Third quarter net income was $0.58 per share, a decrease of 39 percent over the prior-year quarter, primarily due to net realized capital losses of $0.48 per share as well as $0.06 per share for an allowance recorded against a reinsurance recoverable from a subsidiary of Lehman Brothers Holdings Inc. The majority of the net realized capital losses resulted from declines in the market value of certain securities in the company's investment portfolio as a result of deteriorating global economic conditions. The company does not expect the net realized capital losses or any other impacts of the current financial markets turmoil to have a material impact on its financial position or liquidity. Third quarter 2008 total revenue, which includes net realized capital losses, grew 10 percent over the prior-year quarter.
"Despite the significant weakening of the U.S. economy as well as the unprecedented turmoil in the financial markets around the world, our core business performance remains solid," said Ronald A. Williams, chairman and CEO. "We continue to win in the marketplace by offering a broad range of products and providing excellent customer service. Aetna also continues to be proactive at the national and state levels in promoting the important issues of increased accessibility and affordability of health care and improved quality for more Americans. Our national presence, strong competitive position and well-conceived strategy have continued to produce solid results even in this difficult economy."
Joseph M. Zubretsky, executive vice president and CFO, said, "While we did incur investment losses this quarter due to the turmoil in the capital markets, Aetna is well-capitalized, with a strong balance sheet and excellent cash flows and liquidity. We expect to generate over $1 billion of excess capital in 2008 and currently have no need to raise additional capital. Our underwriting results were strong, demonstrating our continued ability to manage costs and price with discipline.
"We have lowered our 2008 full-year operating earnings per share guidance to $3.90 to $3.952 primarily due to lower net investment income in the fourth quarter than we originally projected."
Health Care business results
Health Care, which provides a full range of insured and self-insured medical, pharmacy, dental and behavioral health products and services, reported:
Group Insurance business results
Group Insurance, which includes group life, disability and long-term care products, reported:
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:
A live audio webcast of Aetna's conference call to discuss third quarter results, 2008 guidance and preliminary 2009 guidance 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 877-397-0297, or 719-325-4860 for international callers. Aetna suggests participants dial in approximately 10 minutes before the call. The access code is 9786614. 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 9786614. Telephone replays will be available from 11:30 a.m. ET on October 29 until midnight ET on November 12, 2008.
Aetna is one of the nation's leading diversified health care benefits companies, serving approximately 37.2 million people 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 and disability plans, and medical management capabilities and health care management services for Medicaid plans. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labor groups and expatriates.
1 Operating earnings exclude net realized capital gains and losses and other items, if any, from net income 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 Aetna's underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding Aetna's operations and allocation of resources among Aetna's businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. Each of the excluded items is discussed below:
Revenue excludes net realized capital gains and losses.
Aetna also provides medical benefit ratios excluding development of prior-period health care cost estimates when that development is significant. Each quarter, Aetna 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. Aetna believes excluding significant prior-period 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 through 11 and page 13 of this press release.
2 Projected operating earnings per share exclude any future net realized capital gains or losses and other items, if any, from net income. Aetna is not able to project the amount of future net realized capital gains or losses and therefore cannot reconcile projected operating earnings to projected net income, or to a projected change in net income, in any period. Projected operating earnings per share for the full-year 2008 assumes approximately 490 million weighted-average diluted shares.
3 Operating expenses as a percentage of revenue excludes the allowance recorded on the reinsurance recoverable (described in footnote (1) above) from operating expenses and net realized capital gains and losses from total revenue.
4 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 pretax operating margin is based on operating earnings excluding interest expense, income taxes and amortization of other acquired intangible assets. Management also uses pretax operating margin to assess Aetna's performance, including performance versus competitors.
5 Includes an allowance on reinsurance recoverable as described in footnote (1) above.
6 Revenue and operating expense information is presented before income taxes. Operating earnings information is presented net of income taxes.
7 Includes members who participated in a CMS pilot program under which we provided disease and case management services to selected Medicare fee-for-service beneficiaries in exchange for a fee. This program terminated in September 2008.
8 Represents members in consumer-directed health plans included in Aetna's Commercial medical membership.
9 Represents members in products that allow these members access to Aetna's dental provider network for a nominal fee.
10 Represents members who purchased medications through Aetna Rx Home Delivery®, our mail order pharmacy, during the quarterly period and are included in pharmacy membership above.
CAUTIONARY STATEMENT; ADDITIONAL INFORMATION -- Certain information in this press release is forward looking, including our expectations and projections as to operating earnings per share, increase in 2009 pension expense, weighted average diluted shares and the impact of the current financial markets turmoil on Aetna's financial position or liquidity. 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, including adverse economic conditions in the U.S. and abroad which can significantly and adversely affect Aetna's business and profitability; continued volatility and further deterioration of the U.S. and global capital markets, including fluctuations in interest rates, fixed income and equity prices and the value of financial assets, along with the general deterioration in the commercial paper, capital and credit markets, which can adversely impact the value of Aetna's investment portfolio, Aetna's profitability by reducing net investment income and/or Aetna's financial position by causing us to realize additional impairments on our investments; failure to achieve desired rate increases and/or profitable membership growth due to the slowing economy and/or significant competition, especially in key geographic markets where membership is concentrated; adverse pricing or funding actions by federal or state government payors; and unanticipated increases in medical costs (including increased medical utilization, increases resulting from unfavorable changes in contracting or re-contracting with providers, increased pharmacy costs, 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). Other important risk factors include, but are not limited to: adverse changes in size, product mix or medical cost experience of membership; adverse changes in federal or state government policies or regulation (including legislative proposals that would affect our business model and/or limit our ability to price for the risk we assume and/or reflect reasonable costs or profits in our pricing and other proposals, such as initiatives to eliminate or reduce ERISA pre-emption of state laws, that would increase potential litigation exposure or mandate coverage of certain health benefits); the ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; the ability to improve relations with providers while taking actions to reduce medical costs and/or expand the services we offer; the ability to successfully integrate our businesses (including acquired businesses) and implement multiple strategic and operational initiatives simultaneously; our ability to integrate, simplify, and enhance our existing information technology systems and platforms to keep pace with changing customer and regulatory needs; 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 by the New York Attorney General into certain payment practices with respect to out-of-network providers); reputational issues arising from data security breaches or other means; and increases in medical costs or Group Insurance claims resulting from any acts of terrorism, epidemics or other extreme events. For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2007 Annual Report on Form 10-K, on file with the Securities and Exchange Commission ("SEC"). You also should read each of the following documents for a discussion of Aetna's historical results of operations and financial condition: Aetna's Current Report on Form 8-K filed with the SEC on September 18, 2008 as amended by Aetna's Current Report on Form 8-K/A filed with the SEC on September 29, 2008, Aetna's Current Report on Form 8-K filed with the SEC on September 12, 2008, Aetna's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2008, filed with the SEC on August 1, 2008 and Aetna's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 when filed with the SEC.