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Aetna Reports Third-Quarter 2017 Results

Aetna (NYSE: AET) announced third-quarter 2017 net income(1) of $838 million, or $2.52 per share. Adjusted earnings(2) for third-quarter 2017 were $814 million, or $2.45 per share. Aetna's strong third-quarter performance resulted in net income of $1.7 billion and adjusted earnings of $2.9 billion for the nine months ended September 30, 2017.

“Our third-quarter results are a continuation of our momentum from the first half of the year,” said Mark T. Bertolini, Aetna chairman and CEO. “Our tireless focus on service and quality are evident in the recently released 2018 Medicare Star Ratings. For the third year in a row Aetna has the leading position among publicly-traded companies with the highest percentage of members in plans rated four stars or higher.”

“The strength of our core business fundamentals in the third-quarter was driven by disciplined pricing, moderate medical cost trend and focused execution,” said Shawn M. Guertin, Aetna executive vice president and CFO. “We are once again increasing our full year 2017 earnings projections to reflect the continued strength of our operating results year to date.”

 

(In millions, except per share data)

             
        Third-Quarter 2017   Full-Year 2017
        Revenue   Earnings   EPS   Projected EPS(4)
                     
GAAP       $ 14,994     $ 838     $ 2.52     ~ $5.95
                     
Non-GAAP (Adjusted)       $ 14,948     $ 814     $ 2.45     ~ $9.75
                     
Medical Membership totaled 22.2 million at September 30, 2017
 

 

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 through 11 for reconciliations of the most directly comparable GAAP financial measures to non-GAAP financial measures.

 
Third-Quarter Financial Results at a Glance
        Third-Quarter
(Millions, except per common share data)       2017   2016   Change
Total revenue       $ 14,994     $ 15,781     (5 )%
Adjusted revenue(3)       14,948     15,738     (5 )%
Net income(1)       838     604     39 %
Adjusted earnings(2)       814     734     11 %
                 
Per share results:                
Net income(1)       $ 2.52     $ 1.70     48 %
Adjusted earnings(2)       2.45     2.07     18 %
                 
Weighted average common shares - diluted       332.0     354.3      

Total Company Results

  • Net income(1) was $838 million for third-quarter 2017 compared with $604 million for third-quarter 2016. The increase in net income during third-quarter 2017 was primarily due to the increase in adjusted earnings described below and lower transaction and integration-related costs in 2017 compared to 2016.
  • Adjusted earnings(2) were $814 million for third-quarter 2017 compared with $734 million for third-quarter 2016. The increase in adjusted earnings during third-quarter 2017 was primarily due to continued strong performance in Aetna's Health Care segment.
  • Total revenue and adjusted revenue(3) were $15.0 billion and $14.9 billion, respectively, for third-quarter 2017 and were $15.8 billion and $15.7 billion, respectively, for third-quarter 2016. The decrease in total revenue and adjusted revenue during third-quarter 2017 was primarily due to lower premiums in Aetna's Health Care segment, including lower membership in Aetna's ACA compliant individual and small group products, and the temporary suspension of the health insurer fee ("HIF") in 2017.
  • Total company expense ratio was 17.4 percent and 17.9 percent for the third quarters of 2017 and 2016, respectively. The adjusted expense ratio(5) was 17.5 percent and 17.6 percent for the third quarters of 2017 and 2016, respectively. The improvement in both ratios during 2017 was primarily due to the temporary suspension of the HIF in 2017 and the continued execution of Aetna's expense management initiatives, largely offset by targeted investment spending on Aetna's growth initiatives. The total company expense ratio also improved due to lower transaction and integration-related costs in third-quarter 2017 compared to 2016.
  • After-tax net income margin was 5.6 percent and 3.8 percent for the third quarters of 2017 and 2016, respectively. The adjusted pre-tax margin(6) was 9.2 percent and 8.5 percent for the third quarters of 2017 and 2016, respectively. The improvement in both third-quarter 2017 ratios was primarily due to continued strong performance in Aetna's Health Care segment. The improvement in the adjusted pre-tax margin was partially offset by the negative impact of the temporary suspension of the HIF in 2017.
  • Total debt to consolidated capitalization ratio(7) was 39.5 percent at September 30, 2017 compared with 53.6 percent at December 31, 2016. The total debt to consolidated capitalization ratio at September 30, 2017 reflects (i) Aetna's decision to pre-fund debt maturities of approximately $1.0 billion coming due in the fourth quarter of 2017 with the issuance of $1.0 billion aggregate principal amount of senior notes during the third quarter of 2017 and (ii) the repayment of approximately $11.6 billion aggregate principal amount of Aetna's senior notes during the first half of 2017.
  • Effective tax rate was 33.4 percent for third-quarter 2017 compared with 44.4 percent for third-quarter 2016. The decrease in Aetna's effective tax rate for third-quarter 2017 was primarily due to the temporary suspension of the non-deductible HIF in 2017 and anticipated incremental tax benefits related to certain costs associated with the Humana transaction incurred in 2017.

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) and pre-tax adjusted earnings(2) remained relatively consistent at approximately $1.3 billion for the third-quarters of 2017 and 2016. The third quarter of 2017 reflects continued strong performance across Aetna's core Health Care businesses and reduced losses in Aetna's individual Commercial products, which offset the negative impact of the temporary suspension of the HIF in 2017.
  • Total revenue was $14.3 billion for third-quarter 2017 and $15.1 billion for third-quarter 2016. Adjusted revenue(3) was $14.2 billion for third-quarter 2017 and $15.1 billion for third-quarter 2016. The decrease in total revenue and adjusted revenue was primarily due to lower membership in Aetna's ACA compliant individual and small group products, lower membership in Aetna's Medicaid products and the temporary suspension of the HIF in 2017. The decrease was partially offset by higher premium yields in Aetna's Commercial and Government businesses and membership growth in Aetna's Medicare products.
  • Medical membership at September 30, 2017 increased slightly compared with June 30, 2017. The increase primarily reflects increases in Aetna's International Commercial Insured and Commercial ASC products, partially offset by declines in Aetna's Medicaid and ACA compliant individual and small group products.
  • Medical benefit ratios ("MBRs") for the three and nine months ended September 30, 2017 and 2016 were as follows:
               
          Three Months Ended September 30,   Nine Months Ended September 30,
          2017   2016   Change   2017   2016   Change
Commercial         81.4 %   83.8 %   (2.4 ) pts.   79.7 %   81.7 %   (2.0 ) pts.
Government         82.4 %   80.1 %   2.3   pts.   83.0 %   81.6 %   1.4   pts.
Total Health Care         81.9 %   82.0 %   (0.1 ) pts.   81.5 %   81.7 %   (0.2 ) pts.
                                               
  • Aetna's third-quarter 2017 Commercial MBR decreased compared with third-quarter 2016 primarily due to reduced losses in Aetna's individual Commercial products and improved performance across Aetna's core Commercial business. The decrease was partially offset by the unfavorable impact of the temporary suspension of the HIF in 2017.
  • Aetna's third-quarter 2017 Government MBR increased compared with third-quarter 2016 primarily due to the unfavorable impact of the temporary suspension of the HIF in 2017.
  • In third-quarter 2017, Aetna experienced favorable development of prior-period health care cost estimates in its Commercial, Medicare, and Medicaid products, primarily attributable to second-quarter 2017 performance.
  • Prior year's health care costs payable estimates developed favorably by $783 million and $717 million during the first nine months of 2017 and 2016, 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 2017 operating results.
  • Days claims payable(7) was 54 days at September 30, 2017, consistent with June 30, 2017 and a decrease of three days compared with September 30, 2016. The year-over-year decrease was driven by changes in business mix, primarily related to the decline in Aetna's individual Commercial product membership and the increase in Aetna's Medicare product membership.

Group Insurance Segment Results

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

  • Income before income taxes(1) of $53 million for third-quarter 2017 compared with $27 million for third-quarter 2016. Pre-tax adjusted earnings(2) were $34 million for third-quarter 2017 compared with $22 million for third-quarter 2016. Income before income taxes and pre-tax adjusted earnings increased primarily due to higher underwriting margins in Aetna's disability products, partially offset by lower underwriting margins in Aetna's life products. The increase in income before income taxes also reflects higher net realized capital gains in third-quarter 2017 compared to third-quarter 2016.
  • Total revenue of $650 million and $621 million for the third quarters of 2017 and 2016, respectively. Adjusted revenue(3) was $631 million and $616 million for the third quarters of 2017 and 2016, respectively. The increase in total revenue and adjusted revenue was primarily due to higher premiums in Aetna's life and disability products. The increase in total revenue also reflects higher net realized capital gains in third-quarter 2017 compared to third-quarter 2016.
  • In October 2017, Aetna entered into a definitive agreement under which Aetna will sell a substantial portion of its Group Insurance segment consisting of its domestic group life insurance, group disability insurance and absence management businesses. The transaction is expected to close in early November 2017.

Large Case Pensions Segment Results

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

  • Income before income taxes(1) was $6 million for both the third quarters of 2017 and 2016. Pre-tax adjusted earnings(2) were $5 million and $3 million for the third quarters of 2017 and 2016, respectively.
  • Total revenue of $80 million for third-quarter 2017 compared with $70 million for third-quarter 2016. Adjusted revenue(3) was $79 million and $67 million for the third quarters of 2017 and 2016, respectively. The increase in total revenue and adjusted revenue was primarily due to higher net investment income.

Aetna's conference call to discuss third-quarter 2017 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 website at www.aetna.com/investor. 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 1-877-709-8150, or +1-201-689-8354 for international callers. The company suggests participants dial in approximately 10 minutes before the call. No access code is required. 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 website at www.aetna.com/investor or by dialing 1-877-660-6853, or +1-201-612-7415 for international callers. The replay conference ID is 13671637. Telephone replays will be available until 11 p.m. ET on November 14, 2017.

About Aetna
Aetna is one of the nation's leading diversified health care benefits companies, serving an estimated 44.6 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, behavioral health, group life and disability 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)
            September 30,   December 31,
(Millions)           2017   2016
Assets:                
Cash and short-term investments           $ 8,797     $ 21,042
Accounts receivable, net           4,965     4,580
Other current assets           2,672     2,827
Total current assets           16,434     28,449
Long-term investments           21,507     21,833
Other long-term assets           19,442     18,864
Total assets           $ 57,383     $ 69,146
                 
Liabilities and shareholders’ equity:                
Health care costs payable           $ 6,139     $ 6,558
Current portion of long-term debt           1,998     1,634
Other current liabilities           11,510     10,502
Total current liabilities           19,647     18,694
Long-term debt, less current portion           8,161     19,027
Other long-term liabilities           13,757     13,482
Total Aetna shareholders' equity           15,583     17,881
Non-controlling interests           235     62
Total liabilities and equity           $ 57,383     $ 69,146
                       
   
Consolidated Statements of Income
(Unaudited)
        Three Months Ended
September 30,
  Nine Months Ended
September 30,
(Millions)       2017   2016   2017   2016
Revenue:                    
Health care premiums       $ 12,710     $ 13,525     $ 39,152     $ 40,623  
Other premiums       562     549     1,658     1,636  
Fees and other revenue       1,443     1,454     4,404     4,395  
Net investment income       233     219     730     688  
Net realized capital gains (losses)       46     34     (262 )   85  
Total revenue       14,994     15,781     45,682     47,427  
                     
Benefits and expenses:                    
Health care costs       10,412     11,092     31,905     33,172  
Current and future benefits       548     535     1,632     1,589  
Operating expenses:                    
Selling expenses       401     408     1,224     1,245  
General and administrative expenses       2,211     2,422     7,793     7,232  
Total operating expenses       2,612     2,830     9,017     8,477  
Interest expense       90     189     349     414  
Amortization of other acquired intangible assets       58     61     176     187  
Loss on early extinguishment of long-term debt               246      
Reduction of reserve for anticipated future losses on discontinued products               (109 )   (128 )
Total benefits and expenses       13,720     14,707     43,216     43,711  
                     
Income before income taxes       1,274     1,074     2,466     3,716  
Income tax expense       426     477     815     1,588  
Net income including non-controlling interests       848     597     1,651     2,128  
Less: Net income (loss) attributable to non-controlling interests       10     (7 )   (9 )   (4 )
Net income attributable to Aetna       $ 838     $ 604     $ 1,660     $ 2,132  
                                     
 
Consolidated Statements of Cash Flows
(Unaudited)
            Nine Months Ended
September 30,
(Millions)           2017   2016
Cash flows from operating activities:                
Net income including non-controlling interests           $ 1,651     $ 2,128  
Adjustments to reconcile net income to net cash provided by operating activities:                
Net realized capital losses (gains)           262     (85 )
Depreciation and amortization           499     511  
Debt fair value amortization           (14 )   (22 )
Equity in (earnings) losses of affiliates, net           (80 )   1  
Stock-based compensation expense           135     147  
Reduction of reserve for anticipated future losses on discontinued products           (109 )   (128 )
Amortization of net investment premium           54     62  
Loss on early extinguishment of long-term debt           246      
Changes in assets and liabilities:                
Premiums due and other receivables           (184 )   (278 )
Income taxes           (15 )   387  
Other assets and other liabilities           (1,196 )   57  
Health care and insurance liabilities           931     1,841  
Distributions from partnership investments           44      
Net cash provided by operating activities           2,224     4,621  
Cash flows from investing activities:                
Proceeds from sales and maturities of investments           8,854     10,747  
Cost of investments           (7,860 )   (10,876 )
Additions to property, equipment and software           (301 )   (197 )
Cash used for acquisitions, net of cash acquired           (24 )    
Net cash provided by (used for) investing activities           669     (326 )
Cash flows from financing activities:                
Issuance of long-term debt           988     12,886  
Repayment of long-term debt           (11,734 )    
Common shares issued under benefit plans, net           (132 )   (103 )
Common shares repurchased           (3,845 )    
Dividends paid to shareholders           (420 )   (262 )
Net payment on interest rate derivatives               (274 )
Contributions, non-controlling interests           182      
Net cash (used for) provided by financing activities           (14,961 )   12,247  
Net (decrease) increase in cash and cash equivalents           (12,068 )   16,542  
Cash and cash equivalents, beginning of period           17,996     2,524  
Cash and cash equivalents, end of period           $ 5,928     $ 19,066  
Margins and Ratios
          Three Months Ended
September 30,
  Nine Months Ended
September 30,
(Millions)         2017   2016   2017   2016
Reconciliation of income before income taxes to adjusted earnings before income taxes, excluding interest expense:                      
Income before income taxes (GAAP measure)         $ 1,274     $ 1,074     $ 2,466     $ 3,716  
Interest expense(9)         90     80     264     237  
Loss on early extinguishment of long-term debt                 246      
Penn Treaty-related guaranty fund assessments                 231      
Transaction and integration-related costs             164     1,202     333  
Reduction of reserve for anticipated future losses on discontinued products                 (109 )   (128 )
Amortization of other acquired intangible assets         58     61     176     187  
Net realized capital (gains) losses         (46 )   (34 )   262     (85 )
Adjusted earnings(2) before income taxes, excluding interest expense     (A)   $ 1,376     $ 1,345     $ 4,738     $ 4,260  
                       
Reconciliation of net income to adjusted earnings excluding interest expense, net of tax:                      
Net income(1) (GAAP measure)     (B)   $ 838     $ 604     $ 1,660     $ 2,132  
Interest expense(9)         90     80     264     237  
Loss on early extinguishment of long-term debt                 246      
Penn Treaty-related guaranty fund assessments                 231      
Transaction and integration-related costs             164     1,202     333  
Reduction of reserve for anticipated future losses on discontinued products                 (109 )   (128 )
Amortization of other acquired intangible assets         58     61     176     187  
Net realized capital (gains) losses         (46 )   (34 )   262     (85 )
Income tax benefit         (68 )   (89 )   (863 )   (183 )
Adjusted earnings(2) excluding interest expense, net of tax         $ 872     $ 786     $ 3,069     $ 2,493  
                       
Reconciliation of total revenue to adjusted revenue:                      
Total revenue (GAAP measure)     (C)   $ 14,994     $ 15,781     $ 45,682     $ 47,427  
Interest income on proceeds of transaction-related debt             (9 )   (11 )   (12 )
Net realized capital (gains) losses         (46 )   (34 )   262     (85 )
Adjusted revenue(3) (excludes net realized capital (gains) losses and an other item)     (D)   $ 14,948     $ 15,738     $ 45,933     $ 47,330  
                       
Reconciliation of total operating expenses to adjusted operating expenses:                      
Total operating expenses (GAAP measure)     (E)   $ 2,612     $ 2,830     $ 9,017     $ 8,477  
Penn Treaty-related guaranty fund assessments                 (231 )    
Transaction and integration-related costs             (64 )   (1,128 )   (168 )
Adjusted operating expenses     (F)   $ 2,612     $ 2,766     $ 7,658     $ 8,309  
                       
Net income and adjusted pre-tax margins:                      
After-tax net income margin (GAAP measure)     (B)/(C)   5.6 %   3.8 %   3.6 %   4.5 %
Adjusted pre-tax margin(6)     (A)/(D)   9.2 %   8.5 %   10.3 %   9.0 %
                       
Expense ratios:                      
Total company expense ratio (GAAP measure)     (E)/(C)   17.4 %   17.9 %   19.7 %   17.9 %
Adjusted expense ratio(5)     (F)/(D)   17.5 %   17.6 %   16.7 %   17.6 %
                               
 
Health Care, Group Insurance and Corporate Financing Operating Cash Flow as a Percentage of Net Income
            Nine Months Ended
September 30,
(Millions)           2017   2016
Net cash provided by operating activities (GAAP measure)           $ 2,224     $ 4,621  
Less: Net cash used for operating activities: Large Case Pensions           (196 )   (186 )
Net cash provided by operating activities: Health Care, Group Insurance and Corporate Financing       (A)   2,420     4,807  
                 
Net income(1) (GAAP Measure)           1,660     2,132  
Less: Net income: Large Case Pensions           88     99  
Net income: Health Care, Group Insurance and Corporate Financing       (B)   $ 1,572     $ 2,033  
                 
Operating cash flow as a percentage of net income:                
Operating cash flow as a percentage of net income(1) (GAAP Measure)       (A)/(B)   153.9 %   236.4 %
                     

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. Prior to March 31, 2017, operating earnings was the measure reported to the chief executive officer for purposes of assessing financial performance and making operating decisions, such as the allocation of resources among Aetna's business segments. Effective March 31, 2017, 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 Financing segment and are not allocated to Aetna's business segments. Also effective March 31, 2017, transaction and integration-related costs were reclassified to Aetna's Corporate Financing segment because they do not reflect Aetna's underlying business performance. The prior periods have been restated to reflect this presentation. 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 nine months ended September 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 $750 million aggregate principal amount of its outstanding senior notes due 2020.
  • During the nine months ended September 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.
  • Aetna recorded transaction and integration-related costs during the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 primarily related to its proposed acquisition of Humana (the "Humana Transaction"). Transaction costs include costs associated with 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 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 nine months ended September 30, 2017 and 2016, 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 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.
  • The corresponding tax benefit or expense related to the items excluded from adjusted earnings discussed above. The tax benefit or expense was calculated utilizing the appropriate tax rate for each individual item excluded from adjusted earnings. The three months ended September 30, 2017 include a $29 million tax benefit which reflects anticipated incremental tax benefits related to certain costs associated with the Humana Transaction.

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 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) Projected full-year 2017 net income per share and adjusted earnings per share reflect a range of 334 million to 335 million weighted average diluted shares. Projected full-year 2017 adjusted earnings per share exclude from projected full-year 2017 net income per share the loss on early extinguishment of long-term debt, the projected Penn Treaty-related guaranty fund assessments, projected transaction and integration-related costs (including termination costs) primarily related to the Humana Transaction, the reduction of the reserve for anticipated future losses on discontinued products, estimated amortization of other acquired intangible assets, net realized capital gains and losses, other items, if any, that neither relate to the ordinary course of Aetna's business nor reflect Aetna's underlying business performance and the corresponding income tax benefit or expense related to the items excluded from net income per share discussed above. Amortization of other acquired intangible assets relates to Aetna's acquisition activities. The table below reconciles projected 2017 net income per share to projected 2017 adjusted earnings per share:

Reconciliation of Projected 2017 Net Income Per Share to Projected 2017 Adjusted Earnings Per Share
Projected net income per share (GAAP measure)     Approximately   $ 5.95  
Loss on early extinguishment of long-term debt         .74  
Penn Treaty-related guaranty fund assessments         .69  
Transaction and integration-related costs (including termination costs)         3.59  
Reduction of reserve for anticipated future losses on discontinued products         (.33 )
Amortization of other acquired intangible assets         .70  
Net realized capital losses         .78  
Income tax benefit         (2.37 )
Projected adjusted earnings per share     Approximately   $ 9.75  

Aetna will experience net realized capital gains or net realized capital losses during the remainder of 2017, however Aetna cannot project the amount of such future gains or losses. Therefore, Aetna has assumed no net realized capital gains or losses after September 30, 2017 for purposes of projecting net income and net income per share. Aetna's annual net realized capital gains or losses ranged from a net realized capital loss of $65 million to a net realized capital gain of $86 million during calendar years 2014 through 2016.

(5) 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.

(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 Financing segment is not a business segment. It is added to Aetna's business segments to reconcile segment reporting to Aetna's consolidated results. The Corporate Financing segment includes interest expense on Aetna's outstanding debt and the financing components of Aetna's pension and other postretirement employee benefit plan expenses (benefits), and, effective March 31, 2017, all transaction and integration-related costs and income taxes. The prior periods have been restated to reflect this presentation. As described in (2) above, the adjusted earnings of the Corporate Financing segment 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 the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 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. Interest expense for the nine months ended September 30, 2016 excludes costs associated with bridge credit agreement executed in connection with the Humana Transaction. These costs are included within transaction and integration-related costs. Refer to (2) above for further discussion.

Supplementary Information

 
Statements of Income Before Income Taxes Attributable to Aetna by Segment (Unaudited)
                         
        Health   Group   Large Case   Corporate    
(Millions)       Care   Insurance   Pensions   Financing   Total
Three Months Ended September 30, 2017                        
Revenue:                        
Health care premiums       $ 12,710     $     $     $     $ 12,710  
Other premiums           552     10         562  
Fees and other revenue       1,417     24     2         1,443  
Net investment income       111     55     67         233  
Net realized capital gains       26     19     1         46  
Total revenue       14,264     650     80         14,994  
Benefits and expenses:                        
Health care costs       10,412                 10,412  
Current and future benefits           478     70         548  
Operating expenses:                        
Selling expenses       366     35             401  
General and administrative expenses       2,149     84     4     (26 )   2,211  
Total operating expenses       2,515     119     4     (26 )   2,612  
Interest expense                   90     90  
Amortization of other acquired intangible assets       58                 58  
Total benefits and expenses       12,985     597     74     64     13,720  
Income (loss) before income taxes including non-controlling interests       1,279     53     6     (64 )   1,274  
Less: Income before income taxes attributable to non-controlling interests       14                 14  
Income (loss) before income taxes attributable to Aetna       $ 1,265     $ 53     $ 6     $ (64 )   $ 1,260  
                         
                         
Three Months Ended September 30, 2016                        
Revenue:                        
Health care premiums       $ 13,525     $     $     $     $ 13,525  
Other premiums           537     12         549  
Fees and other revenue       1,425     27     2         1,454  
Net investment income       105     52     53     9     219  
Net realized capital gains       26     5     3         34  
Total revenue       15,081     621     70     9     15,781  
Benefits and expenses:                        
Health care costs       11,092                 11,092  
Current and future benefits           474     61         535  
Operating expenses:                        
Selling expenses       377     31             408  
General and administrative expenses       2,281     89     3     49     2,422  
Total operating expenses       2,658     120     3     49     2,830  
Interest expense                   189     189  
Amortization of other acquired intangible assets       61                 61  
Total benefits and expenses       13,811     594     64     238     14,707  
Income (loss) before income taxes including non-controlling interests       1,270     27     6     (229 )   1,074  
Less: Loss before income taxes attributable to non-controlling interests       (9 )               (9 )
Income (loss) before income taxes attributable to Aetna       $ 1,279     $ 27     $ 6     $ (229 )   $ 1,083  
                                             
 
Statements of Income Before Income Taxes Attributable to Aetna by Segment (Unaudited)
                         
        Health   Group   Large Case   Corporate    
(Millions)       Care   Insurance   Pensions   Financing   Total
Nine Months Ended September 30, 2017                        
Revenue:                        
Health care premiums       $ 39,152     $     $     $     $ 39,152  
Other premiums           1,622     36         1,658  
Fees and other revenue       4,322     76     6         4,404  
Net investment income       339     179     201     11     730  
Net realized capital gains (losses)       34     36     4     (336 )   (262 )
Total revenue       43,847     1,913     247     (325 )   45,682  
Benefits and expenses:                        
Health care costs       31,905                 31,905  
Current and future benefits           1,411     221         1,632  
Operating expenses:                        
Selling expenses       1,116     108             1,224  
General and administrative expenses       6,485     249     9     1,050     7,793  
Total operating expenses       7,601     357     9     1,050     9,017  
Interest expense                   349     349  
Amortization of other acquired intangible assets       176                 176  
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       39,682     1,768     121     1,645     43,216  
Income (loss) before income taxes including non-controlling interests       4,165     145     126     (1,970 )   2,466  
Less: (Loss) income before income taxes attributable to non-controlling interests       (7 )       1         (6 )
Income (loss) before income taxes attributable to Aetna       $ 4,172     $ 145     $ 125     $ (1,970 )   $ 2,472  
                         
                         
Nine Months Ended September 30, 2016                        
Revenue:                        
Health care premiums       $ 40,623     $     $     $     $ 40,623  
Other premiums           1,604     32         1,636  
Fees and other revenue       4,309     79     7         4,395  
Net investment income       333     172     171     12     688  
Net realized capital gains       51     25     9         85  
Total revenue       45,316     1,880     219     12     47,427  
Benefits and expenses:                        
Health care costs       33,172                 33,172  
Current and future benefits           1,394     195         1,589  
Operating expenses:                        
Selling expenses       1,150     95             1,245  
General and administrative expenses       6,836     262     9     125     7,232  
Total operating expenses       7,986     357     9     125     8,477  
Interest expense                   414     414  
Amortization of other acquired intangible assets       187                 187  
Reduction of reserve for anticipated future losses on discontinued products               (128 )       (128 )
Total benefits and expenses       41,345     1,751     76     539     43,711  
Income (loss) before income taxes including non-controlling interests       3,971     129     143     (527 )   3,716  
Less: Loss before income taxes attributable to non-controlling interests       (4 )       (1 )       (5 )
Income (loss) before income taxes attributable to Aetna       $ 3,975     $ 129     $ 144     $ (527 )   $ 3,721  
                                             
 
Membership
        September 30, 2017   June 30, 2017   December 31, 2016   September 30, 2016
(Thousands)       Insured   ASC   Total   Insured   ASC   Total   Insured   ASC   Total   Insured   ASC   Total
Medical Membership:                                                    
Commercial       4,584     13,470     18,054     4,407     13,375     17,782     5,457     13,132     18,589     5,596     13,064     18,660
Medicare Advantage       1,467         1,467     1,453         1,453     1,362         1,362     1,364         1,364
Medicare Supplement       733         733     724         724     685         685     667         667
Medicaid       1,311     600     1,911     1,307     822     2,129     1,668     806     2,474     1,629     801     2,430
Total Medical Membership       8,095     14,070     22,165     7,891     14,197     22,088     9,172     13,938     23,110     9,256     13,865     23,121
                                                     
Dental Membership:                                                    
Total Dental Membership       5,538     7,930     13,468     5,534     8,078     13,612     6,086     8,386     14,472     5,940     8,393     14,333
                                                     
Pharmacy Benefit Management Services Membership:                                                    
Commercial               7,994             8,087             9,400             9,610
Medicare Prescription Drug Plan (stand-alone)               2,074             2,062             2,067             2,031
Medicare Advantage Prescription Drug Plan               1,124             1,116             953             952
Medicaid               2,493             2,832             2,783             2,719
Total Pharmacy Benefit Management Services Membership               13,685             14,097             15,203             15,312
                                                           
 
Health Care Medical Benefit Ratios
        Three Months Ended
September 30,
  Nine Months Ended
September 30,
(Millions)       2017   2016   2017   2016
Premiums (GAAP measure)                    
Commercial       $ 6,043     $ 6,952     $ 18,419     $ 20,967  
Government       6,667     6,573     20,733     19,656  
Health Care       $ 12,710     $ 13,525     $ 39,152     $ 40,623  
Health Care Costs (GAAP measure)                    
Commercial       $ 4,917     $ 5,829     $ 14,688     $ 17,128  
Government       5,495     5,263     17,217     16,044  
Health Care       $ 10,412     $ 11,092     $ 31,905     $ 33,172  
Medical Benefit Ratios "MBRs"                    
Commercial       81.4 %   83.8 %   79.7 %   81.7 %
Government       82.4 %   80.1 %   83.0 %   81.6 %
Health Care       81.9 %   82.0 %   81.5 %   81.7 %
                             
 
Roll Forward of Health Care Costs Payable
(Unaudited)
        Nine Months Ended
September 30,
(Millions)       2017   2016
Health care costs payable, beginning of period       $ 6,558     $ 6,306  
Less: reinsurance recoverables       5     4  
Health care costs payable, beginning of period, net       6,553     6,302  
Add: Components of incurred health care costs:            
Current year       32,611     33,804  
Prior years(a)       (783 )   (717 )
Total incurred health care costs (b)       31,828     33,087  
             
Less: Claims paid            
Current year       26,959     27,382  
Prior years       5,364     5,222  
Total claims paid       32,323     32,604  
             
Health care costs payable, end of period, net       6,058     6,785  
Add: premium deficiency reserve       77     85  
Add: reinsurance recoverables       4     3  
Health care costs payable, end of period       $ 6,139     $ 6,873  
                     

(a) Negative amounts reported for incurred health care costs related to prior years result from claims being settled for amounts less than originally estimated.
(b) Total incurred health care costs exclude from the table above $77 million and $85 million, respectively, related to the premium deficiency reserve recorded during the nine months ended September 30, 2017 and 2016, for the 2017 and 2016 coverage years primarily related to Aetna's individual Commercial products.

 
Days Claims Payable (Unaudited)
          September 30, 2017   June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016
Days Claims Payable         54   54   53   54   57
                           
Health Care Reform's Reinsurance, Risk Adjustment and Risk Corridor (the “3Rs”)(a) Net Receivable (Payable)
        September 30, 2017   December 31, 2016
       

 

 

(Unaudited)

               
(Millions)       Reinsurance   Risk Adjustment   Risk Corridor(b)   Reinsurance   Risk Adjustment   Risk Corridor
Current       $ 37     $ (42 )   $ (6 )   $ 202     $ (690 )   $ (10 )
Long-term           28                  
Total net receivable (payable)       $ 37     $ (14 )   $ (6 )   $ 202     $ (690 )   $ (10 )
                                                     

(a) Aetna participates in certain public health insurance exchanges established pursuant to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, “Health Care Reform” or the “ACA”). Under regulations established by the U.S. Department of Health and Human Services (“HHS”), HHS pays Aetna a portion of the premium and through September 30, 2017, paid a portion of the health care costs for low-income individual Public Exchange members. In addition, HHS administers the 3Rs risk management programs. The ACA’s temporary Reinsurance and Risk Corridor programs expired at the end of 2016.
(b) Aetna estimates that as of September 30, 2017, it is entitled to receive a total of $314 million from HHS under the three-year ACA risk corridor program for the 2014 through 2016 program years. At September 30, 2017, Aetna did not record any ACA risk corridor receivables related to the 2016 or 2015 program years or any amount in excess of HHS's announced prorated funding amount for the 2014 program year, because payments from HHS are uncertain.

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