   14,944   14,066  
Health Care $ 13,283   $ 13,242   $ 26,386   $ 26,482  
Health Care Benefit Costs (GAAP measure)
Commercial $ 4,475 $ 4,938 $ 8,798 $ 9,798
Government 6,116   5,653   12,284   11,721  
Health Care $ 10,591   $ 10,591   $ 21,082   $ 21,519  
Medical Benefit Ratios "MBRs"
Commercial 77.1 % 78.5 % 76.9 % 78.9 %
Government 81.8 % 81.3 % 82.2 % 83.3 %
Health Care 79.7 % 80.0 % 79.9 % 81.3 %
 
 
Roll Forward of Health Care Costs Payable
(Unaudited)
    Six Months Ended June 30,
(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 21,598 22,123
Prior years(a) (548 ) (750 )
Total incurred health care costs (b) 21,050 21,373
 
Less: Claims paid
Current year 16,493 16,580
Prior years 4,711   5,224  
Total claims paid 21,204 21,804
 
Health care costs payable, end of period, net 5,655 6,122
Add: premium deficiency reserve 8 120
Add: reinsurance recoverables 3   4  
Health care costs payable, end of period $ 5,666   $ 6,246  
 

(a) Negative amounts reported for incurred health care costs
related to prior years result from claims being settled for less than
originally estimated.
(b) Total incurred health care
costs during the six months ended June 30, 2018 in the table above
exclude $8 million related to a premium deficiency reserve for the 2018
coverage year related to Aetna's Medicaid products. Total incurred
health care costs during the six months ended June 30, 2017 in the table
above exclude $120 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 the six months ended June
30, 2018 and 2017 in the table above also exclude $24 million and $26
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)
    June 30, 2018     March 31, 2018     December 31, 2017     September 30, 2017     June 30, 2017
Days Claims Payable 49 50 49 54 54
 

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