Aetna second-quarter operating earnings increase to $522.8 million

Aetna (NYSE: AET) today announced second-quarter 2011 operating earnings of $522.8 million, or $1.35 per share, a per share increase of 29 percent over 2010. The increase in the second quarter operating earnings was largely the result of higher Commercial underwriting margins from improved underlying performance, partially offset by the effect of lower Commercial Insured membership in 2011. Second-quarter results included favorable prior-period reserve development of $.31 per share, primarily from first quarter 2011 incurred health care costs. Second-quarter net income per share was $1.39.

For the first half of 2011, operating earnings per share were $2.78, including $.32 per share of favorable prior-years reserve development primarily from 2010 incurred health care costs. Net income per share was $2.88 for the first half of 2011.

"Aetna's second-quarter financial results reflect strong operating fundamentals across the enterprise," said Mark T. Bertolini, chairman, CEO and president. "Three main factors account for our success: disciplined pricing and medical cost management; lower than anticipated utilization of health care services by our members; and strong cash flow generation. The result has been better-than-projected financial results in the first half of 2011.

"Our long-term strategy remains focused on delivering profitable growth and consistent performance through a diversified portfolio of businesses. Our business units are generally performing very well as we acquire new capabilities to enhance our value proposition. I am pleased with the initial progress of our Accountable Care Solutions model for collaboration with high-quality health systems such as Carilion Clinic, Heartland Health and Emory Healthcare. We believe this new model will help create the transformational change people are looking for in health care," said Bertolini.

"Our strong financial position and prudent capital management have allowed us to capitalize on marketplace opportunities," said Joseph M. Zubretsky, senior executive vice president and CFO. "We have deployed capital to fund several strategic acquisitions in recent quarters, as well as share repurchases and an increased dividend. We believe we can benefit both our customers and shareholders by continuing to invest to strengthen our core business and create new growth opportunities.

"Based on our results and our outlook for the balance of the year, we now project full-year 2011 operating earnings per share of $4.60 to $4.70."

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:

• Operating earnings of $512.9 million for the second quarter of 2011, compared with $467.4 million for the corresponding period in 2010. The increase in operating earnings was primarily due to higher Commercial underwriting margins from improved underlying performance, partially offset by the effect of lower Commercial Insured membership in 2011. Operating earnings included approximately $121.3 million and $127.6 million, after tax, of favorable prior-period reserve development in the second quarter of 2011 and 2010, respectively.
• Total revenue for the second quarter of 2011 was $7.7 billion compared with $7.9 billion for the second quarter of 2010. The decrease was primarily attributable to lower Commercial Insured membership in 2011 as well as changes in the customer market, product and geographic mix of business, partially offset by premium rate increases.
• Medical benefit ratios ("MBRs") for second quarter 2011 and 2010 were as follows:

• Excluding prior-period reserve development, the Commercial MBR was 81.2 percent and 83.2 percent for the second quarter of 2011 and 2010, respectively. Commercial medical costs include favorable development of prior-period health care cost estimates of $167.5 million and $160.4 million in the second quarter of 2011 and 2010, respectively.
• Excluding prior-period reserve development, the Medicare MBR was 85.9 percent and 88.7 percent for the second quarter of 2011 and 2010, respectively. Medicare medical costs include favorable development of prior-period health care cost estimates of $17.6 million and $33.4 million in the second quarter of 2011 and 2010, respectively.

Prior-period reserve development for the second quarter of 2011 relates primarily to first quarter 2011 incurred health care costs.

• Excluding the acquisition of Prodigy Health Group, sequentially, second-quarter 2011 medical membership decreased by 76 thousand to 17.718 million; dental membership decreased by 95 thousand to 13.394 million and pharmacy benefit management services membership decreased by 79 thousand to 8.486 million. The acquisition of Prodigy Health Group on June 28, 2011 added approximately 523 thousand medical members, 392 thousand dental members and 292 thousand pharmacy benefit management services members.
• Net income was $522.6 million for the second quarter of 2011, compared with $494.6 million for the second quarter of 2010.
  
  Prior-years reserve development was $196.6 million and $150.3 million in the first half of 2011 and 2010, respectively. 2011 prior-years reserve development relates primarily to 2010 incurred health care costs, and 2010 prior-years reserve development relates primarily to 2009 incurred health care costs.

Group Insurance business results

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

• Operating earnings of $44.4 million for the second quarters of both 2011 and 2010.
• Net income of $47.3 million for the second quarter of 2011, compared with $50.5 million for the second quarter of 2010.
• Revenues for the second quarter of 2011 were $499.5 million, compared with $517.0 million for the second quarter of 2010. Second quarter total revenue, which includes net realized capital gains, was $503.9 million in 2011 and $526.5 million in 2010.

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 $6.2 million for the second quarter of 2011, compared with $6.1 million for the second quarter of 2010.
• Net income of $7.5 million for the second quarter of 2011, compared with net income of $13.6 million for the second quarter of 2010.

Total company results

• Total Revenues were $8.3 billion for the second quarter of 2011 compared with $8.5 billion for the second quarter of 2010.

• Operating Expenses were $1.6 billion for the second quarter of 2011, $13.6 million higher than the second quarter of 2010. The operating expense ratio was 19.1 percent for the second quarter of 2011 and 18.6 percent for the second quarter of 2010. Including net realized capital gains and litigation-related insurance proceeds recorded in 2010, these percentages were 19.1 percent and 18.2 percent for the second quarter of 2011 and 2010, respectively.
• Corporate Financing Interest Expense was $39.9 million and $39.4 million after tax for the second quarter of 2011 and 2010, respectively.
• Net Income was $536.7 million for the second quarter of 2011 compared with $491.0 million for the second quarter of 2010.
• Pre-tax Operating Margin was 10.7 percent for the second quarter of 2011 compared with 9.2 percent for the second quarter of 2010. For the second quarter of 2011, the after-tax net income margin was 6.4 percent compared with 5.7 percent for 2010.
• Share Repurchases totaled 11.2 million shares at a cost of $485 million in the second quarter of 2011.