Aetna’s operating earnings increase 7% to $561.8M in third-quarter 2013

Oct 29 2013

Aetna (NYSE: AET) announced third-quarter 2013 operating earnings of $561.8 million, an increase of 7 percent over the third quarter of 2012. Third-quarter operating earnings per share were $1.50 in 2013 and $1.55 in 2012. Net income for the third quarter of 2013 was $518.6 million, or $1.38 per share and includes $.09 per share of integration-related costs and $.03 per share of net realized capital losses.

"Aetna's diversified business model produced another solid performance in the third quarter, which includes our first full quarter of results from the Coventry operations," said Mark T. Bertolini, Aetna chairman, CEO and president. "Bolstered by the acquisition and continued strong performance in our Commercial and Medicaid businesses, Aetna generated higher operating earnings and operating revenues year over year. As we look to the final quarter of 2013, we continue to project strong year-over-year performance.

"In October, CMS released the 2014 star ratings data, which is the basis for Medicare Advantage star bonus revenue payments in 2015. Aetna now has more than 60 percent of our members in four star or greater plans, a meaningful improvement over last year and the highest percentage among national carriers. These ratings are a testament to our continued focus and execution in this important business," said Bertolini.

"Aetna reported solid progress and execution this quarter," said Shawn M. Guertin, Aetna senior vice president and CFO. "Operating revenue increased by nearly 46 percent year over year, primarily from the addition of Coventry. Coventry's businesses performed well, giving us increased confidence in our ability to achieve our synergy and accretion targets.

"Our capital generation is strong, allowing us to execute upon our strategic vision and return cash to shareholders. This quarter we paid a dividend of $74 million and repurchased $333 million of shares. Year to date, Aetna has returned nearly $1.2 billion of capital to our shareholders through these two programs. Our financial position, capital structure, and liquidity all continue to be very strong," said Guertin.

Total company results

• Operating earnings were $561.8 million for the third quarter of 2013 compared with $523.2 million for the third quarter of 2012. Operating earnings were 7 percent higher in the third quarter of 2013 due to the inclusion of results from the acquisition of Coventry partially offset by lower underwriting margins primarily in our underlying Medicare and Group Life businesses.
• Operating revenues for the third quarter of 2013 were $13.0 billion compared with $8.9 billion for the third quarter of 2012. The 46 percent increase is primarily the result of higher Commercial, Medicare and Medicaid Health Care premiums from the acquisition of Coventry as well as growth in our underlying Medicare membership. Total revenue was $13.0 billion and $8.9 billion for the third quarters of 2013 and 2012, respectively.
• Operating Expenses were $2.3 billion for the third quarter of 2013. The operating expense ratio was 17.3 percent and 18.3 percent for the third quarters of 2013 and 2012, respectively. The improvement in the operating expense ratio is primarily driven by operating revenue growth and continued execution of our expense initiatives, including execution on our Coventry-related cost synergies. The total company expense ratio was 17.7 percent and 18.4 percent for the third quarters of 2013 and 2012, respectively.
• Pre-tax Operating Margin was 7.9 percent for the third quarter of 2013 compared with 10.2 percent for the third quarter of 2012 primarily due to lower underwriting margins in our underlying Medicare business. For the third quarter of 2013, the after-tax net income margin was 4.0 percent compared to 5.6 percent for 2012.
• Outstanding Shares were 367.5 million and 334.5 million as of September 30, 2013 and 2012, respectively. Share repurchases in the third quarter of 2013 totaled 5.2 million shares at a cost of $333 million.

Health Care business results

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

• Operating earnings of $585.8 million for the third quarter of 2013 compared with $531.8 million for the third quarter of 2012. Operating earnings were 10 percent higher in the third quarter of 2013 due to the acquisition of Coventry partially offset by lower underwriting margins primarily in our underlying Medicare business.
• Net income was $549.1 million for the third quarter of 2013 compared with $532.3 million for the third quarter of 2012.
• Operating revenues of $12.3 billion for the third quarter of 2013 compared with $8.2 billion for the third quarter of 2012. The 49-percent increase is due primarily to the inclusion of Coventry revenue as well as growth in our underlying Medicare membership. Total revenue for the third quarter of 2013 was $12.3 billion compared with $8.3 billion for the third quarter of 2012.

• Sequentially, third-quarter 2013 medical membership increased by 184 thousand due to growth across our Health Care businesses, primarily in Commercial as well as Medicare Supplement.
• Medical benefit ratios (MBRs) for the three and nine months ended September 30, 2013 and 2012 were as follows:

Our third-quarter Commercial MBR includes the impact of lower than projected medical cost trends, which resulted in favorable development of prior periods' health care cost estimates, primarily attributable to 2013 performance. The increase in our third-quarter Medicare MBR is primarily due to reflecting favorable 2012 experience in customer premiums on renewal in 2013 as well as underperformance in two specific Medicare product offerings and the impacts of sequestration. The improvement in our third-quarter Medicaid MBR is primarily due to the inclusion of Coventry, which added geographies carrying relatively lower MBRs.

• Prior-years' health care costs payable estimates have developed favorably by $396.4 million and $145.0 million during the first nine months of 2013 and 2012, respectively. This development does not directly correspond to an increase in our operating results for the nine months ended September 30, 2013. The development is reported on a basis consistent with the prior years' development reported in the health care costs payable tables in our annual audited financial statements.

Group Insurance business results

Group Insurance, which includes group life, disability and long-term care products, reported:

• Operating earnings of $19.7 million for the third quarter of 2013 compared with $29.3 million for the third quarter of 2012 primarily reflecting lower underwriting margins in our Group Life products due to higher claim incidence, partially offset by higher underwriting margins in our Disability products.
• Net income of $17.2 million for the third quarter of 2013 compared with $33.2 million for the third quarter of 2012.

• Operating revenues of $577.7 million for the third quarter of 2013, a 9-percent increase over $531.2 million for the third quarter of 2012. Total revenue was $573.7 million in the third quarter of 2013 and $537.1 million in the third quarter of 2012.

Large Case Pensions business results

Large Case Pensions, which manages a variety of discontinued and other retirement and savings products, primarily for qualified pension plans, reported:

• Operating earnings of $6.2 million for the third quarter of 2013 compared with $3.7 million for the third quarter of 2012.
• Net income of $2.4 million for the third quarter of 2013 compared with $.8 million for the third quarter of 2012.
• Operating revenues of $113.7 million for the third quarter of 2013 compared with $124.3 million for the third quarter of 2012. Total revenue, which includes net realized capital losses, was $162.1 million in the third quarter of 2013 compared with $119.8 million in the third quarter of 2012. Third-quarter 2013 total revenue also includes $54.1 million of group annuity conversion premium related to the conversion of an existing Large Case Pensions group annuity contract from a participating to a non-participating contract. That revenue is offset by an equivalent benefit expense associated with that contract conversion.

Aetna's conference call to discuss third-quarter 2013 results will begin at 8:30 a.m. ET today. The public may access the conference call through a live audio webcast available on Aetna's Investor Information link on the Internet at www.aetna.com. Financial, statistical and other information, including GAAP reconciliations, related to the conference call also will be available on Aetna's Investor Information website.

The conference call also can be accessed by dialing 1-888-297-0360 or +1-719-457-2573 for international callers. The company suggests participants dial in approximately 10 minutes before the call. The access code is 5078030. Individuals who dial in will be asked to identify themselves and their affiliations.

A replay of the call may be accessed through Aetna's Investor Information link on the Internet at www.aetna.com or by dialing 1-888-203-1112, or +1-719-457-0820 for international callers. The replay access code is 5078030. Telephone replays will be available until 11 p.m. ET on November 12, 2013.

Source: Aetna