Aetna (AET)

Q3 2011 Earnings Call

October 27, 2011 8:30 am ET


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

Thomas F. Cowhey - Vice President of Investor Relations

Joseph Zubretsky - Chief Financial Officer and Senior Executive Vice President


Carl R. McDonald - Citigroup Inc, Research Division

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Doug Simpson - Morgan Stanley, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Justin Lake - UBS Investment Bank, Research Division

Scott J Fidel - Deutsche Bank AG, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

John F. Rex - JP Morgan Chase & Co, Research Division



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Good morning. My name is Dave, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Aetna Third 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 F. Cowhey

Good morning, and thank you for joining Aetna's Third 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 and 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 this morning's press release and the reports we filed with the SEC, including our 2010 Form 10-K and 2011 Form 10-Qs. We have provided reconciliations of metrics related to the company's performance that are non-GAAP measures in our third quarter 2011 financial supplement and our 2011 guidance summary.

These reconciliations are available on the Investor Information section of Also, as you know, our ability to respond to certain inquiries from investors and analysts in nonpublic forms is limited, 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 T. Bertolini

Good morning. Thank you, Tom, and thank you all for joining us today. This morning, we reported third quarter operating earnings per share of $1.40, a 40% increase over 2010. These results were a continuation of our strong operating performance in the first and second quarters, bringing our year-to-date operating earnings per share to $4.19. Underlying these results, commercial underwriting performance continued to benefit from lower-than-projected utilization, our pricing discipline and our medical cost management strategies. These drivers resulted in the third quarter 2011 commercial medical benefit ratio of 77.8% and year-to-date ratio of 77.5%. Further, our Medicare business posted another strong quarter with a third quarter 2011 Medicare medical benefit ratio of 81.4%.

Based on these results and our outlook for the balance of the year, we have adjusted our 2011 guidance. Our full year 2011 operating earnings projection has increased to $5 per share. Projected net dividends from subsidiaries for 2011 have increased to approximately $2.9 billion, up from our previous projection of $2.6 billion. And we project the year end medical membership of 18.35 million, which includes the acquisition of the Genworth Medicare Supplement members. As we assess our opportunities and challenges in 2012, we are confident in an initial operating EPS projection of at least $4.80 next year. We will provide detailed guidance regarding 2012, including specific operational metrics at our investor event on December 15 in New York.

In a few moments, Joe will provide more detailed results in the quarter and will review our updated guidance. But first, I would like to discuss our progress in executing against our strategic priorities in the third quarter. I describe our strategy to create shareholder value in 3 dimensions: advancing the core business; emerging business growth; and deploying capital effectively. In discussing the core business, I will focus on the outlook of our Medicare and Medicaid businesses, and our strategy for improving our national account value proposition, which are all keys to our growth story.

Our Medicare franchise is a key element of our strategy to advance the core business. Medicare has been a strong growth driver for our business over the last 6 years, starting from a small membership base of 100,000 Medicare Advantage members in 2005, we have grown this business to serve almost 400,000 Medicare Advantage members and over 400,000 Part D members, generating nearly $5.5 billion in annual premiums. In fact, following the close of the acquisition of Genworth's Medicare Supplement business in early October, we now serve almost 1 million Medicare members. The Medicare product portfolio is diverse and highly competitive. We currently serve 270,000 group Medicare lives. Our group Medicare product takes advantage of our core strengths in marketing, too, and servicing large employers, as well as state and local governments to develop solutions that provide quality care while lowering plan sponsor cost.

Within our existing commercial client base alone, we estimate that we serve up to 1.2 million Medicare eligibles with an opportunity to convert them to a group Medicare product over time. In addition, there's a growing opportunity in state and municipal governments to address their unfunded retiree health obligations, which are estimated to be $600 billion and which are severely stressing the state budgets. We also serve over 125,000 individual Medicare members. These members choose Aetna on the strength of our competitive product offerings in 19 states plus the District of Columbia. With the close of the acquisition of Genworth's Medicare Supplement business in October, we now have a complete product portfolio to serve the needs of this important and growing population. We now serve over 160,000 Medicare Supplement members with product offerings in 39 states and a substantial distribution network.

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