Aetna Reports Fourth Quarter And Full-year 2004 Results



HARTFORD, Conn., February 10, 2005 — Aetna (NYSE: AET) today announced fourth-quarter operating earnings of $2.06 per share. Operating earnings, excluding favorable development, were $1.82 per share, an increase of 38 percent over the prior year. Favorable reserve development was approximately $38 million, after tax, or $0.24 per share. The increase in operating earnings primarily reflects higher membership levels, growth in revenues from increased premiums and fees and continued general and administrative expense efficiencies, offset in part by a higher medical cost ratio. Operating earnings exclude net realized capital gains and losses and other items.1
Quarterly Financial Results at a Glance

Three Months Ended
December 31
2004
December 31
2003
Change
 
Total revenues
$5.2 billion
$4.6 billion
13%

Operating earnings*
$317.6 million $239.9 million 32%
Net income $300.7 million $249.5 million 21%
Per share results:      
Operating earnings* $2.06 $1.50 37%
Favorable development of prior-period health care cost estimates (0.24) (0.18)  
Operating earnings, excluding development* $1.82 $1.32 38%
Net income $1.95 $1.56 25%
* For full description of operating earnings and per share operating earnings, please see footnote 1 at end of press release.
2004 Financial Results at a Glance

Twelve Months Ended
December 31
2004
December 31
2003
Change
 
Total revenues
$19.9 billion
$18.0 billion
11%

Operating earnings*
$1.2 billion $966.8 million 24%
Income from continuing operations $1.2 billion $933.8 million 30%
Income from discontinued operations 1.0 billion - -    
Net income** $2.2 billion $933.8 million  
Per share results:      
Operating earnings* $7.64 $6.12 25%
Favorable development of prior-year health care cost estimates (0.36) (0.94)  
Operating earnings, excluding development* $7.28 $5.18 41%
Income from continuing operations $7.74 $5.91 31%
Income from discontinued operations 6.56 - -    
Net income** $14.30 $5.91  
* For full description of operating earnings and per share operating earnings, please see footnote 1 at end of press release.
** Includes the previously announced tax refund and favorable tax adjustments. For full explanation, please see footnote 2 at end of press release.
Full-year 2004 operating earnings increased by 41 percent over the prior year to $7.28 per share, excluding favorable development related to prior years and other items. Net income, which includes the previously announced tax refund and favorable tax reserve adjustments2, was $14.30 per share.

"We are very pleased to have delivered on our commitments by every measure in 2004," said John W. Rowe, M.D., chairman and CEO. "We profitably grew membership, maintained stable medical cost trends, achieved strong top-line revenue growth, and continued to achieve our operating expense efficiencies. We also demonstrated our commitment to effective capital deployment through an active share repurchase program, targeted acquisitions and strategic investments in our business, including the launch of a specialty pharmacy partnership and the development of a second mail order facility. These capital deployment efforts complement recent policy-related initiatives in racial and ethnic disparities and care at the end of life, further differentiating Aetna in our industry.

"Based on our continued success in the marketplace, combined with our ongoing, rigorous focus on disciplined pricing and cost management, we are increasing our guidance for 2005 operating earnings to $8.75 to $8.90 per share from our prior guidance of $8.40 per share, representing an increase of 20 percent to 22 percent over 2004, and we are increasing our guidance for membership growth to 950,000 to 1.05 million."3

"We believe that our enhanced customer offerings have truly differentiated Aetna," said Ronald A. Williams, president. "In fact, the continued increase in our enrollment is important market validation of the strength of Aetna's product and service offerings. We are quite pleased to report a very strong January 2005 selling season on the heels of an 86,000 net membership increase in the fourth quarter and 654,000 net new members for all of 2004.

"In addition, our recently enhanced Aexcel network, which allows members access to quality, cost-effective providers, has seen strong customer acceptance. We have expanded Aexcel's availability to nine geographic locations from three, and the number of medical specialties from six to twelve," Williams said.

Health Care business results

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


Full-year 2004 operating earnings for Health Care were $1.1 billion, compared with 2003 operating earnings of $862.4 million including reserve development. Excluding favorable reserve development of approximately $57 million, after tax, in 2004 and approximately $148 million, after tax, in 2003, operating earnings were $1.1 billion in 2004, compared with $714.4 million in 2003, an increase of 47 percent. Full-year 2004 operating earnings were higher primarily due to higher membership levels, growth in revenues from increased premiums and fees and continued general and administrative expense efficiencies, offset in part by a higher medical cost ratio. Full-year net income for 2004 was $1.1 billion, compared with $809.6 million in 2003.

Group Insurance business results

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


For full-year 2004, Group Insurance reported operating earnings of $126.5 million, compared with $134.8 million in 2003. The decline was primarily due to a higher overall benefit cost ratio, which more than offset an improvement in the operating expense ratio. Full-year net income for 2004 was $146.3 million, compared with $149.3 million in 2003.

Large Case Pensions business results

Large Case Pensions, which manages a variety of discontinued and other retirement and savings products primarily for defined benefit and defined contribution plan customers, reported:


For full-year 2004, Large Case Pensions reported operating earnings of $31.3 million, compared with $36.5 million in 2003. The year-over-year change is mainly due to lower investment income and the runoff of liabilities and related assets. Full-year net income for 2004 and 2003 was $41.8 million in each year.

Total company results


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 web site.

The conference call also can be accessed by dialing 800-810-0924, or 913-981-4900 for international callers. The Company suggests participants dial in approximately 10 minutes prior to the call. 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 888-203-1112, or 719-457-0820 for international callers. The replay access code is 485178. Telephone replays will be available from 11:30 a.m. ET on February 10 until midnight ET on February 17.

As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 13.7 million medical members, 11.9 million dental members, 8.4 million pharmacy members and 13.5 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost-effective health care through a nationwide network of more than 655,000 health care professionals, including over 390,000 primary care and specialist doctors and 3,937 hospitals. For more information, please visit www.aetna.com. (Figures as of December 31, 2004)

1 Operating earnings exclude net realized capital gains (losses) and other items from income from continuing operations as discussed below. Although the excluded items may recur, management believes that operating earnings and operating earnings per share provide a useful comparison of its underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding its operations and allocation of resources among its businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. Each of these excluded items is discussed below: The Company also displays certain metrics (e.g., medical cost ratios, operating earnings, operating earnings per share and pretax operating margins) excluding changes to prior-period health care cost estimates. Each quarter, the Company re-examines previously established health care cost payable estimates based on actual claim submissions and other changes in facts and circumstances. Decreases (increases) in prior periods' estimates represent the effect of favorable (unfavorable) development of prior period health care cost estimates on current period results of operations, at each financial statement date. The Company believes excluding changes to prior period health care cost estimates better reflects the underlying current-period health care costs.

For a reconciliation of these items to financial measures calculated under accounting principles generally accepted in the United States of America (GAAP), refer to the tables on pages 10 to 14 of this release.

2On July 8, 2004, the Company was notified that the Congressional Joint Committee on Taxation approved a tax refund of approximately $740 million after tax, including interest, relating to businesses that were sold in the 1990s by the Company's predecessor. The Company received approximately $666 million of the tax refund during the third quarter of 2004 and expects to receive the remaining refund in 2005. The refund was recorded as income from discontinued operations. This approval also finalized the Internal Revenue Service's (IRS) audit of the Company's tax returns for the years 1991 through 2001. As a result of the resolution of these audits, the Company also recorded favorable adjustments of $250 million to existing tax liabilities as income from discontinued operations. In the first quarter of 2004, the Company recorded favorable adjustments of $40 million to existing tax liabilities as income from discontinued operations due to the finalization of the IRS audit of the Company's tax returns for the years 1984 through 1990. The total of these items for 2004 related to discontinued operations was $1.03 billion.

3Projected operating earnings per share for 2005 exclude any future net realized capital gains or losses. The Company is not able to project the amount of future net realized capital gains or losses and cannot therefore reconcile projected 2005 operating earnings to projected income from continuing operations. Projected operating earnings per share are prior to the effect of the stock split. Projected operating earnings per share for full year 2005 assume approximately 154 million weighted-average diluted shares. Projected operating earnings for 2005 exclude the effect of expensing stock options which will become effective in the third quarter of 2005.

4In order to provide useful information regarding profitability of the Company on a basis comparable to others in the industry, without regard to financing decisions, income taxes and amortization of other acquired intangible assets (each of which may vary for reasons not directly related to performance of the underlying business), the company's pretax operating margin excludes interest expense, income taxes and amortization of other acquired intangible assets. Management also uses pretax operating margin to assess its performance, including performance versus competitors. Operating earnings used in the pretax margin calculation also exclude the items noted in footnote 1. For a reconciliation to margin calculated under GAAP, refer to the tables on page 13 of this release.

ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to earnings and membership. Forward-looking information is based on management's estimates, assumptions and projections, and is subject to significant uncertainties and other factors, many of which are beyond Aetna's control. Important risk factors could cause actual future results and other future events to differ materially from those currently estimated by management. Those risk factors include, but are not limited to: unanticipated increases in medical costs (including increased medical utilization, increased pharmacy costs, increases resulting from unfavorable changes in contracting or re-contracting with providers, changes in membership mix to lower-premium or higher-cost products or membership-adverse selection; as well as changes in medical cost estimates due to the necessary extensive judgment that is used in the medical cost estimation process, the considerable variability inherent in such estimates, and the sensitivity of such estimates to changes in medical claims payment patterns and changes in medical cost trends); decreases in membership or failure to achieve desired membership growth due to significant competition or other factors; increases in medical costs or Group Insurance claims resulting from any acts of terrorism or otherwise; the ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, and to improve relations with providers while taking actions to reduce medical costs; the ability to successfully implement Aetna's operating model to a projected growing membership base and to successfully implement multiple strategic and operational initiatives simultaneously; lower levels of investment income from continued low interest rates; adverse government regulation (including legislative proposals eliminating or reducing ERISA pre-emption of state laws that would increase potential litigation exposure, and other proposals, such as patients' rights legislation, that would increase potential litigation exposure or mandate coverage of certain health benefits); adverse pricing actions by government payors; changes in size, product mix and medical cost experience of membership in key markets; our ability to integrate, simplify, and enhance our existing information technology system and platform to keep pace with changing customer and regulatory needs; and the outcome of various litigation and regulatory matters, including litigation and ongoing reviews of business practices by various regulatory authorities (including the current industry wide investigation into insurance brokerage practices concerning broker compensation arrangements, bid quoting practices and potential antitrust violations being conducted by the New York Attorney General and the Connecticut Attorney General, and for which the Company has received and may receive subpoenas, and related litigation). For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2003 Annual Report on Form 10-K, on file with the Securities and Exchange Commission. You also should read Aetna's 2004 Annual Report on Form 10-K when filed with the Securities and Exchange Commission for a discussion of Aetna's historical results of operations and financial condition.




Related Links:

4Q04 Financial Supplement
(PDF: 951 KB / 16 pages)

4Q04 Earnings Tables
(PDF: 22 KB / 5 pages)

Guidance Summary
2/10/05

(PDF: 151 KB / 2 pages)




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