Aetna (AET)

Q1 2011 Earnings Call

April 28, 2011 8:30 am ET


Mark Bertolini - Chairman, Chief Executive Officer, President, Member of Investment and Finance Committee and Member of Executive Committee

Thomas Cowhey - Vice President of Investor Relations

Joseph Zubretsky - Chief Financial Officer and Senior Executive Vice President


Joshua Raskin - Barclays Capital

Peter Costa - Wells Fargo Securities, LLC

Justin Lake - UBS Investment Bank

Carl McDonald - Citigroup Inc

Charles Boorady - Crédit Suisse AG

Scott Fidel - Deutsche Bank AG

Ana Gupte - Sanford C. Bernstein & Co., Inc.

John Rex - JP Morgan Chase & Co

Doug Simpson - Morgan Stanley

Kevin Fischbeck - BofA Merrill Lynch

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Christine Arnold - Cowen and Company, LLC



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Good morning. My name is Jenny, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Aetna First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Tom Cowhey, Vice President of Investor Relations. Mr. Cowhey, please go ahead.

Thomas Cowhey

Good morning, and thank you for joining Aetna's First Quarter 2011 Earnings Call and Webcast. This is Tom Cowhey, Head of Investor Relations for Aetna. And with me this morning are Aetna's Chairman, Chief Executive Officer and President, Mark Bertolini; and Senior Executive Vice President and Chief Financial Officer, Joe Zubretsky. Following their prepared remarks, we will respond to your questions.

During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in Aetna's 2010 Form 10-K. Pursuant to SEC Regulation G, we have provided reconciliations of metrics related to the company's performance that are non-GAAP measures in our first quarter 2011 financial supplement and our 2011 guidance summary. These reconciliations are available on the Investor Information portion of Also, as you know, Regulation FD limits our ability to respond to certain inquiries from investors and analysts in nonpublic forums, so we invite you to ask all questions of a material nature on this call.

With that, I will turn the call over to Mark Bertolini. Mark?

Mark Bertolini

Good morning. Thank you, Tom, and thank you all for joining us today. This morning, we reported first quarter operating earnings per share of $1.43. Excluding favorable prior period development, first quarter operating earnings per share was $1.14, $0.17 higher than the consensus estimate of $0.97. These results reflect strong operating fundamentals across all aspects of our business, including discipline pricing, medical cost management, expense discipline and strong cash flow generation.

Our first quarter 2011 Commercial medical benefit ratio was 77% or 79.8% excluding favorable prior period development, a result of disciplined execution of our pricing, our medical cost management strategy and lower than projected utilization. Based on these results and our outlook for the balance of the year, we have increased our full year 2011 operating EPS projection from $4.20 to $4.30 and are updating our full year medical membership outlook to approximately 18.4 million medical members, pro forma for the acquisition of Prodigy Health, which we announced this morning.

Further driven by our strong earnings profile, working capital improvements in some of our nonregulated businesses and our Vitality Re capital management transactions, we now project increased excess capital generation in 2011 with projected dividends from subsidiaries increasing to $2.4 billion from $1.7 billion. In a few moments, Joe will provide more detailed results on the quarter and will review our updated 2011 guidance.

I would like to provide some commentary on our progress related to our strategic and operational priorities during the first quarter. At our recent Investor Day, we discussed the 3 components of our strategy to create shareholder value: Advancing the core business, emerging business growth and deploying capital effectively. I would like to comment on 3 important aspects of our core businesses. Aetna's National Account value proposition, as we are in the midst of our 2012 selling season; our broker compensation strategy, as its successful execution is critical to our large account fully insured franchise; and the outlook for our Medicare business in light of the sanctions imposed by CMS.

Our national accounts franchise continues to be an important part of our core business. And as we are currently engaged in the 2012 selling season, we are getting ample opportunities to convey our value proposition to the market. We believe in keeping people healthy by providing access to affordable quality care and promoting preventive care. We are focused on empowering members to live healthier lives. This total cost management approach includes: Consumer engagement through effective plan designs and convenient yet powerful online tools such as our payment estimator and mobile applications; Integrated Care management, including our active Health Care engine; and our new alliance with CVS Caremark, integrating Pharmacy and medical benefits.

At our Investor Day, we highlighted the power of our Consumer tools and our integrated solutions. The value we deliver through our product designs was recently highlighted in our seventh annual study of our Aetna Health Fund Consumer Directed Health Plans. In this study, we were able to demonstrate that plan sponsors who replace their previous plan options with Aetna Health Fund experienced lower annual cost trends over 5 years, reducing savings of nearly $21.5 million per 10,000 members. While it was too early in the selling season to give you a January 2012 national accounts membership outlook, we are committed to improving our performance in the 2012 sales cycle based on the value proposition that I just described.

In early 2011, catalyzed by Health Care Reform, Aetna instituted a series of changes to broker compensation. While we have made different commission changes based on specific products and geographies, the following representative changes were instituted: First, for individual products, we reduced commissions for all new business. This change was needed to keep the individual product affordable, and was made concurrent with similar changes by many of our competitors.

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