Aetna (AET)

Q2 2011 Earnings Call

July 27, 2011 8:30 am ET

Executives

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

Thomas Cowhey - Vice President of Investor Relations

Joseph Zubretsky - Chief Financial Officer and Senior Executive Vice President

Analysts

Joshua Raskin - Barclays Capital

Justin Lake - UBS Investment Bank

Peter Costa - Wells Fargo Securities, LLC

Carl McDonald - Citigroup Inc

Matthew Borsch - Goldman Sachs Group Inc.

Charles Boorady - Crédit Suisse AG

Scott Fidel - Deutsche Bank AG

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

John Rex - JP Morgan Chase & Co

Christine Arnold - Cowen and Company, LLC

Kevin Fischbeck - BofA Merrill Lynch

Doug Simpson - Morgan Stanley

Presentation

Operator

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Good morning. My name is Trisha, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Aetna Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd 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 Second Quarter 2011 Earnings Call and Webcast. This is Tom Cowhey, Vice President 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 and our second quarter 2011 Form 10-Q when filed with the SEC. Pursuant to SEC Regulation G, we have provided reconciliations of metrics related to the company's performance that are non-GAAP measures in our second quarter 2011 financial supplement and our 2011 guidance summary. These reconciliations are available on the Investor Information portion of aetna.com.

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 second quarter operating earnings per share of $1.35, a 29% increase over 2010. These results reflect strong operating fundamentals across all aspects of our business, including disciplined pricing and medical cost management and strong cash flow generation. Our second quarter 2011 Commercial medical benefit ratio was 77.9%, a result of disciplined execution of our pricing and medical cost management strategies and lower-than-projected utilization.

The Medicare and Medicaid businesses also performed well in the quarter. The second quarter 2011 Medicare medical benefit ratio was 84.6%, with performance driven by our group Medicare results, while the Medicaid business added 30,000 members in the quarter.

On a year-to-date basis, we have reported operating earnings of $2.78 per share and an 11% pretax operating margin, exceptional results that were partially driven by declining utilization and the medical cost trends. We continue to target high single-digit pretax operating margins and our pricing to reflect our forward view of medical cost trends.

Based on these results and our outlook for the balance of the year, we have increased our full-year 2011 operating EPS projection to $4.60 to $4.70. We project dividends from subsidiaries for 2011 will increase to $2.6 billion, up from our previous projection of $2.4 billion.

We further project a full-year outlook of approximately 18.2 million medical members consistent with our second quarter medical membership. The change in membership from our previous guidance reflects both a decline in our core business, driven primarily by Commercial ASC membership and Prodigy delivering fewer members than we have previously estimated. In a few moments, Joe will provide more detailed results on the quarter and will review our updated 2011 guidance.

First, I would like to discuss our progress in executing against our strategic priorities in the second quarter. At our Investor Day, we discussed the 3 dimensions of our strategy to create shareholder value: advancing the core business, emerging business growth and deploying capital effectively.

I will start my comments with our core business, and we'll provide an update on the 2012 national account selling season and describe the outlook for our Medicare business. Our national accounts franchise is an important part of our core business, serving over 8.8 million medical members and 2/3 of the Fortune 100. The cornerstone of our value proposition and our historical success has been our quality and total cost approach, which we believe delivers superior long-term value. However, current economic conditions continue to drive some plan sponsors to favor unit cost discounts over total value.

Our current projection is that the first quarter 2012 national account membership will decrease by approximately 500,000 Commercial ASC members. Our projected membership decline is driven by the lapse of 2 specific accounts, which together account for approximately 300,000 members. Our expected change in 2012 national accounts ASC membership is disappointing, and our senior leadership is actively engaged in reversing this unfavorable trend. We are committed to strengthening our provider contracts with a specific focus on our targeted growth markets to meet the needs of our customers and improve our performance.

While we must improve our discount position and our performance, we continue to believe that the long-term value we offer to our customers is superior to our competition. The strength of our value proposition is validated by the improving performance of our large group commercial risk business, where we priced the benefits of our solutions into competitive marketplace premiums. In fact, we projected the decline in 2012 national accounts ASC membership will be partially offset by the growth in other businesses, including Medicare Advantage and large group commercial risk. These businesses are currently showing sales traction that we expect to continue into 2012.

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