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2005 Financial Results at a Glance
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Twelve Months Ended |
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December 31
2005 |
December 31
2004 |
Change
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Total revenues
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$22.5 billion
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$19.9 billion
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13%
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Operating earnings*
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$1.57 billion |
$1.20 billion |
24% |
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Income from continuing operations
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$1.63 billion |
$1.22 billion |
35% |
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Income from discontinued operations
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- - |
1.03 billion |
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Net income**
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$1.63 billion |
$2.25 billion |
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Per share results:
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Operating earnings*
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$5.19 |
$3.82 |
36% |
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Favorable development of prior-year health care cost estimates
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(0.52) |
(0.18) |
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Operating earnings, excluding development*
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$4.67 |
$3.64 |
28% |
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Income from continuing operations
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$5.40 |
$3.87 |
40% |
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Income from discontinued operations
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- - |
3.28 |
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Net income**
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$5.40 |
$7.15 |
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* For full description of operating earnings and per share operating earnings, please refer to footnote 1 at the end of the press release.
** Includes the previously announced tax refund and favorable tax adjustments. For full explanation, please refer to footnote 2 at the end of the press release.
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Full-year 2005 operating earnings increased by 28 percent over the prior year to $4.67 per share, excluding favorable development related to prior years. Net income was $5.40 per share. Operating earnings exclude net realized capital gains and other items.1
"We are very pleased to report that 2005 has been another year of exceptional results for Aetna," said John W. Rowe, M.D., chairman and CEO. "Our full-year operating earnings per share increased by 28 percent and our medical membership grew by 1.1 million to 14.8 million in 2005. Our consistent financial performance and the very positive response we are getting in the marketplace has placed the company in the top tier of industry leaders.
"It's clear that Aetna's value proposition, disciplined strategy and ability to respond to market forces have contributed immensely to our growth and success. We have become even more valuable to customers by maintaining among the lowest medical cost trends in the industry, while our targeted acquisitions in 2005 have added to our capabilities," Rowe said.
"We aspire to make Aetna the preferred company in our industry," said Ronald A. Williams, president. "We expect to continue to differentiate ourselves by providing innovative solutions and an integrated approach to our product and service offerings while rigorously executing our strategy. With a clear focus on delivering value to our customers, we can remain well-positioned for continued momentum in the marketplace.
"Based on our continued success in 2005 and a strong beginning in 2006, we are increasing our guidance for 2006 operating earnings, after adopting the new stock option expense guidelines, to $5.42 to $5.48 per share, representing an increase of 22 percent to 23 percent over 2005. We are increasing our guidance for medical membership growth to 900,000 to 1 million from our prior range of 800,000 to 900,000, with a gain of 575,000 in the first quarter."3
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:
- Operating earnings of $388.0 million in the fourth quarter of 2005, compared with $288.2 million in the fourth quarter of 2004. Excluding favorable development, operating earnings increased 39 percent to $348.0 million in the fourth quarter of 2005, from $250.2 million in the fourth quarter of 2004. Favorable development was $40 million after tax in the fourth quarter of 2005, and $38 million after tax in the fourth quarter of 2004. The increase in operating earnings primarily reflects growth in revenues from higher membership levels, as well as strong underwriting results and continued general and administrative expense efficiencies.
- Net income of $390.0 million for the fourth quarter of 2005, compared with $261.8 million in the fourth quarter of 2004.
- A Commercial Risk Medical Cost Ratio (MCR) of 76.8 percent in the fourth quarter of 2005, compared to 77.6 percent in the fourth quarter of 2004. Excluding favorable reserve development, the Commercial Risk MCR was 78.1 percent in the fourth quarter of 2005, compared to 79.0 percent in the fourth quarter of 2004.
- A Medicare MCR of 84.0 percent in the fourth quarter of 2005, compared with 88.5 percent in the fourth quarter of 2004. Excluding favorable reserve development, the Medicare MCR was 87.5 percent in the fourth quarter of 2005, compared to 91.1 percent in the fourth quarter of 2004. Medicare currently represents less than 1 percent of our medical membership.
- Total medical membership of 14.755 million at December 31, 2005, compared with 14.650 million at September 30, 2005, an increase of approximately 105,000. Fourth quarter dental membership increased sequentially by 67,000 to 13.098 million. Pharmacy membership increased by 108,000 to 9.445 million from September 30, 2005.
- Total revenues in the fourth quarter of 2005 increased by 15 percent to $5.1 billion from $4.5 billion in the fourth quarter of 2004.
Full-year 2005 operating earnings for Health Care were $1.5 billion, compared with 2004 operating earnings of $1.1 billion, including reserve development. Excluding favorable reserve development, operating earnings increased 26 percent to $1.3 billion in 2005, compared with $1.1 billion in 2004. Favorable reserve development was $159 million after tax in 2005, and $57 million after tax in 2004. Full-year 2005 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. Full-year net income for 2005 was $1.5 billion, compared with $1.1 billion in 2004. Full-year medical membership growth was 1.1 million, an increase of 8 percent.
Group Insurance business results
Group Insurance, which includes group life, disability and long-term care products, reported:
- Operating earnings of $35.2 million for the fourth quarter of 2005, compared with $38.0 million for the fourth quarter of 2004, reflecting a higher overall benefit cost ratio, offset in part by higher net investment income.
- Net income of $37.3 million for the fourth quarter of 2005, compared with $44.0 million for the fourth quarter of 2004.
- Total revenues increased 6.8 percent in fourth quarter of 2005 to $554.5 million, compared with $519.3 million for the fourth quarter of 2004.
- Total Group Insurance membership of 13.618 million at December 31, 2005, compared with 13.675 million at September 30, 2005.
For full-year 2005, Group Insurance reported operating earnings of $129.7 million, compared with $126.5 million in 2004. The increase was primarily due to higher net investment income offset in part by a higher overall benefit cost ratio. Full-year net income for 2005 was $138.4 million, compared with $146.3 million in 2004.
Large Case Pensions business results
Large Case Pensions, which manages a variety of discontinued and other retirement and savings products, primarily qualified pension plans, reported:
- Operating earnings of $12.0 million for the fourth quarter of 2005, compared with $9.6 million for the fourth quarter of 2004, primarily reflecting favorable reserve experience related to a run-off product.
- Net income of $16.9 million for the fourth quarter of 2005, compared with $13.1 million for the fourth quarter of 2004.
For full-year 2005, Large Case Pensions reported operating earnings of $33.2 million, compared with $31.3 million in 2004. Full-year net income for 2005 was $82.0 million compared with $41.8 million in 2004. Net income for full-year 2005 includes a $43.4 million after-tax benefit related to the reduction of reserves for discontinued products.
Total company results
- Total Revenues. Revenues increased 14 percent to $5.9 billion for the fourth quarter of 2005, compared with $5.2 billion for the fourth quarter of 2004. The growth in fourth quarter revenue reflects premium and fee rate increases and a higher level of membership that resulted in an increase of 14 percent in premiums and 20 percent in fees and other revenue. For full-year 2005, total revenues were $22.5 billion, compared with $19.9 billion in 2004.
- Total Operating Expenses. Operating expenses, excluding other items, were $1.1 billion for the fourth quarter of 2005, $114.8 million higher than the fourth quarter of 2004. Including other items, operating expenses were $69.8 million higher. Operating expenses as a percentage of revenue4 improved to 19.6 percent in the fourth quarter of 2005 from 20.0 percent in the fourth quarter of 2004, reflecting continued expense efficiencies. Including net realized capital gains and an other item in 2004, these percentages were 19.5 percent in the fourth quarter of 2005 and 20.8 percent in the fourth quarter of 2004. For full-year 2005, operating expenses as a percentage of revenue improved to 19.4 percent from 20.1 percent for full-year 2004. Including net realized capital gains and an other item in 2004, these percentages were 19.4 percent for full-year 2005 and 20.2 percent for full-year 2004.
- Corporate Interest expense was $21.2 million after tax for the fourth quarter of 2005, compared with $18.2 million for the fourth quarter of 2004. Corporate interest expense was $79.8 million for full-year 2005, compared with $68.0 million for full-year 2004. The increase in interest expense reflects the termination of interest rate swap agreements in the second quarter of 2005.
- Net Income. Aetna reported net income of $423.0 million for the fourth quarter of 2005, compared with $300.7 million for the fourth quarter of 2004. For full-year 2005, Aetna reported net income of $1.6 billion, compared with $1.2 billion for full-year 2004, adjusted for the tax refund announced in the third quarter of 2004. Net income for 2004 included $1.03 billion of a tax refund and favorable tax adjustments related to discontinued operations.
- Operating margin, excluding reserve development, improved to 10.8 percent in the fourth quarter of 2005 from 9.1 percent in the fourth quarter of 2004, pre-tax.5 The after-tax operating margin, which represents income from continuing operations divided by total revenue, was 7.2 percent in the fourth quarter of 2005, compared with 5.8 percent in the fourth quarter of 2004. For full-year 2005, the pre-tax operating margin, excluding development, improved to 10.6 percent from 9.7 percent in 2004. The after-tax operating margin improved to 7.3 percent in 2005 from 6.1 percent in 2004.
A live audio webcast of the fourth-quarter results conference call will begin at 8:30 a.m. ET today. The public may access the conference call through a live audio webcast available on Aetna's Investor Information link on the Internet at www.aetna.com. Financial, statistical and other information, including GAAP reconciliations, related to the conference call also will be available on Aetna's Investor Information web site.
The conference call also can be accessed by dialing 877-502-9276, or 913-981-5591 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 8090463. Telephone replays will be available from 11:30 a.m. ET on February 9 until midnight ET on February 16.
Aetna is one of the nation's leading diversified health care benefits companies, serving approximately 27.9 million unique members with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, long-term care and disability plans, and medical management capabilities. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans and government-sponsored plans.
www.aetna.com
1
Operating earnings exclude net realized capital gains and 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 more 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:
- 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, but 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 the Company's business operations.
- A contribution to the Aetna Foundation, Inc. of approximately $29.3 million after tax ($45.0 million pre-tax) is included as an other item in the fourth quarter and full-year 2004 and represented a non-recurring voluntary contribution that is over and above the Company's normal level of contributions for 2004 and did not reflect underlying 2004 business performance.
- Release of reserves of $43.4 million, after tax, for anticipated future losses on discontinued products in Large Case Pensions, is included as an other item by the Company in the full-year 2005, and does not benefit ongoing business operations.
The Company also displays certain metrics (e.g., medical cost ratios, operating earnings, operating earnings per share and pretax operating margins) excluding reserve development. 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 reserve development better reflects the underlying current-period health care costs.
For a reconciliation of these items to financial measures calculated under U.S generally accepted accounting principles (GAAP), refer to the tables on pages 10 to 14 of this release.
2
On 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, related to businesses that were sold in the 1990s by the Company's former parent company. Also in 2004, the Company filed for, and was approved for, a $35 million tax refund related to businesses that were sold by the Company's former parent company. The Company received approximately $666 million of the tax refund during the fourth quarter of 2004, approximately $69 million during the fourth quarter of 2005, and expects to receive the remaining amount in 2006. The tax refunds were recorded as income from discontinued operations in 2004. This approval also finalized the Internal Revenue Service's (the "IRS's") audits of the Company's tax returns for the years 1991 through 2001. In 2004, the Company also finalized the IRS's audits of the Company's tax returns for the years 1984 through 1990. As a result of the resolution of these audits, the Company also recorded favorable adjustments of approximately $255 million to existing tax liabilities in 2004 as income from discontinued operations.
3
Projected operating earnings per share for 2006 exclude any future net realized capital gains or losses from income from continuing operations. The Company is not able to project the amount of future net realized capital gains or losses and cannot therefore reconcile projected 2006 operating earnings to projected income from continuing operations, or to a projected change in income from continuing operations. Projected operating earnings per share are prior to the effect of the 2-for-1 stock split announced on January 27, 2006. Projected operating earnings per share for 2006 assume approximately 297 million weighted-average diluted shares. Please refer to the Company's Financial Supplement on the Investor Relations portion of aetna.com for restated 2005 and 2004 results for stock option expense under FAS 123R.
4
Operating expenses as a percentage of revenue excludes net realized capital gains and losses from total revenue. Net realized capital gains and losses do not directly relate to underwriting or servicing of products for customers and are not directly related to the core performance of the Company's business operations. Operating expenses for 2004 exclude the contribution to the Aetna Foundation, Inc. as described in footnote 1. For a reconciliation to operating expenses as a percentage of revenue calculated under GAAP, refer to the tables on page 14 at the end of the press release.
5
In 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 operating margin calculated under GAAP, refer to the tables on page 14 of this release.
ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to operating 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, reputational issues or other factors; increases in medical costs or Group Insurance claims resulting from any acts of terrorism, epidemics or other extreme events; 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, the Connecticut Attorney General and others, and for which the Company has received and may receive subpoenas, and may be subject to related litigation). For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2004 Annual Report on Form 10-K, on file with the Securities and Exchange Commission. You also should read Aetna's 2005 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.
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