Date of Report (Date of earliest event reported): | May 1, 2018 |
Pennsylvania | 1-16095 | 23-2229683 |
(State or other jurisdiction of | (Commission | (IRS Employer |
incorporation) | File Number) | Identification No.) |
151 Farmington Avenue, Hartford, CT | 06156 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: | (860) 273-0123 |
Former name or former address, if changed since last report: | N/A |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
Aetna Inc. |
Date: May 1, 2018 | By: | /s/ Heather Dixon |
Name: Heather Dixon | ||
Title: Vice President, Controller and Chief Accounting Officer |
151 Farmington Avenue Hartford, Conn. 06156 | Media Contact: Ethan Slavin 860-273-6095 slavine@aetna.com | |
Investor Contact: Joe Krocheski 860-273-0896 krocheskij@aetna.com | ||
First-Quarter 2018 | |||||||||||
Revenue | Earnings | EPS | |||||||||
GAAP | $ | 15,335 | $ | 1,209 | $ | 3.67 | |||||
Non-GAAP (Adjusted) | $ | 15,216 | $ | 1,051 | $ | 3.19 | |||||
Medical Membership totaled 22.1 million at March 31, 2018 | |||||||||||
Aetna presents both GAAP and non-GAAP financial measures in this press release to provide investors with additional information. Refer to footnotes (1) through (6) for definitions of non-GAAP financial measures and pages 9 and 10 for reconciliations of the most directly comparable GAAP financial measures to non-GAAP financial measures. | |||||||||||
First-Quarter Financial Results at a Glance | ||||||||||
First-Quarter | ||||||||||
(Millions, except per common share data) | 2018 | 2017 | Change | |||||||
Total revenue | $ | 15,335 | $ | 15,165 | 1 | % | ||||
Adjusted revenue(3) | 15,216 | 15,487 | (2 | )% | ||||||
Net income (loss)(1) | 1,209 | (381 | ) | N/M* | ||||||
Adjusted earnings(2) | 1,051 | 939 | 12 | % | ||||||
Per share results: | ||||||||||
Net income (loss)(1) | $ | 3.67 | $ | (1.11 | ) | N/M* | ||||
Adjusted earnings(2) | 3.19 | 2.71 | 18 | % | ||||||
Weighted average common shares - diluted (GAAP)(5) | 329.6 | 343.8 | ||||||||
Adjusted weighted average common shares - diluted (non-GAAP)(5) | 329.6 | 346.2 | ||||||||
• | 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. |
• | Net income(1) was $1.2 billion for first-quarter 2018 compared with a net loss of $381 million for first-quarter 2017. The increase in net income during first-quarter 2018 compared with a net loss during first-quarter 2017 was primarily due to first-quarter 2017 reflecting costs associated with the termination of the Humana Merger Agreement and the increase in adjusted earnings described below. |
• | Adjusted earnings(2) were $1.1 billion for first-quarter 2018 compared with $939 million for first-quarter 2017. The increase in adjusted earnings during first-quarter 2018 was primarily due to the favorable impact of the Tax Cuts and Jobs Act of 2017 (the "TCJA"). Adjusted earnings exclude the impact of a non-recurring tax benefit in first-quarter 2018 and other items as described in footnote (2). |
• | Total revenue was $15.3 billion for first-quarter 2018 compared with $15.2 billion for first-quarter 2017. The increase in total revenue was primarily due to first-quarter 2017 reflecting a realized capital loss of $336 million pre-tax due to unamortized cash flow hedge losses being recognized into earnings upon the redemption of certain of Aetna's senior notes, largely offset by the decrease in adjusted revenue discussed below. |
• | Adjusted revenue(3) was $15.2 billion for first-quarter 2018 compared with $15.5 billion for first-quarter 2017. The decrease in adjusted revenue was primarily due to the sale of Aetna's domestic group life insurance, group disability insurance and absence management businesses (the "Group Insurance sale") during fourth-quarter 2017, partially offset by higher adjusted revenue in Aetna's Health Care segment described below. |
• | Total company expense ratio was 18.2 percent and 25.4 percent for the first quarters of 2018 and 2017, respectively. The improvement for first-quarter 2018 was primarily due to the first-quarter 2017 ratio reflecting the costs associated with the termination of the Humana Merger Agreement, partially offset by the reinstatement of the health insurer fee ("HIF") for 2018. |
• | Adjusted expense ratio(4) was 17.9 percent and 16.0 percent for the first quarters of 2018 and 2017, respectively. The increase for first-quarter 2018 was primarily due to the reinstatement of the HIF for 2018. |
• | After-tax net income margin was 7.9 percent for first-quarter 2018 compared with after-tax net loss margin of 2.5 percent for first-quarter 2017. The increase in the after-tax net income margin for first-quarter 2018 compared with after-tax net loss margin for first-quarter 2017 was primarily due to the first-quarter 2017 ratio reflecting the costs associated with the termination of the Humana Merger Agreement. |
• | Adjusted pre-tax margin(6) remained relatively consistent at 10.1 percent and 10.0 percent for the first quarters of 2018 and 2017, respectively. The 2018 ratio reflects continued strong performance in Aetna's Health Care segment. |
• | Total debt to consolidated capitalization ratio(7) decreased to 35.8 percent at March 31, 2018 compared with 37.0 percent at December 31, 2017. |
• | Effective tax rate was 16.8 percent for first-quarter 2018 compared with 39.6 percent for first-quarter 2017. The decrease in Aetna's effective tax rate for first-quarter 2018 was primarily due to the reduced corporate income tax rate specified in the TCJA and a non-recurring tax benefit recorded in first-quarter 2018, partially offset by the reinstatement of the non-deductible HIF in 2018. |
• | Operating cash flow excluding large case pensions products as a percentage of net income was 282.5% during first-quarter 2018. The ratio reflects an advance payment of Medicare premium received in March 2018 related to April 2018. |
• | Cash and investments at the parent were approximately $2.3 billion at March 31, 2018. |
• | Aetna started the quarter with approximately $2.2 billion; |
• | Net subsidiary dividends to the parent were $427 million in the quarter; |
• | Aetna paid a shareholder dividend of $164 million in the quarter; and |
• | After other sources and uses, Aetna ended the quarter with approximately $2.3 billion of cash and investments at the parent. |
• | Income before income taxes(1) of $1.4 billion for first-quarter 2018 compared with $1.2 billion for first-quarter 2017. The increase in income before income taxes was primarily due to first-quarter 2017 reflecting a $231 million pre-tax expense related to estimated future guaranty fund assessments as a result of Penn Treaty being placed in liquidation. |
• | Pre-tax adjusted earnings(2) remained relatively consistent at approximately $1.5 billion for the first-quarters of 2018 and 2017. Aetna's first-quarter 2018 results were favorably impacted by Aetna's previously announced exit from individual Commercial products and by membership growth in its Medicare products, substantially offset by lower membership in Aetna's Commercial and Medicaid insured products. |
• | Total revenue and adjusted revenue(3) were both $15.1 billion for first-quarter 2018 and both $14.8 billion for first-quarter 2017. The increase in total revenue and adjusted revenue was primarily due to membership growth in Aetna's Medicare products, the adoption of new accounting guidance related to revenue recognition effective during first-quarter 2018 and the favorable impact of the reinstatement of the HIF for 2018. The increase was partially offset by lower membership in Aetna's ACA compliant individual and small group products and its Medicaid products. |
• | Medical membership at March 31, 2018 decreased slightly compared with December 31, 2017 reflecting declines in Aetna's Commercial products primarily related to Aetna's ACA compliant individual and small group products and declines in Aetna's Medicaid products, partially offset by growth in Aetna's Medicare products. |
• | Medical benefit ratios ("MBRs") for first-quarter 2018 and 2017 were as follows: |
First-Quarter | |||||||||
2018 | 2017 | Change | |||||||
Commercial | 77.5 | % | 79.3 | % | (1.8 | ) | pts. | ||
Government | 82.6 | % | 85.3 | % | (2.7 | ) | pts. | ||
Total Health Care | 80.4 | % | 82.5 | % | (2.1 | ) | pts. | ||
• | Aetna's first-quarter 2018 Commercial MBR decreased compared with first-quarter 2017 primarily due to the reinstatement of the HIF for 2018 and Aetna's previously announced exit from individual Commercial products for 2018. |
• | Aetna's first-quarter 2018 Government MBR decreased compared with first-quarter 2017 primarily due to the reinstatement of the HIF for 2018. |
• | Aetna's first-quarter 2018 Total Health Care MBR was negatively impacted by approximately 50 basis points compared with first-quarter 2017 due to higher medical costs as a result of a more severe flu season during first-quarter 2018 compared to first-quarter 2017. |
• | In first-quarter 2018, Aetna experienced favorable development of prior years' health care cost estimates in its Commercial, Medicare and Medicaid products, primarily attributable to fourth-quarter 2017 performance. |
• | Prior years' health care costs payable estimates developed favorably by $503 million and $614 million during the first quarters of 2018 and 2017, respectively. This development is reported on a basis consistent with the prior years' development reported in the health care costs payable table in Aetna's annual audited financial statements, and does not directly correspond to an increase in 2018 operating results. |
• | Days claims payable(7) was 50 days at March 31, 2018, a sequential increase of 1 day compared to December 31, 2017 and a decrease of 3 days compared with March 31, 2017. The year over year decrease was driven primarily by changes in business mix. |
Condensed Consolidated Balance Sheets | ||||||||||
(Unaudited) | ||||||||||
(Millions) | At March 31, 2018 | At December 31, 2017 | ||||||||
Assets: | ||||||||||
Cash and short-term investments | $ | 10,396 | $ | 6,356 | ||||||
Accounts receivable, net | 5,650 | 5,071 | ||||||||
Other current assets | 4,655 | 4,096 | ||||||||
Total current assets | 20,701 | 15,523 | ||||||||
Long-term investments | 16,409 | 17,793 | ||||||||
Other long-term assets | 22,087 | 21,835 | ||||||||
Total assets | $ | 59,197 | $ | 55,151 | ||||||
Liabilities and shareholders’ equity: | ||||||||||
Health care costs payable | $ | 5,783 | $ | 5,815 | ||||||
Current portion of long-term debt | 1,374 | 999 | ||||||||
Other current liabilities | 12,536 | 10,023 | ||||||||
Total current liabilities | 19,693 | 16,837 | ||||||||
Long-term debt, less current portion | 7,785 | 8,160 | ||||||||
Other long-term liabilities | 15,054 | 14,317 | ||||||||
Total Aetna shareholders' equity | 16,398 | 15,580 | ||||||||
Non-controlling interests | 267 | 257 | ||||||||
Total liabilities and equity | $ | 59,197 | $ | 55,151 | ||||||
Consolidated Statements of Income | ||||||||||
(Unaudited) | ||||||||||
Three Months | ||||||||||
Ended March 31, | ||||||||||
(Millions) | 2018 | 2017 | ||||||||
Revenue: | ||||||||||
Premiums | $ | 13,070 | $ | 13,763 | ||||||
Fees and other revenue | 2,062 | 1,475 | ||||||||
Net investment income | 197 | 260 | ||||||||
Net realized capital gains (losses) | 6 | (333 | ) | |||||||
Total revenue | 15,335 | 15,165 | ||||||||
Benefits and expenses: | ||||||||||
Benefit costs | 10,574 | 11,461 | ||||||||
Cost of products sold | 373 | — | ||||||||
Operating expenses | 2,787 | 3,853 | ||||||||
Interest expense | 89 | 173 | ||||||||
Amortization of other acquired intangible assets | 47 | 60 | ||||||||
Loss on early extinguishment of long-term debt | — | 246 | ||||||||
Total benefits and expenses | 13,870 | 15,793 | ||||||||
Income (loss) before income taxes | 1,465 | (628 | ) | |||||||
Income tax expense (benefit) | 246 | (249 | ) | |||||||
Net income (loss) including non-controlling interests | 1,219 | (379 | ) | |||||||
Less: Net income attributable to non-controlling interests | 10 | 2 | ||||||||
Net income (loss) attributable to Aetna | $ | 1,209 | $ | (381 | ) | |||||
Consolidated Statements of Cash Flows | ||||||||||
(Unaudited) | ||||||||||
For the Three Months | ||||||||||
Ended March 31, | ||||||||||
(Millions) | 2018 | 2017 | ||||||||
Cash flows from operating activities: | ||||||||||
Net income (loss) including non-controlling interests | $ | 1,219 | $ | (379 | ) | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Net realized capital (gains) losses | (6 | ) | 333 | |||||||
Depreciation and amortization | 132 | 160 | ||||||||
Debt fair value amortization | (3 | ) | (7 | ) | ||||||
Equity in earnings of affiliates, net | (10 | ) | (38 | ) | ||||||
Stock-based compensation expense | 39 | 54 | ||||||||
Amortization of net investment premium | 15 | 17 | ||||||||
Loss on early extinguishment of long-term debt | — | 246 | ||||||||
Gain on sale of businesses | (113 | ) | — | |||||||
Changes in assets and liabilities: | ||||||||||
Premiums due and other receivables | (384 | ) | (477 | ) | ||||||
Income taxes | 240 | (271 | ) | |||||||
Other assets and other liabilities | 319 | (95 | ) | |||||||
Health care and insurance liabilities | 1,893 | 1,356 | ||||||||
Net cash provided by operating activities | 3,341 | 899 | ||||||||
Cash flows from investing activities: | ||||||||||
Proceeds from sales and maturities of investments | 2,410 | 2,738 | ||||||||
Cost of investments | (1,621 | ) | (2,723 | ) | ||||||
Additions to property, equipment and software | (99 | ) | (71 | ) | ||||||
Cash used for acquisitions, net of cash acquired | (6 | ) | — | |||||||
Net cash provided by (used for) investing activities | 684 | (56 | ) | |||||||
Cash flows from financing activities: | ||||||||||
Repayment of long-term debt | — | (11,484 | ) | |||||||
Common shares issued under benefit plans, net | (72 | ) | (103 | ) | ||||||
Common shares repurchased | — | (3,300 | ) | |||||||
Dividends paid to shareholders | (164 | ) | (88 | ) | ||||||
Contributions, non-controlling interests | 10 | 13 | ||||||||
Net cash used for financing activities | (226 | ) | (14,962 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 3,799 | (14,119 | ) | |||||||
Cash and cash equivalents, beginning of period | 4,076 | 17,996 | ||||||||
Cash and cash equivalents, end of period | $ | 7,875 | $ | 3,877 |
Reconciliation of the Most Directly Comparable GAAP Measure to Certain Reported Amounts | |||||||||||||||||||||||
(Millions, except per common share data) | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | |||||||||||||||||||||
Reconciliation of net income (loss) to adjusted earnings | Total Company | Per Common Share | Total Company | Per Common Share | |||||||||||||||||||
Net income (loss)(1) (GAAP measure) | $ | 1,209 | $ | 3.67 | $ | (381 | ) | $ | (1.11 | ) | |||||||||||||
Gain related to sale of certain domestic group insurance businesses | (113 | ) | (0.34 | ) | — | — | |||||||||||||||||
Transaction and integration-related costs | 58 | 0.18 | 1,212 | 3.50 | |||||||||||||||||||
Loss on early extinguishment of long-term debt | — | — | 246 | 0.71 | |||||||||||||||||||
Penn Treaty-related guaranty fund assessments | — | — | 231 | 0.67 | |||||||||||||||||||
Amortization of other acquired intangible assets | 47 | 0.14 | 60 | 0.17 | |||||||||||||||||||
Net realized capital (gains) losses | (6 | ) | (0.02 | ) | 333 | 0.96 | |||||||||||||||||
Income tax benefit | (144 | ) | (0.44 | ) | (762 | ) | (2.20 | ) | |||||||||||||||
Dilutive share impact to adjusted earnings(5) | — | — | — | 0.01 | |||||||||||||||||||
Adjusted earnings(2) | $ | 1,051 | $ | 3.19 | $ | 939 | $ | 2.71 | |||||||||||||||
Weighted average common shares - diluted (GAAP)(5) | 329.6 | 343.8 | |||||||||||||||||||||
Adjusted weighted average common shares - diluted (non-GAAP)(5) | 329.6 | 346.2 | |||||||||||||||||||||
Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | ||||||||||||||||||||||
(Millions) | Health Care | Corporate/Other(8) | Total Company | Health Care | Corporate/Other(8) | Total Company | |||||||||||||||||
Reconciliation of total revenue to adjusted revenue | |||||||||||||||||||||||
Total revenue (GAAP measure) | $ | 15,127 | $ | 208 | $ | 15,335 | $ | 14,806 | $ | 359 | $ | 15,165 | |||||||||||
Gain related to sale of certain domestic group insurance businesses | — | (113 | ) | (113 | ) | — | — | — | |||||||||||||||
Interest income on proceeds of transaction-related debt | — | — | — | — | (11 | ) | (11 | ) | |||||||||||||||
Net realized capital (gains) losses | (5 | ) | (1 | ) | (6 | ) | (1 | ) | 334 | 333 | |||||||||||||
Adjusted revenue(3) (excludes net realized capital (gains) losses and other items) | $ | 15,122 | $ | 94 | $ | 15,216 | $ | 14,805 | $ | 682 | $ | 15,487 | |||||||||||
Reconciliation of income (loss) before income taxes to pre-tax adjusted earnings (loss) | |||||||||||||||||||||||
Income (loss) before income taxes (GAAP measure) | $ | 1,457 | $ | 8 | $ | 1,465 | $ | 1,193 | $ | (1,821 | ) | $ | (628 | ) | |||||||||
Less: Income before income taxes attributable to non-controlling interests (GAAP measure) | 13 | — | 13 | 2 | 1 | 3 | |||||||||||||||||
Income (loss) before income taxes attributable to Aetna (GAAP measure) | 1,444 | 8 | 1,452 | 1,191 | (1,822 | ) | (631 | ) | |||||||||||||||
Gain related to sale of certain domestic group insurance businesses | — | (113 | ) | (113 | ) | — | — | — | |||||||||||||||
Transaction and integration-related costs | — | 58 | 58 | — | 1,212 | 1,212 | |||||||||||||||||
Loss on early extinguishment of long-term debt | — | — | — | — | 246 | 246 | |||||||||||||||||
Penn Treaty-related guaranty fund assessments | — | — | — | 231 | — | 231 | |||||||||||||||||
Amortization of other acquired intangible assets | 47 | — | 47 | 60 | — | 60 | |||||||||||||||||
Net realized capital (gains) losses | (5 | ) | (1 | ) | (6 | ) | (1 | ) | 334 | 333 | |||||||||||||
Pre-tax adjusted earnings (loss)(2) | $ | 1,486 | $ | (48 | ) | $ | 1,438 | $ | 1,481 | $ | (30 | ) | $ | 1,451 |
Margins and Ratios | ||||||||
Three Months | ||||||||
Ended March 31, | ||||||||
(Millions) | 2018 | 2017 | ||||||
Reconciliation of income (loss) before income taxes to adjusted earnings before income taxes, excluding interest expense: | ||||||||
Income (loss) before income taxes (GAAP measure) | $ | 1,465 | $ | (628 | ) | |||
Interest expense(9) | 89 | 88 | ||||||
Gain related to sale of certain domestic group insurance businesses | (113 | ) | — | |||||
Transaction and integration-related costs | 58 | 1,212 | ||||||
Loss on early extinguishment of long-term debt | — | 246 | ||||||
Penn Treaty-related guaranty fund assessments | — | 231 | ||||||
Amortization of other acquired intangible assets | 47 | 60 | ||||||
Net realized capital (gains) losses | (6 | ) | 333 | |||||
Adjusted earnings(2) before income taxes, excluding interest expense | (A) | $ | 1,540 | $ | 1,542 | |||
Reconciliation of net income (loss) to adjusted earnings excluding interest expense, net of tax: | ||||||||
Net income (loss)(1) (GAAP measure) | (B) | $ | 1,209 | $ | (381 | ) | ||
Interest expense(9) | 89 | 88 | ||||||
Gain related to sale of certain domestic group insurance businesses | (113 | ) | — | |||||
Transaction and integration-related costs | 58 | 1,212 | ||||||
Loss on early extinguishment of long-term debt | — | 246 | ||||||
Penn Treaty-related guaranty fund assessments | — | 231 | ||||||
Amortization of other acquired intangible assets | 47 | 60 | ||||||
Net realized capital (gains) losses | (6 | ) | 333 | |||||
Income tax benefit | (163 | ) | (793 | ) | ||||
Adjusted earnings(2) excluding interest expense, net of tax | $ | 1,121 | $ | 996 | ||||
Reconciliation of total revenue to adjusted revenue: | ||||||||
Total revenue (GAAP measure) | (C) | $ | 15,335 | $ | 15,165 | |||
Gain related to sale of certain domestic group insurance businesses | (113 | ) | — | |||||
Interest income on proceeds of transaction-related debt | — | (11 | ) | |||||
Net realized capital (gains) losses | (6 | ) | 333 | |||||
Adjusted revenue(3) (excludes net realized capital (gains) losses and other items) | (D) | $ | 15,216 | $ | 15,487 | |||
Reconciliation of total operating expenses to adjusted operating expenses: | ||||||||
Total operating expenses (GAAP measure) | (E) | $ | 2,787 | $ | 3,853 | |||
Transaction and integration-related costs | (58 | ) | (1,138 | ) | ||||
Penn Treaty-related guaranty fund assessments | — | (231 | ) | |||||
Adjusted operating expenses | (F) | $ | 2,729 | $ | 2,484 | |||
After-tax net income (loss) and adjusted pre-tax margins: | ||||||||
After-tax net income (loss) margin (GAAP measure) | (B)/(C) | 7.9 | % | (2.5 | )% | |||
Adjusted pre-tax margin(6) | (A)/(D) | 10.1 | % | 10.0 | % | |||
Expense ratios: | ||||||||
Total company expense ratio (GAAP measure) | (E)/(C) | 18.2 | % | 25.4 | % | |||
Adjusted expense ratio(4) | (F)/(D) | 17.9 | % | 16.0 | % |
Operating Cash Flow excluding Large Case Pensions Products as a Percentage of Net Income | ||||||||
Three Months | ||||||||
Ended March 31, | ||||||||
(Millions) | 2018 | 2017 | ||||||
Net cash provided by operating activities (GAAP measure) | $ | 3,341 | $ | 899 | ||||
Less: Net cash used for operating activities: Large case pensions products | (60 | ) | (84 | ) | ||||
Net cash provided by operating activities excluding large case pensions products | (A) | 3,401 | 983 | |||||
Net income (loss)(1) (GAAP Measure) | 1,209 | (381 | ) | |||||
Less: Net income: Large case pensions products | 5 | 5 | ||||||
Net income (loss) attributable to Aetna excluding large case pensions products | (B) | $ | 1,204 | $ | (386 | ) | ||
Operating cash flow excluding large case pensions products as a percentage of net income: | ||||||||
Operating cash flow as a percentage of net income (1) (GAAP Measure) | (A)/(B) | 282.5 | % | N/M* | ||||
• | 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. |
• | During 2017, Aetna sold its domestic group life insurance, group disability insurance and absence management businesses. The transaction was accomplished through an indemnity reinsurance arrangement. A significant portion of the gain on sale was deferred and will be amortized into earnings: (a) over the remaining contract period (estimated to be approximately 3 years) in proportion to the amount of insurance protection provided for the prospective reinsurance portion of the gain; and (b) as Aetna recovers amounts due from the buyer over a period estimated to be approximately 30 years for the retrospective reinsurance portion of the gain. The gain recognized during the three months ended March 31, 2018 does not directly relate to the underwriting or servicing of products for customers and is not directly related to the core performance of Aetna's business operations. |
• | Aetna recorded transaction-related costs during the three months ended March 31, 2018 related to its proposed acquisition by CVS Health Corporation ("CVS Health"). Aetna also recorded transaction and integration-related costs during the three months ended March 31, 2017 primarily related to its proposed acquisition of Humana (the "Humana Transaction"). Transaction costs include costs associated with the transactions contemplated by the CVS Health merger agreement, real estate costs associated with the cancellation of Aetna's previously announced headquarters relocation which will no longer occur due to CVS Health's proposed acquisition of Aetna, the termination of the Humana Merger Agreement (as defined below), the termination of Aetna's agreement to sell certain assets to Molina Healthcare, Inc. and advisory, legal and other professional fees which are reflected in Aetna's GAAP Consolidated Statements of Income in operating expenses. Transaction costs also include the negative cost of carry associated with the debt financing that Aetna obtained in June 2016 for the Humana Transaction. Prior to the mandatory redemption of the SMR Notes (as defined below), the negative cost of carry associated with these senior notes was excluded from adjusted earnings and pre-tax adjusted earnings. The negative cost of carry associated with the $2.8 billion aggregate principal amount of Aetna's senior notes issued in June 2016 that are not subject to mandatory redemption (the "Other 2016 Senior Notes") was excluded from adjusted earnings and pre-tax adjusted earnings through the date of the termination of the Humana Merger Agreement. The components of the negative cost of carry are reflected in Aetna's GAAP Consolidated Statements of Income in interest expense and net investment income. Subsequent to the termination of the Humana Merger Agreement, the interest expense and net investment income associated with the Other 2016 Senior Notes were no longer excluded from adjusted earnings and pre-tax adjusted earnings. |
• | During the three months ended March 31, 2017, Aetna incurred losses on the early extinguishment of long-term debt due to (a) the mandatory redemption of $10.2 billion aggregate principal amount of certain of its senior notes issued in June 2016 (collectively, the "SMR Notes") following the termination of the definitive agreement (the "Humana Merger Agreement") to acquire Humana Inc. ("Humana") and (b) the early redemption of $750 million aggregate principal amount of its outstanding senior notes due 2020. |
• | During the three months ended March 31, 2017, Aetna recorded an expense for estimated future guaranty fund assessments related to Penn Treaty Network America Insurance Company and one of its subsidiaries (collectively, "Penn Treaty"), which was placed in rehabilitation in 2009 and placed in liquidation in March 2017. This expense does not directly relate to the underwriting or servicing of products for customers and is not directly related to the core performance of Aetna's business operations. |
• | Other acquired intangible assets relate to Aetna's acquisition activities and are amortized over their useful lives. However, this amortization does not directly relate to the underwriting or servicing of products for customers and is not directly related to the core performance of Aetna's business operations. |
• | Net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of liabilities. However, these transactions do not directly relate to the underwriting or servicing of products for customers and are not directly related to the core performance of Aetna's business operations. |
• | The corresponding tax benefit or expense related to the items excluded from adjusted earnings above was calculated utilizing the appropriate tax rate for each individual item. In addition, Aetna recorded a non-recurring tax benefit of $149 million in first-quarter 2018. Neither the income tax benefit or expense on the excluded items nor the tax benefit related to the non-recurring item directly relates to the underwriting or servicing of products for customers, and neither is directly related to the core performance of Aetna's business operations. |
• | 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. |
Statements of Income Before Income Taxes Attributable to Aetna by Segment (Unaudited) | ||||||||||||
Health | Corporate/ | |||||||||||
(Millions) | Care | Other | Total | |||||||||
Three months ended March 31, 2018 | ||||||||||||
Revenue: | ||||||||||||
Premiums | $ | 13,048 | $ | 22 | $ | 13,070 | ||||||
Fees and other revenue | 1,947 | 115 | 2,062 | |||||||||
Net investment income | 127 | 70 | 197 | |||||||||
Net realized capital gains | 5 | 1 | 6 | |||||||||
Total revenue | 15,127 | 208 | 15,335 | |||||||||
Benefits and expenses: | ||||||||||||
Benefit costs | 10,491 | 83 | 10,574 | |||||||||
Cost of products sold | 373 | — | 373 | |||||||||
Operating expenses | 2,759 | 28 | 2,787 | |||||||||
Interest expense | — | 89 | 89 | |||||||||
Amortization of other acquired intangible assets | 47 | — | 47 | |||||||||
Total benefits and expenses | 13,670 | 200 | 13,870 | |||||||||
Income before income taxes including non-controlling interests | 1,457 | 8 | 1,465 | |||||||||
Less: Income before income taxes attributable to non-controlling interests | 13 | — | 13 | |||||||||
Income before income taxes attributable to Aetna | $ | 1,444 | $ | 8 | $ | 1,452 | ||||||
Three months ended March 31, 2017 | ||||||||||||
Revenue: | ||||||||||||
Premiums | $ | 13,240 | $ | 523 | $ | 13,763 | ||||||
Fees and other revenue | 1,448 | 27 | 1,475 | |||||||||
Net investment income | 117 | 143 | 260 | |||||||||
Net realized capital gains (losses) | 1 | (334 | ) | (333 | ) | |||||||
Total revenue | 14,806 | 359 | 15,165 | |||||||||
Benefits and expenses: | ||||||||||||
Benefit costs | 10,928 | 533 | 11,461 | |||||||||
Operating expenses | 2,625 | 1,228 | 3,853 | |||||||||
Interest expense | — | 173 | 173 | |||||||||
Amortization of other acquired intangible assets | 60 | — | 60 | |||||||||
Loss on early extinguishment of long-term debt | — | 246 | 246 | |||||||||
Total benefits and expenses | 13,613 | 2,180 | 15,793 | |||||||||
Income (loss) before income taxes including non-controlling interests | 1,193 | (1,821 | ) | (628 | ) | |||||||
Less: Income before income taxes attributable to non-controlling interests | 2 | 1 | 3 | |||||||||
Income (loss) before income taxes attributable to Aetna | $ | 1,191 | $ | (1,822 | ) | $ | (631 | ) |
Membership | |||||||||||||||||||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | |||||||||||||||||||||||||
(Thousands) | Insured | ASC | Total | Insured | ASC | Total | Insured | ASC | Total | ||||||||||||||||||
Medical Membership: | |||||||||||||||||||||||||||
Commercial | 4,068 | 13,737 | 17,805 | 4,504 | 13,596 | 18,100 | 4,557 | 13,351 | 17,908 | ||||||||||||||||||
Medicare Advantage | 1,722 | — | 1,722 | 1,473 | — | 1,473 | 1,443 | — | 1,443 | ||||||||||||||||||
Medicare Supplement | 748 | — | 748 | 740 | — | 740 | 711 | — | 711 | ||||||||||||||||||
Medicaid | 1,104 | 728 | 1,832 | 1,316 | 608 | 1,924 | 1,570 | 814 | 2,384 | ||||||||||||||||||
Total Medical Membership | 7,642 | 14,465 | 22,107 | 8,033 | 14,204 | 22,237 | 8,281 | 14,165 | 22,446 | ||||||||||||||||||
Dental Membership: | |||||||||||||||||||||||||||
Total Dental Membership | 5,058 | 7,665 | 12,723 | 5,421 | 8,006 | 13,427 | 5,898 | 8,116 | 14,014 | ||||||||||||||||||
Pharmacy Benefit Management Services Membership: | |||||||||||||||||||||||||||
Commercial | 7,442 | 8,034 | 8,217 | ||||||||||||||||||||||||
Medicare Prescription Drug Plan (stand-alone) | 2,156 | 2,077 | 2,064 | ||||||||||||||||||||||||
Medicare Advantage Prescription Drug Plan | 1,243 | 1,129 | 1,106 | ||||||||||||||||||||||||
Medicaid | 2,256 | 2,525 | 2,817 | ||||||||||||||||||||||||
Total Pharmacy Benefit Management Services Membership | 13,097 | 13,765 | 14,204 | ||||||||||||||||||||||||
Health Care Medical Benefit Ratios | |||||||
Three Months Ended | |||||||
March 31, | March 31, | ||||||
(Millions) | 2018 | 2017 | |||||
Health Care Premiums (GAAP measure) | |||||||
Commercial | $ | 5,580 | $ | 6,129 | |||
Government | 7,468 | 7,111 | |||||
Health Care | $ | 13,048 | $ | 13,240 | |||
Health Care Benefit Costs (GAAP measure) | |||||||
Commercial | $ | 4,323 | $ | 4,860 | |||
Government | 6,168 | 6,068 | |||||
Health Care | $ | 10,491 | $ | 10,928 | |||
Medical Benefit Ratios "MBRs" | |||||||
Commercial | 77.5 | % | 79.3 | % | |||
Government | 82.6 | % | 85.3 | % | |||
Health Care | 80.4 | % | 82.5 | % |
Roll Forward of Health Care Costs Payable | |||||||
(Unaudited) | |||||||
Three Months Ended March 31, | |||||||
(Millions) | 2018 | 2017 | |||||
Health care costs payable, beginning of period | $ | 5,815 | $ | 6,558 | |||
Less: reinsurance recoverables | 6 | 5 | |||||
Health care costs payable, beginning of period, net | 5,809 | 6,553 | |||||
Add: Components of incurred health care costs | |||||||
Current year | 10,974 | 11,420 | |||||
Prior years(a) | (503 | ) | (614 | ) | |||
Total incurred health care costs (b) | 10,471 | 10,806 | |||||
Less: Claims paid | |||||||
Current year | 6,176 | 6,298 | |||||
Prior years | 4,334 | 4,742 | |||||
Total claims paid | 10,510 | 11,040 | |||||
Health care costs payable, end of period, net | 5,770 | 6,319 | |||||
Add: premium deficiency reserve | 9 | 110 | |||||
Add: reinsurance recoverables | 4 | 3 | |||||
Health care costs payable, end of period | $ | 5,783 | $ | 6,432 | |||
Days Claims Payable (Unaudited) | |||||||||||||||
March 31, 2018 | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 | |||||||||||
Days Claims Payable | 50 | 49 | 54 | 54 | 53 |
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